General economic policy

 

 

01. Approaches

02. Methods

03. Target analysis

04.  Means analysis

05.  Promoter analysis

06. Political economy

07. Welfare economy

08. Order analysis

09. Order conception

10. Order dynamics

 

 

Chapter 2a: Methods

 

 

Outline:

 

1. Introduction

2. Are there economic laws?

2 a. The controversy between Karl Menger and Gustav von Schmoller

2 b. Friedrich List: Are laws confined to a historical phase?

2 c. Historical laws in terms of economy stages

2 d. Developmental laws

2 e. Human liberty prevents laws

2 f. Too little empirical knowledge?

2 g. Von Hayek: Confinement to pattern statements

2 h. Walter Eucken: Historically different forms

3. The principle of the non-normativity

3 a. Max Weber: Freedom from value judgment

3 b. Assessments within the radius of science

3 c. Three different positions

3 d. The socio-technical restatement

4. The reproach of the model platonism

4 a. Theory as thinking tool

4 b. Hans Alberts reproach against the neoclassical economics

4 c. The importance of models of thought

 

 

  

1. Introduction

 

The first chapter of this lecture has dealt with the approaches in economics. Instead of approaches, however, it can also be spoken of methods. In this chapter we want to follow the question how the methodical approaches of economics have developed in the course of their story.

 

In the story of the economic opinions the controversy about the right scientific method has played a decisive role. While the layman is primarily interested in the results of science and prefers to leave the methods controversy to the scientists, the methods controversy nevertheless is of importance since the results of a science can be influenced substantially by the choice of the method.

 

Which contentious issues was it about? Three questions can be distinguished.

 

Question no. 1: Which significance has the historical development for the explanation of today's economic problems? Are there at all timelessly valid laws in the area of economics?

 

Question no. 2: Does economics confine itself to uncover factual connections or can the economist judge economy and sociopolitical demands in conclusion without exceeding his own limits?

 

Question no. 3: Deals economics alone with investigating systematically and organizing predefined facts or does this science furthermore try to find new fact connections, with other words: Does economics want to be more than a bare thinking tool?

 

 

2 Are there economic laws?

 

2 a. The controversy between Karl Menger and Gustav von Schmoller

 

Our first question was in the centre of a controversy between the supporters of the pure theory and the proponents of the historical method in second half of the 19th century. The pure theory was primarily defended by Karl Menger, the historical method particularly by Gustav von Schmoller. The historical school criticized the procedure of the classical theory. It was reproached against the classics of the economic theory that they would have rashly generalized certain legitimacies.

 

Laws which would be valid for a highly developed industry and trading nation like England then might under no circumstances be unseenly transferred to countries - like the other European states at this time – which would be only in the initial phase of an industrial development. These generalizations would be inadmissible since the social laws are subject to a historical change unlike laws of nature.

 

The economic process of a nation then could be understood only fully if one has previously become clear about how the economy process has developed itself historically and on which stage of development a nation is.

 

Karl Menger on the other hand held the view, the question about the developmental laws is more second-rate nature, it depends primarily on the general manifestations of the economy in the national economy and these could only be recognized with a general theory, not by a historical research alone. Karl Menger did not deny the value of the historical disciplines as a complementary science for the political economy, though.

 

 

2 b. Friedrich List: Are laws confined to a historical phase?

 

In the question about in what the historical reference consists at the development of economy theories, there were quite different answers within the historical school. First can be referred to the ideas of Friedrich List, even if Friedrich List by the way can be classified actually rather to the liberal wing with economists and not to the historical school. He was of the opinion that the theory developed by the classics like primarily by Adam Smith, that free trade is of benefit to all nations involved in the foreign trade, applies merely to the national economies which would already stand on an advanced development level.

 

The process of the industrialization has started in England already about 50 years before Germany. With the transition of a national economy to an industrial production at first high development costs are connected, however, these are more one timely nature and therefore charge only the national economies which would still be at the beginning of the development.

