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Comparative Economic Policies

Lect. univ. dr. Vlad Topan

([email protected])


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Discussion Topics

Theme 1: The Theoretical Background: The EconomicSystems Debate

The Free Market

Socialism

Interventionism

Theme 2: Comparative Trade Policies: Between Free Tradeand Protectionism

The Free Trade Policy

Protectionism

Theme 3: Comparative Monetary and Banking Policies:State or Private Money and Banking? Private Money and Banking

State Money and Banking

Inflation, Credit Expansion and the Trade Cycle


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Discussion topics

Theme 4: Comparative Fiscal Policies: The Quest For theOptimal Tax System

The Neutral Tax

Miscellaneous (high/low; flat/regressive/progressive;

tax competition; fiscal heavens etc.) Theme 5: Comparative Social Policies: What Is SocialJustice?

The Welfare State

Labor Unionism

Private Charity Appendix 1: Methodological Considerations

Appendix 2: Ethical Considerations: Beyond Economics

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Introductory remarks - 1 The traditional way of treating Comparative

Economic Policies (CEP): the Keynesian legacyof monetary vs. fiscal policy

Premise: the institutional setting/arrangement is taken

for granted (given; unchangeable) The government steers the economy by means of two

instruments/tools: Fiscal policy (raising/lowering/reconfiguring taxes according

to the needs of the moment)

Monetary policy (management of the quantity of money)

The focus is on aggregates; the individual issomewhere behind the aggregates

The discussion is narrow and limited; and has asocial engineering flavor


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Introductory remarks - 2

The systemic approach to ComparativeEconomic Policies (CEP)

Premise: the institutional setting is an issue in itself

The government is not just assumed/postulated to bethe proper agent to steer the economy

All particular policy debates draw on the institutionalsetting options available

The discussion is wider and aims at finding/clarifying

the best institutional settings/arrangements whichpermit a just and prosperous social order or policysolution

The focus is on the individual/person


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Theme 1: The Theoretical Background for

CEP: The Economic Systems Debate

The Free Market

Socialism

Interventionism


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Coreea: Nord i Sud

1992 i 2008

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Coreea: Nord i Sud

2010

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Some references: Ludwig von Mises,Economic Policy: Thoughts

for Today and Tomorrow(http://www.mises.org/etexts/ecopol.asp)

Hans-Hermann Hoppe,A Theory of Socialism andCapitalism(http://www.mises.org/books/Socialismcapitalism.

pdf)

Ludwig von Mises,Money, Method, and theMarket Process(http://www.mises.org/mmmp.asp)

Jnos Kornai, The Socialist System. The PoliticalEconomy of Communism, Clarendon Press,Oxford, 1992
http://www.mises.org/etexts/ecopol.asphttp://www.mises.org/books/Socialismcapitalism.pdfhttp://www.mises.org/books/Socialismcapitalism.pdfhttp://www.mises.org/mmmp.asphttp://www.mises.org/mmmp.asphttp://www.mises.org/books/Socialismcapitalism.pdfhttp://www.mises.org/books/Socialismcapitalism.pdfhttp://www.mises.org/etexts/ecopol.asp


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Preliminary remarks - 1

The central problem of property and propertyrights

Economic policy is human action (conscious employment of

means for the attainment of chosen ends)

Human action is undertaken in the context of scarcity (ofmeans)

Physical/technological scarcity (a limited/finite amount of

something in the universe)

economic scarcity (the sphere of means is narrower than the

sphere of ends/goals after J.G. Hlsmann; see also Lionel

Robbins,Essay on the Nature and Significance of EconomiceScience - http://www.mises.org/books/robbinsessay2.pdf)

The scarcity of means leads to the problem of property and

property rights
http://www.mises.org/books/robbinsessay2.pdfhttp://www.mises.org/books/robbinsessay2.pdf


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The classical theory of property The legitimate means of acquiring property (the

economic means)

Homesteading (original appropriation; John Locke)

Production

Exchange

Unilateral transfers (gifts, donations, inheritance)

The political means of acquiring property

Expropriation; taxation; plunder; robbery

(for the above, see Franz Oppenheimer, The State,

http://www.franz-oppenheimer.de/state0.htm)
http://www.franz-oppenheimer.de/state0.htmhttp://www.franz-oppenheimer.de/state0.htmhttp://www.franz-oppenheimer.de/state0.htmhttp://www.franz-oppenheimer.de/state0.htm


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The (extended) division of labor Ultimately among individuals (not nations, states or

other supra-personal entities)

On the market

Within the firm

The modern/complex monetary economy

Thousands of intermediary products and production

stages (see Leonard E. Read,I, pencil -http://www.econlib.org/LIBRARY/Essays/rdPncl1.html)

general use of money (the medium of exchange)
http://www.econlib.org/LIBRARY/Essays/rdPncl1.htmlhttp://www.econlib.org/LIBRARY/Essays/rdPncl1.html


