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 1: Approaches

 

 

 

Structure:

 

1 The question of the economic theory

2 The question of the teaching of the economic policy

3 The question of the political economics

4 The question of the welfare economy

5 The question of the order theory

6 Economic complementary sciences

 

 

1 The question of the economic theory

 

In this first chapter the different approaches used in economics shall be analyzed. The individual approaches will respectively be discussed with a concrete problem area.

 

A first approach is found in the general economic theory. It sees itself as a positive theory which aims to demonstrate how the problem sizes occurring in the economy are actually influenced and how to explain the determinants of this problem.

 

Often is spoken of the causes of economic events. These events are then understood as effects of these causes. So which events have triggered e.g. inflation?

 

Though, the idea of the determination reason goes beyond that one of the cause. Although every event to be analyzed, is probably triggered by one or also several causes. Nevertheless it must be expected a different course of the problem sizes with the same cause to be analyzed, since it depends on further attendant circumstances as a cause which have an effect on the problem sizes to be examined.

 

We look at the course of a billiard ball e.g.. The way a billiard ball takes is not only determined by the strength the billiards player exerts on the ball. If e.g. an obstacle faces the ball, the direction of the ball is changed. The composition of the billiard table also decides how strong the friction losses are and how far this ball will roll.

 

We have to assume also in the economic area that the variables to be analyzed are determined by several factors in general. What price on a free market adjusts ultimately depends not only on the manufacturer, but also on the demand side as well on the framework of its economic system which limits the state.

 

When we speak of causes, a distinction is made between the variable that triggered (caused) the process to be tested and the sizes which change these forces triggered (caused). Hitherto the analysis is limited to speak of functional contexts. In this case it is not clarified which of these sizes in a functional relationship, are a cause and what different size to be called action.

 

Thus, e.g., in an empirical study can be noted that the increase of the domestic product is often accompanied of an increase in prices of goods. With this realization it is not yet clear, what the cause and what the effect is. It would be possible that price increases have caused the entrepreneur to invest more and to produce more because of this expected increase in profits, thus price increases have triggered growth in the domestic product. It would also be conceivable that precisely because the demand for products has risen and the offer is indeed extended, but that providers will need time to adapt production to the increased demand that therefore arise initially demand overhangs and for this reason prices are increasing. Here would in other words the fact that the supply of goods cannot keep up with the goods demand, causing price increases.

 

Empirical studies alone can only disclose functional relationships, they say in itself alone nothing about who has initiated this process, the price the quantity or the quantity the price. The knowing, however, we need in this context, clearly refers to the cause-effect relationship. The grievance occurring in the public can only be eliminated if we know what size is the causing and which other variable is the size caused.

 

The hypothesis: ‘All businessmen maximize their profit’ can obviously be disproved if we find only one single businessman who does not behave after this maxim. However, a real verification of this hypothesis is impossible. Even if we manage to study all today and in the past living entrepreneurs on this behavior and even if we had not a single entrepreneur found who does not behave according to this maxim, it would still be reckoned with the possibility that in the future an entrepreneur is found that does not behave according to this maxim. We must expect the possibility that, till now, all examined businessmen have only therefore behaved after this maxim because they were exposed to quite certain compulsions which perhaps are no longer present in future.

 

Such a compulsion could lie e.g. in a strong competition which the businessmen survives as a businessman only if they exhaust all profit opportunities. In this case the hypothesis under discussion has to be amended to the effect that the profit maximizing behavior is contended only under the condition, that businessmen are in competition relations.

 

But the problem is not solved with this correction. Since we live in an environment changing again and again it must always be expected with the possibility that, in future unknown data will occur which make a correction of our hypotheses necessary and this means that this hypothesis is not valid for all times. Our actual knowledge about the empirical legitimacies is left more or less incompletely and this has the consequence on the other hand that we cannot verify any hypothesis empirically for all times.

 

2 The question of the teaching of the economic policy

 

A second philosophy comes into play in the context of the teaching of the economic policy. The protagonists of the economic policy are the politicians. The teachers of the economic policy, however, do not trade as politicians, they rather analyse the actions of the economic politicians. It is primarily all about the question how the philosophy of the 'pure' economic theory is different to that one of the teacher of the economic policy.