 

For these reasons Germany could not pass competition with England. Due to the further development of England no more development costs would arise at the production of English goods, while high development costs were just therefore arising in Germany because this country still stood at the beginning of the industrialization to life times of Friedrich List. Therefore the German enterprises should be protected with protective duties against the English competition until such time as the German economy has also achieved the level of development of the English industry.

 

So Friedrich List was under no circumstances a general opponent of economic theories, he meant only to point out that these laws presuppose a certain historical development.

 

We look at this thesis a little more exactly. At first it is necessary to point out that this statement hardly convinces well as a general restriction of economy theoretical connections. We expect quite generally of enterprises that they are in conditions and willing to have costs in form of investments in the presence which throw off yields only in future periods. Decisive for the question whether an entrepreneur is ready for such an investment is alone, whether the yields turn out so high in the future that they compensate or even overcompensate the incurred cost in the first periods.

 

It wonders why this legitimacy should not also apply to the development costs. Basically there are only two possibilities: either the development costs for industrialization are too high as they are compensated by later yields, in this case it would be also in economic terms undesirable to initiate this development process. Or the future yields are sufficient to compensate the current costs, and then it is incomprehensible why no entrepreneur, willing to take this risk, can be found.

 

One case is conceivable, however, that triggers a real disadvantage for those enterprises which are still in the early days of industrialization. If we namely assume that a national economy does not know patent right, then the businesses which take the high development costs on themselves run the risk that when the development costs run out and the industrial methods are ready for production, that imitators appear which take these methods without participating in the development costs and just therefore are able to drive the innovatory enterprises (the pioneers who have procured the development costs) out of the market.

 

So if these difficulties have not occurred in the more advanced country, but surely exist in the subsequent economies, we can speak in fact that no fair competition is possible and that a free trade disadvantages in this case the country that had begun later with the industrialization.

 

We want to disregard once at this point that the real solution to the problem raised by Friedrich List is in the introduction of patent legislation and not in the imposition of protective duties. We only want to deal with the question, whether the problems shown by List allow the conclusion, that no general laws can be formulated in the area of the economy.

 

We start from the assumption that national economies with different stages of development are subject to also different legitimacies. This, however, does not mean that it would not be possible to develop a general theory.

 

Economic laws in general are indeed not formulated in a way that they correspond to the scheme: 'Whenever x is given also appears y'. Or to give an example. The thesis would be under discussion: 'Every businessman completely maximizes his profit'. Economic theories are formulated well without exception in a way that for the appearance of a certain event x a number of conditions must be met.

 

So e.g. the thesis of the profit maximization is normally only claimed in the case that the entrepreneurs stand in strong competition to each other. Under these conditions a entrepreneur feels forced to carry out any possible (permissible) profit because otherwise he runs the risk of being undercut and thus in the long term driven out of the market by the competitors.

 

Most enterprises will follow this pressure and, even then if some enterprises would not follow this pressure perhaps for moral reasons, then they would go bankrupt sooner or later so that this kind of entrepreneur would not be there anymore on a long-term basis.

 

However, if economic theories always presuppose a whole sentence of assumptions which must be given, in order that the predicted event also occurs, then the circumstances on a historical stage of development represent such preconditions, too, under which alone the said event will occur. The contribution of Friedrich List then does not refer to that general theories are not possible, but alone refers to that certain preconditions mentioned in the general theories occur increased in particular historical epochs.

 

 

2 c. Historical laws in terms of economy stages

 

The representatives of the older historical school therefore declined general theories primarily because certain economy stages and economic styles would have developed in the course in history, while other legitimacies could be observed on every stage of the development. So e.g. Bruno Hildebrand had thought to determine a regular development sequence in all national economies, so approximately the development of a barter- to a monetized- and this in turn to a credit economy. Or in turn Karl Bücher saw a development of a closed domestic economy to a town economy and this to a national economy.

