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 3b: Target analysis continued

 

 

Outline:

 

0th Preliminary notes

1th The question about the normative content of political aims

2nd The question about the topicality of political aims

3rd The question about the reasons of political aims

4th The question about conflicts of aims

5th The question about the realistic of aims

 

 

 

3th The question about the reasons of political aims

 

As already noted, aims can be pursued for its own sake or because one strives in this way for other super ordinate aims. Aims, which have an intrinsic value, do actually not require any explanation, they are self-evident. This applies, for example, to the aim of full employment. This aim derives directly from the requirement that every individual has the right to work. 

 

Despite the intrinsic value character of some aims, politicians feel compelled to defend these objectives in the political contest. In order to come to power, the politician needs the majority of voters and initially there are only his own aims; he has to convince voters of the value of these aims first.

 

However, if the politician can not, in accordance with the assumptions, have recourse to factually verifiable instrumental connections; the politician has to take refuge to certain replacement reasons. So the politician can firstly justify his aims in the way that he refers to the authorities recognized by the voter. These may be individuals; but also the reference that this aim is derived from the constitution, or that the majority of other states are pursuing that aim, can become a reason for justification.

 

Sometimes aims are also justified with the fact that they have always been valid. One refers to the tradition, a justification, which even has a certain justification in a purely stationary society without large data changes.

 

The fact that in a non-changing world certain activities have proved their worth can suggest the assumption that they will prove their worth in the future, too. But we just live in a very dynamic world in which changes occur daily; here is the mere fact that certain aims have proved their worth in the past no guarantee that they promise success even under changed conditions.

 

Sometimes an intrinsic value justification relies simply on synonymous terms or represents a tautological relationship unto super ordinate, already recognized values.

 

The task of science in this context is confined to the indication that a not further justifiable intrinsic value is existent. Now with this type of justification there exists the following risk: In principle, a politician can see in each aim an intrinsic value. Then occurs an aim immunization, which does not allow factual criticism anymore and makes political discussion extremely difficult.

 

Let us now turn to the aims, which are not striven for its own sake, but because other super ordinate aims are to be realized in this way. In this context, it is important that in this kind of justification always some kind of factual hypotheses are claimed, that are possibly inaccurate, but heavily understandable by an economics layman. It is the task of science to verify the correctness of these hypotheses.

 

The following cases are conceivable: firstly, the hypothesis under discussion has been checked and falsified in several empirical studies; the aim reason is invalid.

 

Secondly, it is conceivable that the hypothesis under discussion could have been falsified in a single empirical study. Here it should be noted that this hypothesis may be possibly wrong, but that it requires further investigation; it must be expected always, that mistakes were made in a concrete investigation; so the errors could e.g. consist in the following: it was overlooked that the conclusions are only valid for quite certain special cases.

 

Thirdly, several investigations may be present, where no falsification was possible. Here one can speak of a preliminary confirmation of the hypothesis; however, one must consider that due to data changes occurring in the future in some circumstances a falsification would be possible with further investigations.

 

Fourthly, empirical investigations are often contradictory, indicating that apparently not all causal connections were considered, and that therefore further investigations are necessary.

 

Fifthly, sometimes there are no empirical investigations at hand, then in some circumstances plausibility evidences are cited; one checks whether the relationship formulated in the hypothesis has been tested with success in a related field. So may a behaviour that was detected on merchandize markets be transferred with some justification also on factor markets, if there are no reasons which speak for a different behaviour in both markets.

 

With regard to the content of a hypothesis it has to be distinguished between sufficient and necessary conditions. The closest connection between the aim that is to be justified and the circumstances, by which this aim is justified, consists then, if necessary and sufficient conditions are present. Thus, in the Keynesian economic theory the view has been advanced that only excess demands trigger price increases, and therefore present a necessary condition for inflationary tendencies and that furthermore any excess demand leads to price increases and thus can be referred to as a sufficient condition.

 

The relationships between the causal chains are much more loose, if certain conditions only are necessary or sufficient or even neither necessary nor sufficient. As a rule, namely several conditions have to come together in order that a particular event occurs also, here it requires accompanying measures (here the conditions are not sufficient); at the same time the desired result could be achieved also in some other way, hence there is a competition of the individual means to each other (these conditions are therefore also not necessary).