 

We have seen that the economic theorist always searches for cause - effect relationships. Either he starts out from a certain mostly unwanted event and examines which are the reasons for this event. So he could ask the question, which causes have triggered the mass unemployment appearing in the reality.

And he could get to the result that unemployment was triggered by the sinking of the economic situation.

 

Or else he checks which effects start out from quite certain events. So he also could ask himself the question, which consequences a lessening of the economic upswing would have on the worker employment. In the two cases the very same cause - effect relationship is analyzed only with the difference that this process is checked one time by the effect, and a second time by the cause.

 

In the context of the economic policy, however, targets and means are under discussion. The politicians pursue a certain target. They want to counteract e.g. the mass unemployment. The discussions which precede the employment political activities of the politicians refer besides the question of the desirability of this politics particularly to the question on which way, hence with which means (instruments) the politicians try to carry out this target. It could be discussed on the political level e.g. the question if the mass unemployment can actually- as claimed by John Maynard and his followers- be removed or at least reduced significantly, as a result that the state increases his expenditure and this additional expenditure  is not financed with fiscal resources but with loans of the central bank.

 

Hence at the level of the economic theory the cause-effect relationships are under discussion. In the focus of the economic policy and thus natural also of the teaching of the economic policy is the target-means relationship.

 

It is of decisive importance now that these two relation couples (cause-effect respectively target-means) are narrowly connected to each other. We can just go on even another step and notice that both relations actually base on the same connection only from two different approaches. In connection with this, it is spoken about a socio-technical restatement: The cause-effect relation stated in the economic theory is redrafted socio-technically into an target-means relation. We bring an example:

 

The economic theorist John Maynard Keynes came due to its analyses at the conclusion that unemployment can be explained in a very first line by a fall in the private demand. Whether this theory actually corresponds to reality, we want to leave undecided at this point. As it is well known, the hypotheses formulated by Keynes and his disciples are controversial in the area of economic science. However, here it is not about question whether this is an empirically confirmed theory, but only to the quite different question how the findings of economic theory can be converted into political measures. And then it is all about to show that both the theorist, who speaks about causes and effects - as well as the politician who is looking for suitable remedies (measures) for a certain economic policy target, actually start off from the very same relation.

 

Economics and finance in the grand coalition in the seventies of the Federal Republic of Germany makes the attempt to boost the economic situation again by an expansion of the public expenditure financed in deficit, then he refers to the employment theory developed by Keynes. He understands unemployment as an effect of a decline in the private demand as a reason for this unwanted event. And he plans to remove this cause by the fact that instead of the private, declining demand the state demand is expanded.

 

Formulated positively the economic theory understands the demand for goods as a reason for the height of the occupation. In the context of the economic policy a certain effect on the labour market: The rise of the occupation is aimed. And to accomplish this target it is attempted as a remedy for this target to boost the cause of the level of employment: The demand.

 

Therefore we can assume that the economic policy also starts off by causes and effects, only that the cause is just not representing the real problem variable like in the economic theory but is corrected consciously and the effect is not considered as a date but shall be corrected by the politics. Instead we speak about target and means; we also can speak about intended effects and causes induced consciously. The target is the intended effect; the means are the change caused consciously in the causes.

 

This also shows why we had to point out at the outset that a study of economic policies requires of the knowledge of economic theory. And that within the framework of the doctrine of economic policy it is never possible to give correct answers by which means certain economic policy objectives can be addressed.

 

Let us consider again the question why for economic assessment of the political policy measures it is not sufficient to consider economic theory. And why it requires an independent teaching - separated from the economic theory. The reason for this is that the mere knowledge of economic theory is not sufficient to apply this knowledge to concrete political problems.

 

 

Suppose again the example of Keynesian employment theory.

This theory can provide us information, whether a deficit-financed increase in expenditure of the state actually helps to eliminate unemployment, what conditions possibly must be present, that this measure also leads to success and to what extent the deficit in the national budget must reach, so that the desired success also can occur.

 

 

In reality it is, however, not at all so easy to determine clearly, whether all preconditions listed in the economic theory for an occupation increase are actually fulfilled. We take the case that unemployment has increased strongly, that a fall was detected in the private consumption demand at the same time and that one of the preconditions which must be given is fulfilled, so that the Keynesian theory can be applied with success.