 

W. W. Rostow spoke, however, about five stages of development which he thought to discover and which have developed itself from a traditional society over a transition-, and then advanced-, and a maturity stage finally to a mass consumption society.

 

Alfred Müller-Armack finally separated the concept coined by Werner Sombart of the economic system from the concept of the economic style. A concrete economic system always results from the mixture of most different economic styles while an economic style represents an ideal type of manifestation.

 

The difficulty with all these stage and style theories is that afterwards the advanced stage simply emerges from the previous stage due to that one assumes a stronger development of the work sharing. There are intellectual processes, which are designed here and in no case actually observed developments. The actual historical development has at best frequently but by no means always followed this course.

 

We take the example of the collapse of the German economy immediately after the end of the Second World War Germany stood during the Weimar Republic and the Third Empire on the highest stage of development formulated by Hildebrand: the credit economy, and was then in the immediate time after the collapse replaced by an economic system in which in addition to an officially organized economic activity primarily the black market with symptoms of naturals barter economy was in the foreground.

 

Or we take as a further example the thesis of Karl Marx that a capitalist society necessarily passes into a socialist society. In fact the thesis developed by Karl Marx can no way be assigned to the historical school, we also will see below that at Karl Marx's theory there exists a quite differently founded development theory than with the representatives of economy stages and economic styles.

 

But here, too, the history has produced a completely different development. A communist society was established after the First World War just in Russia that according to Karl Marx's development ideas did not stand yet on the stage of development at all which would have made possible the transition to the socialist economy.

 

By the way this also applies to most European Eastern-bloc countries with the exception of the GDR. The GDR, however, just was not automatically changed into a communist society by a capitalist society; it was rather the military dictation of the Soviet Union which had compulsorily ordered the conversion to a communist society. The Countries of initial FRG were incidentally progressed to a even greater extent in the development of capitalist society, yet there was introduced- again at the instigation of the victorious powers - a market economy and not a communist regime.

 

 

2 d. Developmental laws

 

A slightly different kind of historical developmental laws we find by the way already at Robert Malthus and David Ricardo and Karl Marx. Here, too, it is assumed that the national economies move towards quite certain stages of development. At Robert Malthus and David Ricardo the further development of the capitalist society leads due to a trend of the population for a growth according to a geometric progression and the simultaneous limitation of the food leeway, which can grow only according to an arithmetical progression, necessarily to a stagnation, in which both the rate of profit always continues to decrease and the wage income descends to the subsistence level.

 

Karl Marx, however, tried to prove, that the compulsion to the accumulation and the increasing impoverishment of the workers leads compulsorily to the fall of the capitalist society and thereby provokes a socialist society.

 

Indeed we must notice here again that both development theories were disproved obviously by the history. The population explosion changed into stagnation in the industrial nations, the pay income increased considerably, the entrepreneurs still make high profits and the prophecies of Karl Marx have not occurred until today.

 

Despite this observation, the developmental laws both of the classics as well as of socialism conform in a much greater extent than the theories of economic stages with the requirements which are to be made on a convincing development theory. The transition from an economy stage to the next one arises after the stage theories alone from an increasing work sharing which was classified out of logical considerations as developed more highly, in which no efforts were made to answer, why then in the reality the more highly developed stage necessarily should result from the less developed stage.

 

Ricardo, Malthus and Marx, however, have indeed striven to show why then one stage of development results necessarily from the previous. The approach to a true developmental law was quite given here, only the assumptions made did not correspond to reality.

 

 

 2 e. Human liberties prevents laws

 

Another reason for the rejection of general laws in the area of the economy was also evident in the controversy between Karl Menger and Gustav von Schmoller. Gustav von Schmoller as well as Werner Sombart, the founder of an understanding political economy, held the opinion that human actions quite generally and with that the economic event could be only understood, but not clearly explained in terms of natural science.