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The Free Market System

Definition: that social organization system inwhich the means of production are privatelyowned

the free-market: the general array of voluntaryinterpersonal exchanges (monetary exchanges, in amodern economy)

Scarce resource allocation decisions are taken byprivate entrepreneurs/businessmen

Decentralized allocation of scarce resources


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Economic calculation

Money prices for all goods traded on markets give the possibility ofmonetary profit-and-loss accounting

The historical-evaluative role of economic calculation

The entrepreneurial-anticipative role of economic calculation

The calculation is monetary

Dependent on private property

Not all-encompassing (there are things, both important andunimportant which do not fall under the sphere of economiccalculation)

Extremely important for capital goods (goods that do not directlysatisfy consumption needs)

Non-coercive, entrepreneurial-subjective, but real

It is not value calculation


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Incentives

Effort-results connection On the free-market:

Strong efforts-results connection

Good entrepreneurial judgment brings high profits (to the owner-entrepreneur) incentive to judge as best as possible the futureconfiguration of the relevant market data

Poor entrepreneurial judgments bring lower profits/loss (to the sameowner entrepreneur) incentive to avoid as losses, waste

The private property system brings strong budgetary constraints (a firmcan continue its activity only based on resources previously obtained atthe market)

Free competition (not perfect competition); free entry in every branch ofactivity

The free-market has a built-in selection process: Good entrepreneurs get to command more resources

Poor entrepreneurs get to command less resources (eventually, go bankrupt)


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Terminological note

The free-marketthe private property over the means of productionsystem

The market economyidentical with the free-market

Liberalismthe social system of freedom; based of private property; a

system of ideas; ideology; socio-political doctrine (the concept islarger than the free-market concept); a system of values;

Capitalism an economic regime in which there is a greataccumulation of capital goods Free-market capitalism (the more usual meaning)

State capitalism (ex: Ceausescus/Stalins industrialization policy;)

The functional market economy: empty labelit either means thefree-market, or it means nothing (used by the EU)


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Socialism

Definition: the system of public/state/collectiveproperty over the means of production

Scarce resource allocation decisions are taken by

the state (the planning board/the dictator)

Centralized allocation of scarce resources

according to a central plan

One will alone (a few wills) acts/decides (Ludwig

von Mises,Human Action, cap. 25-26,http://www.mises.org/humanaction/chap25sec1.as

p)
http://www.mises.org/humanaction/chap25sec1.asphttp://www.mises.org/humanaction/chap25sec1.asphttp://www.mises.org/humanaction/chap25sec1.asphttp://www.mises.org/humanaction/chap25sec1.asp


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Whos who in socialist history Theoretical origins:

Utopian socialists: Charles Fourier; Saint-Simon; J.Proudhomme

Scientific socialism: Karl Marx & Fr. Engels

First socialist country: USSR (Soviet Russia) after the 1917 October/November

Bolshevik Revolution

Socialist countries cca. 1987: Soviet Union (1917); Mongolia (1921); Albania (1944); Yugoslavia (1945); Bulgaria

(1947); Czechoslovakia (1948); Hungary (1948); Poland (1948); Romania (1948); NorthKorea (1948); China (1949); East Germany (1949); Vietnam (1954); Cuba (1959); Congo

(1963); Somalia (1969); South Yemen (1969); Benin (1972); Ethiopia (1974); Angola

(1975); Cambodia (1975); Laos (1975); Mozambique (1975); Afghanistan (1978);

Nicaragua (1979); Zimbabwe (1980)

Socialist countries today (cca. 2013):North Korea; Cuba;

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ri socialiste n timp i spaiu:

(http://cnx.org/content/m42922/latest/)

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http://cnx.org/content/m42922/latest/http://cnx.org/content/m42922/latest/


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The Impossibility of Economic Calculation

under Socialism - 1

Ludwig von Mises,Economic Calculation in the SocialistCommonwealth (1920) (http://www.mises.org/econcalc.asp)

The central characteristic of a socialist system can be rephrased asfollows: in socialism there are no markets for the means/factors of

production (f.o.p)

The Mises argument: no private property over the f.o.p no marketsfor f.o.p (no exchanges between f.o.p owners and those who ownmoney and demand f.o.p) no money prices for the f.o.p no

possibility of calculating the monetary costs of production nopossibility of calculating monetary profit and loss no possibility ofrationally selecting alternative investment projects based on their

profitability in terms of money

The Hayek version of the argument (based on information problems;falls back on the idea of the impracticability of S. due to the extremedifficulty of gathering the dispersed information)
http://www.mises.org/econcalc.asphttp://www.mises.org/econcalc.asp