 

Now the employment theory often is not able to indicate whether there are not also other causes which may trigger unemployment.

 So we assume e.g. that a rapid increase in the raw material costs or a defect in the education of the employees also can be seen as a possible cause of unemployment. If the raw material costs have risen at the same time it is not clear from the outset which of these two events (fall in the private consumption demand or increase in the raw material costs) is responsible for the increase in unemployment and which measures will be able to increase the level of employment. However, other causes necessitate other measures.

 

Furthermore the assessment of a political-economic measure does not confine itself to the clarification, how efficient a certain measure will be with regard to the aim, which shall be carried out with this measure. We must rather assume that almost all measures we would execute in politics, but also in other areas, influence not only the variable which is meant to influence with this means but yield  also side effects on other variables which are striven in a national community too.

 

Primarily when these secondary effects are negative therefore impair the realization of other targets; it is not sufficient to ask only for the efficiency of a measure with regard to the target striven with this means. Only clarifications on the extent to which other objectives of economic policy are affected by this measure, the conditions are met to make a statement about the desirability of this measure.

 

Now in the economic theory a decisive difference consists in the question how efficient a certain means is and with which unwanted side effects it has to be calculated. Even if we cannot be sure at any time that we already know all causes of a certain phenomenon, after all, a theory raises the target to detect all the possible causes. An employment theory can only just then be considered satisfactory if it lists all regulation reasons for unemployment.

 

However, there is no theory comparable with the employment theory which lists all possible side effects of a measure. The increase in the deficit of the national accounts budget can have a negative effect on the price level. Whether, or under what conditions this is the case, is not clarified in the context of the employment theory, but the theory of inflation.

 

Furthermore an increase in the deficit of the national accounts budget can lead to an unwanted increase in the share of the collective goods in the domestic production. In turn this question is not in the focus of the employment theory but is examined in the context of the welfare economy.

 

But it is not just that there is no theory, which lists all secondary effects of a political measure so that in such a way the possible secondary effects of a measure are cleared in the most different places of economics. The study of the single areas of the economic theory leads very well to that it is searched after further regulation reasons of an event while there is no method which makes possible the uncovering of further, hitherto unknown secondary effects.

 

Indeed, if we still do not know all the causes of unemployment, for example, in applying this theory we will very soon encounter employment changes which cannot be resolved with the hypotheses previously known. So here there is a strong motive to further investigate these unknown determinants of employment. Only then if in the reality no greater unemployment appears which cannot be explained satisfactorily with the previous employment theory, this theory has achieved a satisfactory condition and the researchers can turn to other problem sizes.

 

But there is in finding possible secondary effects no comparable method to detect additional side effects of a particular event.

 While a special theory like e.g. the employment theory in general remains easily comprehensible, so that the occupation theorist is not overtaxed in the task of finding new regulation reasons. But the scientist who searches for side effects which are further and not known until now has to find possible side effects in all possible sub-disciplines of economics. He therefore is, because of the very strong specialization of science, not able anymore to know about all branches as well as he could find further regulation reasons. It is therefore mostly coincidence which have detected until now unknown side effects.

 

These difficulties are further intensified because within the framework of efficiency analysis the relevant effect relationship is happening within a relatively short period of time while secondary effects often are visible only much later, after a few years, sometimes even after several decades. It is relatively easy to clarify possible further determinants of an event, if the relevant variables occur at the same time while it is very unlikely that effect relationships that occur only after decades are recognized at all. Also as a lack of theory there is no reason to see much later occurring events as a direct result of measures which were introduced decades ago.

 

We take as an example the straightening of the Rhine which was carried out in the 19th century and was considered very successful at that time. This way it was possible to improve the Rhine into a busy waterway. The success was immediate and visible to everyone.

 

Today, we know that exactly this straightening was besides other causes the most important reason for the nowadays ascertainable inundations. Because of these long-term visible side effects such straightening will be no more seen as a measure which has improved overall welfare of the German economy. The success in the improvement of navigation must be compared with the billion high devastation due to inundations in relation with the straightening of the Rhine. However, it passed a lot of time until the inundations have ever been recognized as a result of the straightening of rivers.