 

At decisions which are taken by people it has to be considered always that man has a free will and despite there were still so very social compulsions which pressed a human decision in a quite certain direction, the single person can decide differently anyway.

 

As a scientist one is able to comprehend only after a performed decision why a certain person has decided just the way he has decided. Nevertheless, it would have been possible that this person would have decided differently under the same conditions, so that from a certain situation can never be derived necessarily a quite certain decision.

 

These considerations may be correct now if one would make the attempt to explain the behaviour of single personalities like a single entrepreneur with the help of the economic theory. However, the economic theory is never ever suitable as a blueprint for the description of biographies of single persons.

 

However, this is not the intention of the economic theory either. The theoretical economics always wants to explain only general events. E.g. if it comes to explain what effects has a price increase on supply and demand, then no theory will say that every provider and every consumer acts in the asserted manner of the theory. This is not even necessary.

 

Within the scope of the neoclassical market theory is the only question under discussion to what extent the total demand or the entire supply of an industry responds to price variations. If for example it is claimed that a price increase leads to an expansion of the amount of supply and simultaneously to a reduction in demand, so it is completely irrelevant that individual economic agents react in a different way on price increases.

 

It may well be accepted that individuals do not respond to price increases and others even reduce their supply or expand their demand. For the validity of this theory alone shall be conclusive that the total demand and the total supply respond in this way, different behavior though reduces perhaps the general movements and often also opposite behaviors offset each other partially, but the trend remains mostly obtained.

 

It is to assume that the behaviors insinuated by the theory arise due to strong incentives which suggest certain behaviors. For example, taking advantage of any (permissible) chances of profit of an entrepreneur who would run risk of being driven out of the market by the competitors, if he would not give in to this compulsion.

 

Furthermore it also has to be pointed out that most behavior assumptions built by the market theory were a thousand and a million times covered in the course of history so that these theories are under no circumstances theoretically derived speculations but very well hypotheses empirically proved repeatedly.

 

 

2 f. Too little empirical knowledge?

 

Gustav von Schmoller had corrected his attitude in this question a little in his later announcements. Later, he did not talk any more about the fact that he generally declines the possibility of economic legitimacies but he affirmed very well the necessity and possibility of the development of general theories, however, thought now that our historical knowledge about the economic motives and legitimacies is still far too little to develop a generally valid economic theory already at that time.

 

In this attitude fits the fact that at the economic faculties, governed by the historical school for a long time, research work was awarded almost only to those who have confined themselves to a description of individual industries in specific economic areas and certain eras.

 

One may concede to Gustav von Schmoller straight away that the state of knowledge of political economy was inadequate to life times of the representatives of the historical school but this may be valid on actually all sciences and at all times. It can also be absolutely certified to the historical school that it has increased our knowledge about economic behavior decisively due to the turning to a description of historical facts. This applies particularly to the Anglo-Saxon variant of the historical school, thus for the group of institutionalists such as Thorstein Veblen, who indeed has certainly enriched our knowledge of consumer behavior.

 

Nevertheless it has to be noticed that the theoretical attitude of refusal -even if it was thought only as a temporary attitude- has led to that the German national economy has failed miserably facing the question, such as for e.g. how the rampant inflation in the 20s can be fought or how mass unemployment can be avoided or how finally the reparations problem can be satisfactorily resolved. It is one thing to have contributed to the further development of some special theories and the other thing to have inexcusably missed the passing on of the already known knowledge of the classical and the neoclassical economics.

 

 

 2 g. Von Hayek: Confinement to pattern statements

 

In connection with this, the thesis of Friedrich of Hayeks also earns attention that economy science can only make pattern statements but is never able to describe the economic events in the sense of natural sciences exactly. It is true that the works of Hayek certainly cannot assign to the historical school, Hayek is among the representatives of the liberal school. Nevertheless, Von Hayek agrees with the representatives of the historical school in that the neoclassical theory has not brought any satisfactory analysis of the economy process.