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References on the impossibility of

economic calculation under socialism Murray Rothbard, The End of Socialism and the

Calculation Debate Revisited(http://www.mises.org/story/2401)

Ludwig von Mises, Socialism. An Economic andSociological Analysis

(http://www.mises.org/books/socialism/contents.aspx) J.G. Hlsmann,Knowledge, Judgment, and the Use of

Property(http://mises.org/journals/rae/pdf/RAE10_1_2.pdf)

Joseph T. Salerno,Postscript: Why A Socialist Economy Is

Impossible, http://www.mises.org/econcalc/POST.asp Hans-Hermann Hoppe, Socialism: A Knowledge or

Property Problem?,http://www.mises.org/journals/rae/pdf/RAE9_1_13.pdf
http://www.mises.org/story/2401http://www.mises.org/books/socialism/contents.aspxhttp://mises.org/journals/rae/pdf/RAE10_1_2.pdfhttp://www.mises.org/econcalc/POST.asphttp://www.mises.org/journals/rae/pdf/RAE9_1_13.pdfhttp://www.mises.org/journals/rae/pdf/RAE9_1_13.pdfhttp://www.mises.org/econcalc/POST.asphttp://mises.org/journals/rae/pdf/RAE10_1_2.pdfhttp://www.mises.org/books/socialism/contents.aspxhttp://www.mises.org/story/2401


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The Impossibility of Economic

Calculation under Socialism - 2 Chaotic allocation of resources (allocation

decisions taken virtually randomly, or biased bynon-economic considerations like prestige)

A chronically dis-coordinated structure ofproduction (shortages and queues; surpluses andwaste; disproportion in complementary goods)

Double impossibility (or blindness):

Of rationally selecting economically viable investmentprojects (future oriented)

Of judging whether past investment projects wereeconomical (backward looking)

The Impossibility of Economic Calculation under


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The Impossibility of Economic Calculation under

Socialism - 3 Unsuccessful solutions to the calculation problem:

Calculation in kind/nature The problem of adding apples to pears (heterogeneity)

Labor theory of value Heterogeneity of labor (skilled/unskilled; manual/intellectual etc.)

Trial and error The independent test for trial and error on the market is profit/loss accounting;

what would this test be under socialism?

Quasimarket (Oskar Lange) The entrepreneurial aspect of action is given by the position in the structure of

production and the bearing of real risksof loss; these cannot be simulated; The financial market cannot be reproduced by socialism

One cannot play speculation and investment (Ludwig von Mises,HumanAction)

Mathematical equations (general equilibrium) Equilibrium prices of the future cannot be computed today

They cannot take into account uncertainty and the temporal dimension ofaction, and adapt to them

Entrepreneurs on the market judge based on real market prices, notequilibrium prices (which are an imaginary construct)


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The Impossibility of Economic

Calculation under Socialism - 4

Was the USSR a counterexample to thecalculation argument? Partial vs. global socialism

The problem of an island of socialism in a world market (thepossibility of using world market prices for calculations)

A Soviet joke has it: After world socialism, Switzerland should remaina capitalist reservation to set the world prices! (Silviu Brucan, Socialismat the Crossroads, Praeger, New York, 1987, p. 11)

Pervasive black markets

The real socialisms programs were far from the

theoretical model of socialism (they were rather heavilyinterventionist systems) War Communism(1918-1921)the trial by Lenin to enact a

strict socialism ended in famine and collapse of production andthe economy (Peter Boettke, Calculation and Coordination,http://www.mises.org/etexts/cc.pdf)
http://www.mises.org/etexts/cc.pdfhttp://www.mises.org/etexts/cc.pdf


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War Communism

(1918-1921/23)

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Incentives under socialism:


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Incentives under socialism:

Whos gonna take out the garbage?

Weak efforts-results connection Moral hazard; adverse selection

Status-quo bias (change is irritating); servility towards superiors; hostilityand harshness towards lower ranks

Promotion by age/political opinion/servility etc., not productivity (or othermerit criteria) (See Ludwig von Mises,Bureaucracy,http://www.mises.org/etexts/bureaucracy.pdf)

Weak/soft budgetary constraints

Economic units can continue their activity not only based on resourcespreviously obtained at the market; no correlation between production andturnover on the one side, and profitability on the other

No competition; coordination by the central plan No dependence on customers; therefore no strong customers orientation;

no selection process to maintain good decision makers from bad ones

No incentive to innovate (weak technological progress; Silviu Brucan,Pluralism si conflict social)

F.A. HayekWhy the worst get on top (chapter in The Road toSerfdom)

The calculation argument has effects even in a society of angels (wereincentivessee furtherraise no problem at all)
http://www.mises.org/etexts/bureaucracy.pdfhttp://www.mises.org/etexts/bureaucracy.pdf


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Terminological note

Socialism the system of private property of the means of production

Communism the final stage of socialism (from everyone according to possibilities, to

everyone according to needs; the new socialist man); economically notdifferent from S.