 

These considerations make further clear that whenever in the policies the attempt is made to introduce measures intended to combat a particular adverse event,  as a first step the question needs to be resolved, to what causes the undesirable event can be attributed, that a political wants to fight. It is only then possible to fight the unwanted event by fighting these causes with success. Who resigns to ask in a first step for the causes of the event to be corrected, will cure the symptoms and this has in almost every case the result that the undesirable condition is not resolved.

 

Obvious as this conclusion may be, but politicians mostly do not consider to follow this rule, instead try to remedy these shortcomings by simply forbidding these shortcomings by law. For example, in fighting the problem of the minimum payment, by politicians, instead of asking in a first step for the causes of why nowadays many workers receive a wage income, which is even below the cultural subsistence level, and then attempt in a second step to resolve those causes, it is decreed by law that every employer shall pay all workers a minimum wage.

 

Not enough that one failed to eliminate the root causes of an identified problem, one even campaigns against those who indicate that on this way the problem cannot be solved. One is pretending as if this was a moral problem. And insinuates to the ones who describe these measures as inefficient, to fight the target itself, that is to grant every employee at least an income in height of the cultural existence minimum.

 

This target is, however, undisputed. Already the constitution establishes in the article 4 that the human dignity is inviolable. The human dignity surely is not guaranteed for everyone who does not obtain any regulated income which at least corresponds to the cultural subsistence level. However, at the realizing of the uniform legal minimum wage it is not all about the aim, which is undisputed, but only  about the question, whether a proper solution was found this way, which one is efficient to grant a minimum income to every citizen on one side, and on the other side does not lead to strong unwanted side effects at other aims of the economic policy of the same importance.

 

If one arrives namely at the conclusion that these two conditions are not satisfied, a proper solution of the present problem is just prevented this way. Just because one acts as if this problem is already solved, the politicians turn to other problems and contribute that the unsatisfactory situation in this area lasts.

 

It is tried now and then to notice some weeks after the introduction of the legal minimum wage that the law is already successful. However, this observation is not possible this way at all. It is not claimed by the critics of this solution at all that the inefficiency or the secondary effects feared enter immediately after the introduction of this measure.

 

Quite the reverse: when in the long run a measure must be described as unsatisfactory, there is a good chance that initial successes appear, too. There are several reasons for it. Just because the politics will try to take care that the law is also followed by everybody at the times immediately after the introduction of a measure, those which suffer losses due to this law will keep still at first to not stand out and be accused, too.

 

Furthermore it needs also certain time, until the ones involved have ascertained at all which consequences a law will have for themselves and how big the to be feared damage turns out. Some time passes again until those which suffer losses, and therefore look out for ways to avoid these losses, have finally found such new ways to avoid these losses.

 

We have already mentioned above that secondary effects appear mostly only after some time. We take the example of the Keynesian manpower policy. As hardly another economics idea the Keynesian revolution was seized by politicians. There is hardly a major market-based organized economy, in which the politicians did not made the attempt to fight unemployment on a large scale by means of the instruments provided by Keynes.

 

Indeed noteworthy early successes came immediately after introduction of this policy. For example Karl Schiller in his capacity as Economic and Finance Minister in the sixties could lead the BRD out of the crisis quite successfully with his Keynesian Go and stop  -  policy .

 

Today after over 80 years experience with a Keynesian manpower policy the judgement looks much more down-to-earth. It has not been successful to remove the mass unemployment or to reduce it to an at least considerable extent. The mass unemployment has probably even risen. A clear judgement is not possible since we had not had any exact statistics yet to the size of unemployment in the thirties of the 20th century.

 

That the Keynesian employment policies could be considered successful in the short term, although it has not been successful in the long term, does not depend on the fact that the politicians have not properly followed the scientific recipes . On the contrary, the Keynesian recipes were in almost all major economies implemented one-to-one, it was not taken half-measures.

 

If success failed to appear, this was because the economic agents adapted to the new situation and just these adjustment processes led to the case that long term successes failed to appear. The initial success can be explained that the additional orders of the state to the industry, increased the profit expectations of entrepreneurs and this increase of earnings expectations has led to increased production. With the production the demand for workers also increased, unemployment was dismantled.