 

According to Hayek, the economic science is by no means able to specify exactly how much e.g. the demand for a good rises when the price of that good was falling by a certain percentage. Economic theory can only very generally say that price reductions usually cause demand increasing effects, without being able to specify the exact size of these effects.

 

Now in this scope one must become clear that the demand made on a theory by science and practice, crucially depends on whether this theory tries to explain the processes in a market economy or whether this theory is understood as an action instruction for national planning authorities in the context of a state-directed economy.

 

If with the help of the theory, only the processes of a free market uninfluenced by the state are described, there is also no need to clarify precisely by what percentage certain market variables change when certain data variations occur. One assumes here that the free market regulates the case and that intervention of the state is not required. Sample statements suffice completely in this case.

 

Economic theory is then asked by the economic politician, if e.g. the market does not fulfill its function of balance; here it is important to clarify for what reasons the balance mechanism has failed. So one reason for this failure could be that the legislator prevents certain reactions e.g. by long periods of notice. The task of the economic theory then consists in showing possibilities how these disabilities can be removed from the market without transgressing the targets of these measures through this. To give this advice, it is quite sufficient to know the pattern statements of the theory while the knowledge about the exact elasticity of the market is not necessary.

 

    

2 h. Walter Eucken: Historically different forms

 

Walter Eucken had done his best to mediate in the controversy between neoclassical theory and historical school. He took an intermediate position on this issue. Every concrete action and every single order is unique; it can be nevertheless traced by some few basic elements which could be explained with universally valid theories.

 

So an entire order system consists always of a variety, but limited number of individual order items. So a national economy consists of a variety of single markets. These individual markets are now different due to different features. So there e.g. exists a competition on a market of many acting persons on the two market sides while one single entrepreneur has a monopoly position on another market on the supply side while a variety of small households stands on the demand side.

 

In his teaching of market forms Walter Eucken has initially as well as Heinrich von Stackelberg distinguished between three prototypes: It could be a single large or a small number of medium-sized or eventually a variety of small business units on a market side. Because these options can occur both on the supply and on the demand side, there are already 3 x 3 = 9 constellations of a market form.

 

Later, Walter Eucken then had enlarged this scheme thus on the individual market sides a mixture of these three basic types can appear also: Besides a large one either some middle units or else also a large number of small units can appear, in this case one would speak about either partial monopolies or limited monopolies.

 

In a similar way it would be also conceivable, however, that some few medium-sized units appear together with many little ones. We therefore already come to 7 x 7 = 49 possibilities since these possibilities are able to appear both on the supply and on the demand side (1 large alone, 1 large one with some middle ones, 1 large one with many small ones, 1 large one with few middle ones and many small ones, few middle ones, few middle ones with many small, many small ones on the two sides).

 

In principle on the thousands of markets one of these 49 special types could be made come true now resulting in another total amount of possible constellations. Finally, however, the market forms are by no means the only element in which differ the market relations. So markets after the realized specialization can be different from each other in the exchange relations, in which e.g. the money transaction is met mainly with cash in one national economy, while in another national economy the largest portion of the payments is dealt cashless by bank transfers or also cheques.

 

At this variety of the individual possible types it surely can be assumed that, historically, the mixing ratio of every concrete system is definitely unique, therefore related to a national economy always different mixing ratios appear.

 

For the explanation of concrete facts, it is required on one hand knowledge of the historical facts that are the reply to the question which concrete forms have the markets that are to be analyzed. These facts can change very well in the course of time. If, however, the concrete facts are known, it can be derived only due to a general theory how the individual variables behave within a basic type.

 

So it could be very well spoken quite generally, that market processes under competition conditions behave according to quite certain legitimacies and it could also be obviously stated, that when the market form of the pure supply monopoly (a large one on the supply side and many small ones on the demand side) is made come true, the monopolist manages to raise the market price significantly above the marginal costs.

 

 

To be continued!