 

Precisely because of this difficulty in connection with a demonstration it was proposed by Hans Albert, to abstain entirely from the justification of aims, but to try to expose aims to criticism as much as possible. Those aims seem justified which were exposed to repeated critical reviews and which, though, withstood the criticism. Here the parallels to the scientific procedure for the discovery of theories are intended, here also one does not reach by verification, but rather by the repeated attempt of a non-successful falsification, to proven theories.

 

Prime example of reasoning for an instrumental aim is the aim of monetary stability. A stable monetary value initially has no, or at most a very low, intrinsic value. One strives a monetary stability mainly because one is of the opinion that inflations have undesirable effects on growth, distribution and allocation.

 

Whether economic growth presupposes a monetary stability, has been discussed controversially in the context of the inflation theory. The Keynesians were convinced that even a low inflation would benefit the growth, because the enterprises would receive financial incentives for investment through price increases and because the extent of growth would depend on the degree of investment. In contrast, neoclassicists and neoliberals fear that inflation processes would decrease the need for more efficient production and that in this way it would come to misdirected investments that weaken growth.

 

Inflations are still considered undesirable because in the course of inflation an unjust redistribution of income would take place. On one hand, the workers are disadvantaged of inflation because they only would receive a delayed compensation for loss of purchasing power in the next round of collective bargaining. On the other hand, the owners of financial assets would be disadvantaged with inflation because the real value of financial assets would decrease with the general rise in prices.

 

However, it must be taken into account that these negative effects will have to be feared only under certain conditions. If namely the trade unions manage in the round of collective bargaining to get a compensation for loss of purchasing power already for the expected price increases in the coming period, they are not disadvantaged by the price increase. Furthermore, it is important to consider that owners of financial assets could hedge themselves against losses of value by stable-value clauses and that the expected inflation will generally be incorporated in the amount of interest.

 

Negative allocation effects of inflation are feared because inflation processes lead, at least temporarily, to a distortion of price relationships and thus to the allocation, since the price increases for individual goods occur at different times.

 

 

4 The question about conflicts of aims

 

In the context of the politics not only one single aim but a variety of aims is generally pursued at the same time. So one has to expect that not all aims are in a balanced relationship with one another, but rather they possibly exclude reciprocally and at least impair each other in the sense that in the measure in which one approaches the one aim, at the same time leaves the other aim. For potential aim conflicts there are very different reasons.

 

Firstly, the aim conflicts can be distinguished according to whether they arise from logical reasons or factual coherences. One can not, for example, strive an increase in the income rate of workers under the secondary condition that the income rate of self employed persons remains constant at the same time. At least then, if one divides the entire population in only the two classes: workers and self employed persons, necessarily the income share of the self employed persons has to decrease exactly as much as the wage ratio rises.

 

The situation is different with factual related aim conflicts. Let us insinuate that politicians pursue full employment and monetary stability at the same time. At first glance, both aims seem - logically speaking - to be in harmonious relationship. Full employment presupposes that any surpluses are avoided, the most important condition for monetary stability is to avoid demand surpluses. Both aims can be summarized in the claim for a balanced development in supply and demand.

 

Nevertheless, we generally assume that both aims are in a factual related aim conflict to each other. Arthur W. Phillips has proven in the context of an empirical study that there is a trade-off between unemployment rate and wage growth rate. Paul A. Samuelson has shown that this Phillips curve relationship can be converted into a relationship between inflation and unemployment rate, and that therefore a reduction of the unemployment rate can be achieved by an expansive fiscal policy, but that this policy leads to price increases. So there is a factually based aim conflict between price stability and full employment.

 

Secondly, aim conflicts can also be divided according to whether they are of quantitative or qualitative nature. Qualitative caused aim conflicts arise generally from logical relationships; the individual aims exclude each other. The above mentioned conflict between the two aims: wage share increase and stability in the income share of self-employed would be such a qualitative aim conflict. In contrast, in case of quantitative aim conflicts one assumes that in the extent in which one approaches the realization of an aim, the other aim can be realized to a lesser extent simultaneously.

 

Thirdly, one can also distinguish between permanent and situational aim conflicts. While permanent aim conflicts arise in any situation, the occurrence of a conflict at situational aim conflicts depends upon the particular circumstances. So occurs e.g. the conflict between the aim of balanced foreign exchange payments and the aim of  the stabilization of the economy, if simultaneously in the domestic economy a recession is prevailing, while in the external sector, however, a foreign-currency adverse balance is reported or if economic overheating is associated with a foreign currency balance surplus.