 

The trade unions, however, reacted very soon to the changed situation. The profits therefore increased primarily because the increased demand for goods led very fast to price increases. In turn due to these price increases the real incomes of the employees were reduced, the share of the pay incomes in the complete domestic production was reduced simultaneously, too. The trade unions got active and put an adaptation of the nominal wages to this changed situation in the collective bargaining following on this.

  

To the extent, though, the trade unions were able to implement this adjustment in the nominal wage rates, earnings expectations fell back to its previous level. Therefore, the entrepreneur also had no reason to continue with the expansion of production and neither with the more demand for labour.

 

If the entrepreneurs, though, have got clear once that the state employment policy cannot improve the profits at all on a long-term basis, they also will adapt to the changed situation. Even then, if they can hope for temporary precedes increases in connection with the state employment policy until the adjustment of the trade unions; this politics will not induce the entrepreneurs to hire new workers any more in future. Due to often rigorous dismissal protection legislation, though, the entrepreneurs are not able to dismiss the newly hired workers any more, if it turns out that because of renewed reduction of the production fewer employees are needed. In this case the entrepreneurs try to run the additional public orders by overtime of the already busy employees or shift the production in other countries in which the labour costs turn out lower.

 

This example shows that the success of a policy measure can only be detected when it has become clear how the economic subjects respond to these measures. However, the reactions of the private economy subjects to state measures always need certain time.   

 

3 The question of the political economics

 

 Subject of this introductory lecture are surely the difficulties, which arise from the attempt to apply the knowledge of the economic theory for solution of political-economic problems. Therefore the essential features of the teaching of the economic policy will be in the centre of this lecture, either. And in the centre of this teaching are targets and means difficulties.

 

This, however, does not mean that in this lecture also other philosophies do not attain meaning. First we have already seen that without knowledge of the economic theory the task of the teaching of the economic policy cannot be tackled satisfactorily at all. How the individual measures of economic policy are to be judged, can be carried out only ever with knowledge of the cause-effect relationships in the context of economic systems.

 

However, in connection with this there are also further philosophies of importance. This applies primarily to the so-called political economics. This further philosophy goes back on certain suggestions Joseph Alois Schumpeter. This had compared the political events with the operation of a market economy in a representative democracy in his publication over capitalism, socialism and democracy.

 

Until the emergence of the modern economics by Adam Smith in the ending 18th century economic problems were discussed almost exclusively under the point of view, which behaviour of the businessmen should be expected under the point of view of the public welfare. Schumpeter now made aware that only the actual effect relationships were detected within a market economy system, as it was noted, that the majority of entrepreneurs base their decisions by the extent thereby their own well-being is affected. The liberalism had now shown that macroeconomic undesirable developments  can just then be fought and prevented if  it is investigated and the actual motive powers of economic activity are shown, and indicates that under certain conditions the public welfare then can be realized even if everybody does not have the public welfare in mind at all his decisions.

 

In the same way it has to be recognized, however, that in a representative democracy also the politicians are primarily orientated to their own interests and that the actual political events can only be detected if it is taken note of this actual behaviour of the politicians. Just as entrepreneurs pursue to maximize their profit in all its decisions, it must take note that the politicians in an even manner haggle for votes in the general elections to the Parliament.

 

This change of approach in the assessment of policy decisions now by no means signifies an abandonment of realization of public welfare. Equally, as Adam Smith had shown that under the conditions of general competition finally  the on self-interest oriented behaviour of individual economic agents is channelled in a way that entrepreneurs are also producing the goods that are  just in demand by consumers, as well it can be shown that in a representative democracy, the interests of the people are just then considered best possible when the politicians are striving to attain a maximum of votes in the general election.

 

Of course, it applies here that the realization of public welfare can only be guaranteed if certain preconditions are fulfilled. Here again in the system of representative democracy, there are mechanisms that allow channelization of the politicians interests towards the interests of the entire population.

 

In both societies (in a representative democracy, as well as in a market economy) to the leaders (entrepreneurs as well as politicians) are guaranteed to make their decisions freely, but this does not mean that all possible alternatives may be taken. Every social system requires an order in which the always valid values are described and which specify that alternatives that violate these social values are not allowed.