Command economy the same as S.

Centrally planned economy Idem S.

Nationalization the procedure by which S. can be realized

Socialization Idem N.

i i


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Interventionism1

Definitions A mixed, not a pure system (some allocation decisions are

taken by private entrepreneurs/owners; others by the state,trough coercion; tertium non daturtheres no thirdallocation principle)

Most real world economies are mixed systems: somecloser to the free market (U.S.A., U.K), others closer to

socialism (The Russian Federation, China, Cuba) As the crucial point in separating systems is the type ofownership over the means of production (capital goods),the test for judging whether a certain economy is rathercloser to the free-market than socialism is the existence ofa genuine free capital market (free a real stock andcommodity exchanges; a thriving banking system; a

powerful insurance sector); (see Percy L. Greaves,Understanding the Dollar Crisis,http://www.mises.org/pdf/Salerno_syllabus06/Understanding_dollar_crisis.pdf)
http://www.mises.org/pdf/Salerno_syllabus06/Understanding_dollar_crisis.pdfhttp://www.mises.org/pdf/Salerno_syllabus06/Understanding_dollar_crisis.pdfhttp://www.mises.org/pdf/Salerno_syllabus06/Understanding_dollar_crisis.pdfhttp://www.mises.org/pdf/Salerno_syllabus06/Understanding_dollar_crisis.pdf


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Interventionism2

Types of intervention

See Rothbard,Power and Market,http://www.mises.org/rothbard/mes.asp)

Binary intervention (the state vs. the person)

Taxation (see later Fiscal Policy)

Triangular intervention (the state regulates the conduct ofat least two others)

Price controls (maximum/minimum prices; fixed prices)

Product and production controls (prohibition; monopolisticprivileges: licenses, tariffs and quotas, safety norms, conservationlaws, immigration restrictions, antitrust etc.)
http://www.mises.org/rothbard/mes.asphttp://www.mises.org/rothbard/mes.asp


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Interventionism3

Instability The fundamental problem of interventionism is its instability

the example of price fixing (see chapter 3, Mises,Economic Policy): The government sets a maximum price for milk in order to ease the access of

poor people to this basic product

Demanded quantity raises; offered quantity lowers; shortages result

Black markets tend to appear/expand

Production of milk becomes less profitable In order to ease the situation of the milk producers, the government sets the

prices of their factors of production, giving an impulse for a new set of similareffects mutatis mutandis

Each intervention puts the government in the position to eitherrenounce it due to perverse/unwanted/contrary to purposeconsequences, or to add further interventions in the market system

An interventionist economy will go back and forth (based on theideology and economic ideas of the leading authorities) from the freemarket to socialism

Consistent interventionism must end in socialism (in the aboveexample, all-encompassing price fixing)


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Interventionism4

Calculation and incentives Calculation

Within an interventionist system, each allocation decision takenout from the hands of the market (private entrepreneurs) means arenunciation to the principle of the market test and marketcalculationislands of calculational chaos (Murray Rothbard,

Power and Market, http://www.mises.org/rothbard/mes.asp)

Incentives After an intervention has taken place, those in charge have a bias

to show its usefulness and to argue in favor of its expansion

(especially if it involved the creation of an entire organizationalstructure)

Political competition: those who devise the more ingeniousintervention schemes win votes
http://www.mises.org/rothbard/mes.asphttp://www.mises.org/rothbard/mes.asp


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Terminological note The mixed economy

a mixture of socialism and free market The Third Way

A misleading term referring to interventionism

If we judge economic systems by the number of allocation principles,there are 2 systems (capitalism and the free market)

If we judge systems by the peculiar mixture of market and intervention ofeach country, then we have as many systems as countries (far more than 3)

The Social Market Economy (Sozialemarktwirtschaft) A term devised in the Erhard period (end of the 40s) in Germany to

suggest the fact that the free market has an answer to the needs of allpeople (including the poor)

See Hoppe,De-socialization in a United Germany,http://www.mises.org/journals/rae/pdf/RAE5_2_4.pdf

Market socialism: contradiction in terms (see the quasimarketdiscussion above)

Social democracy (the doctrine behind interventionism); the gradual(Menshevik) version of socialism (as opposed to the Bolshevikone)
http://www.mises.org/journals/rae/pdf/RAE5_2_4.pdfhttp://www.mises.org/journals/rae/pdf/RAE5_2_4.pdf


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Lenins New Economic Policy

(NEP; 1923-1928/29)

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