 

Fourthly, a particular importance is attached to the distinction between aim-related and means-related aim conflicts. With aim related conflicts the actual cause of this aim conflict is situated in the relationship of the aims themselves. So one will, for example, be able to insinuate that the individual insecurity increases in the measure to which civil liberties are extended; the liberty aim and the aim of maximum security are therefore in an aim-related conflict.

 

At means-related aim conflicts, though, it depends on the selection of the employed means that a conflict arises. If one had employed another, more suitable means, the trade-off could have been avoided or would at least have occurred to a lesser extent.

 

Means related aim conflicts arise either from the type of a selected means or from the fact that the number of means is too low. A means-type related aim conflict could, for example, be present when the introduction of participation wages, which must be paid by all enterprises, would burden the marginal companies and if therefore the workers would be dismissed. If one had tried to achieve the wealth political aim, though, by profit participation, these adverse effects on the level of employment would have been absent, since the entrepreneurs would need to provide employees with a share in this case only to the extent of their profits. By choosing a participation wage, an aim conflict then would be present that had resulted from the choice of the means.

 

An aim conflict that results from a too low number of inserted means can be explained by a theorem formulated by Jan Tinbergen. Thereafter economic policy aims can only be realized without conflict, when the number of the used means, independent from each other, corresponds to the number of aims. Let us point out this statement on a diagram.

 

Beschreibung: ziel2

 

 

We consider a simple supply-demand scheme. The quantity of a good is plotted on the abscissa, and the price of this good is plotted on the ordinate. The dark red line represents the original supply curve, whereas the dark blue curve represents the original demand curve. The state has two aims: the price shall be lowered to (p0) and the quantity produced shall be raised to (x0). The state would have in principle the possibility to influence - for example by way of the subsidies - the course of the supply and/or the demand curve.

 

The diagram points out that the state is not able to realize both aims (p0) and (x0) with only one means (only with the shift of one of the two curves). The point corresponding to the two aims can only be achieved, if the state influences both behaviour curves.

 

However, the theorem formulated by Tinbergen applies only under two constraints: On the one hand, the individual means have to be independent of each other. Here it is not primarily about the legal independence of the decision makers. It is quite conceivable that, for example, the central bank is independent from the government in the legal sense; if the central bank always supports the fiscal policy of the government, for instance always accompanies an expansive fiscal policy with expansion of the money supply, anyway, in the economic sense, no independent instruments are present with monetary policy and fiscal policy.

 

On the other hand, the used instruments must be effect-specific, they must be, in other words, in a position to actually influence to be influenced variables. Only such instruments, which are able to influence the position of the supply or demand curve, count in our graphic.

 

The aim conflict existing between foreign economics and trade cycle policy is not just a situational conflict, but can also be traced to the Tinbergen - Theorem. The two aims, foreign exchange balance equilibrium and economic stabilization, only one, in the economic sense independent, instrument is opposed: the simultaneous control of foreign economy and domestic economy by means of expansionary or contractionary methods of influence.

 

According to a proposal by Robert A. Mundell and Harry G. Johnson this trade-off can be cancelled in the way that the central bank is committed to orient its monetary policy exclusively at the aim of the foreign exchange account balance, while the government has to align its fiscal policy exclusively with the aim of economic stabilization. In this case monetary and fiscal policy represent, also in the economic sense, two independent instruments and the trade-off between economic and monetary foreign policy can be avoided.

 

 

5 The question about the realistic of aims

 

In section 2 of this chapter we followed up the question, to what extend the aims which pursue the politicians, have already been realized, respectively to what extent there is a need for action due to lack of previous realization. The fact that certain aims are not realized can naturally be based therein that they are not possible to realize at all, that here it is a matter of utopian aims.

 

Now the voters are deceived when politicians promise them, for the case they would be elected, the realization of certain aims, even though they can not be realized at all. And this is certainly highly undesirable. And as politicians like to promise more than they can keep actually, it is a task of economic policy teaching to examine also how far the aims promised by politicians can be realized.

 

This task is especially important if the facts, which the politicians promise to eliminate, are extremely complex and, therefore, can not be verified by the voters to determine whether these aims can be realized actually.

 

Of course this hint does not mean now that utopian aims should be taboo for politicians, that they should not ever worry about whether aims, which are now seen as utopian, one day could be realized eventually.

 

Long time it has been a certainly very utopian desire to fly just as the birds do. Meanwhile, techniques could have been developed so that flying in airplanes has become a self-evident activity of numerous people.