 

The liberal order is not injured yet, because a certain public-endangering behaviours are prohibited, but only when the state is attempting to take the pending economic decisions into its own hands, and thus dictates the economic individuals what must be done. In a liberal order the principle is that everything is allowed, what is not specifically prohibited (reasons of public welfare) while  in a bureaucratic-political system it is traded according to the motto that everything is prohibited, what is not specifically allowed.

 

But in what way comes this newer approach to the political economy in our context into play? The economic theory is often made the reproach that the requirements which provide the economists to politicians cannot be fulfilled because the politicians often subject to certain constraints, due to which the advice of economists cannot be complied with.

 

So economic theory may point out e.g. that inflation can only be avoided if it is possible to align the money supply on the total amount of goods produced. This thesis still may be so right, nevertheless it must be taken note of that politician would possibly lose the majority in the next elections, when they would align their decisions with these conclusions and that therefore the politicians could not take the advice of the scientists just for these reasons.

 

The political economics could possibly bring remedy here. This branch of economics examines, among other things, what constraints the politicians are exposed to and what advice of the pure economic theorist does not get a chance therefore. The economic science should not be confined to examine with what measures economic policy targets can be realized. In the calculus of economics it should rather be included the question, in what ways it is possible to pursue certain aims in a representative democracy successfully.

 

The starting point of these considerations is thus the knowledge that in a representative democracy, the politicians base their decisions about how these measures impact on voting relations in the next elections.

Only such measures can therefore be regarded as realistic, which do not make re-election possibilities of politicians impossible (improbable) at the outset.

 

So for example the political economy points out that the electors align their vote decisions with the happenings immediately before the election. The longer the period, since a particular measure has been carried out, the less remember the voters to these occurrences, they forget very quickly the measures which they have benefited from, but also the measures, which have restricted their own welfare .

 

If we base on such behaviour of the electors, surely unpopular measures which perform their positive effect only on a long-term basis are not able to be carried out shortly before elections. On the other hand just this elector behaviour allows the politicians to carry out also unpopular measures shortly after the election, when the time period is relatively large yet until the next choice.

 

These considerations also show that for the enforcement of unpopular, but nevertheless necessary and welfare guaranteeing measures it is imperative that legislatures are not set too short, since with very short election periods unpopular measures can hardly be realized.

 

When the political economics starts from the thesis that politicians just in functioning democracies always align their decisions on the re-election possibility, this assumption may not be misinterpreted. The thesis of the vote’s maximization actually refers less to the ultimate motives which move the politicians. It would be wrong to interpret this thesis in a way as if all politicians were bad people who are not ready to accept other interests than their own ones at all. The thesis of the vote maximization doesn't want to say anything at all about what motivates the individual politicians, if they get politically active. The political economy claims about the ultimate motives of the politically actives just as little as the economic theory wants to have its thesis of the profit maximization understood in the way that businessmen are exclusively morally reprehensible and most egotistical personalities. 

 

In the two cases (economic theory such as political economy) these theses say something about the incentive systems to which the executives are exposed. For the proper functioning of a market economy, the mutual competition is crucial, without competition there are no satisfactory results in a market economy. However, intense competition automatically forces the entrepreneurs, each to choose the alternatives, in which all possible cost reductions and hence earnings growth to be exploited. If a businessman being in the competition does go without possible profits, he gets into the danger, to be outdone by competitors and just therefore go bankrupt. This compulsion to take advantage of all profit opportunities is just the vehicle that ensures in a market economy, that everything possible is done to guarantee the welfare of the population.

 

And similar relationships can be noticed with regard to the votes-maximizing behaviour of politicians. Just because the politicians in a functioning representative democracy are under the compulsion to make all of their decisions the way that they have great chances of being re-elected in the next election, it is guaranteed at the same time that politicians base their decisions on what the voters want in their majority. Also here, this obligation (this incentive system) does not automatically mean that politicians always act amoral and act in reality past the common good. The opposite is the case, provided of course that the political order ensures that the conditions for alignment of democracy to the public welfare are also met.

 

 

Continuation follows!