 

Or take the example of telephoning. Certainly, someone who had prophesied a 100 years ago, that it would be possible one day to converse normally by telephones and mobile phones with people who are located at a great distance, perhaps on a different continent (or even in space), would have been denounced as dreamer and idiot. Today the communication with fellow men, regardless of the geographical distance of communicating individuals, has become a matter of course for most of the civilized men.

 

These two examples clearly show that an aim which must be classified as utopian in the current period, by no means has to apply as unrealizable for all time. And therefore it is also a good right of a politician to pursue his dreams of the future and e.g. to promote research activities by granting subsidies with the aim to realize these aims one day in this way.

 

An additional limitation is necessary. Also if an aim - even over a prolonged period - has to be regarded as unattainable, it is - as already indicated - very well reasonable, to get a bit closer to this aim. The criterion of realizability has always not only a temporal, but also a quantitative dimension.

 

When we speak of unattainability, it is always essential to specify for what time periods this is true and how close one can get to this aim, thus by what percentage one can approach an aim, even if it is clear from the outset that one can never approach this aim at 100 per cent.

 

Take the example of monetary stability. In the 60s and 70s, the aim of complete monetary stability, thus the aim to lower the inflation rate to zero, seemed completely illusory for countries such as France or Italy. To pursue this actually, in these countries and in these times, would have had to be viewed as utopian, as never achievable.

 

From the impossibility to realize this aim a 100% it can, though, not be concluded that therefore it should not be taken care of this aim. Also if the central banks succeed to lower a current inflation rate of about 30% to 10%, this must be regarded as a colossal success, because in this case certainly the welfare of the population could be improved very significantly.

 

The infeasibility of certain aims arises from different causes. Firstly, aims may be unattainable for logical reasons.

 

Thus, for example, it is not possible at the same time to increase the wage rate (the portion of the income of the workers), while keeping constant the percentage of self-employed, at least if one only distinguishes between the two income categories, the self-employed and the employees (as the only non-self-employed).

 

A logical infeasibility is always final, thus valid for all times. An aim formulated that way can not either be achieved a little bit. Whenever the percentage of one of two groups of persons is increased only slightly, the percentage of the other group of persons must decline exactly by the same amount for logical reasons.

 

In reality, this impossibility does not refer to real connections at all. Logical impossibilities are based rather on the contradictions in the system of our concepts.

 

Another infeasibility may arise from technical circumstances. If we further discussed above that the distribution of resources may comprise only solutions that are either on the transformation curve or also below this curve, then it is herewith also determined which combinations are not realizable: namely all conceivable combinations which are in the shown diagram above the transformation curve.

 

However, this impossibility can always be determined for the momentary situation only. A combination called impossible today could be realized in the future very well, such as e.g. if the entire resource base could be increased in relation to today, or even when new techniques are known and used, which increase the productivity of the factors of production. However, the improved technology is only one possible, but not necessary condition for that in the future even more goods can be produced than today.

 

Conversely, of course, by the fact that a certain goods combination is considered feasible in today's period (as it is at or below the transformation curve), it can not be regarded as proof that these goods combination can be realized in the future. It must be reckoned with the possibility that the resource base declines and/or that certain techniques are no longer considered as acceptable.

 

In connection with the thesis of Jan Tinbergen, that the number of independent means has to correspond to the number of aims, we have got to know a third cause for an unattainability of certain aims. We have seen there: it was impossible to realize the aim of full employment and the aim of the exchange rate stability at the same time, as long as the central bank was urged to always support the economic policy of the government.

 

Thus, the infeasibility of an aim package resulted from the fact that the policy dictated specific courses of actions, in our example, the request to the central bank to support always the economic policy of the government with its monetary policy measures. Johnson and Mundell could show that a change in these demands can remove this impossibility.

 

Quite generally, one must point out that the infeasibility of certain aims or aim groups can not only be rooted in the non-existing technology, but also in political circumstances. Technically, it would be entirely possible in those cases to achieve certain aims (aim groups), but they can not be realized anyway because they are not politically opportune.

 

Take the example of the phasing out of Germany of the electricity generation from nuclear energy. Originally, Chancellor Merkel had striven the aim of phasing out of nuclear energy only in the long run. After the nuclear disaster in Fukushima Merkel changed the course and pursued an immediate phasing out of the nuclear power industry.

 

In technical terms, the opportunity to reduce the production of nuclear energy only gradually - as originally planned - would have entirely existed. However, from a political view point such adherence to the initially set aims would have probably led inevitably to enormous loss of votes of the CDU in the next federal election. The perseverance of the previous aim was therefore in political terms hardly realizable.