Market and state in socio-economic order: a brief review of theories

Jurczuk, Anna E.; Pysz, Piotr Working Paper Market and state in socio-economic order: a brief review of theories Institute of Economic Research Working Papers, No. 2/2018 Provided in Cooperation with: Institute of Economic Research (IER), Toruń (Poland) Suggested Citation: Jurczuk, Anna E.; Pysz, Piotr (2018) : Market and state in socio-economic order: a brief review of theories, Institute of Economic Research Working Papers, No. 2/2018, Institute of Economic Research (IER), Toruń, https://doi.org/10.24136/eep.wp.2018.2 This Version is available at: https://hdl.handle.net/10419/219984 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Jurczuk Piotr Pysz Białystok, Poland 2018 DOI: 10.24136/eep.wp.2018.2 © Copyright: Institute of Economic Research This work is licensed under a Creative Commons Attribution 4.0 International License. 2 Anna E. Jurczuk University of Bialystok Faculty of History and Sociology, Laboratory of Contemporary Economic Relations e-mail: [email protected] Piotr Pysz The University of Finance and Management in Białystok e-mail: pyszpiot[email protected] Market and state in socio-economic order: a brief review of theories 1 Abstract The purpose of this paper is to present the views of various schools of economic thought on the sources of the institutional order of economies. The premises of the theories of constituted and spontaneous economic orders are taken as the criteria on the basis of which the sources of an institutional order are identified. In order to meet the research objectives, the paper present, on the basis of the theoretical notions of constituted and spontaneous economic orders, the views on the sources of institutional order in capitalism within the last 250 years, i.e. from the times of Adam Smith until the present day. Main results indicate that, the classical/neoclassical model of economic order, interpreted here as the ideal one, is arise by itself as a result of market interaction. In contradistinction to the above ultraliberal model of economic order is the consistently centralised model deriving from the Marxist tradition. A synthesis of the strictly liberal and the centralised models is the ordoliberal model of economic order. As regards the course of market interactions and the auto-formation of spontaneous rules of an economic order resulting from the market operations, it is a par exellence liberal concept. On the other hand, from the consistently centralised model it borrows the idea of top-down dictation of economic order principles by the political government. This synthesis constitutes ordoliberalism and implies a feedback between the constituted and spontaneous rules of economic order. Keywords: classical economics, Marxism, ordoliberalism, economic order, institutional analysis JEL classification: B1, B5 1 The text is intended to be published in a book issued by Forum of Institutional Thought, edited by Anna Ząbkowicz, Maciej Miszewski, Paweł Chmielnicki, Sławomir Czech, forthcoming in 2018. 3 Introduction The history of economic thought on the topic of socio-economic orders has produced a relatively extensive legacy. The idea of order was already enquired into by ancient Roman philosophers, who saw it as a state of affairs characteristic of a civilised society in which free individuals were able to conduct transactions in an unimpeded manner and within a generally applicable legal framework. The European philosophy of the Middle Ages defined an order as a combination of various elements, objects and structures into a single, reasonable whole. Furthermore, later research conducted by both European and East-Asian social thinkers indicates a contrast between the ideas or order and chaos (Pysz 2008, p. 35). The scholarly debate on the theory of economic order has been dominated by the views of Friedrich August von Hayek and Walter Eucken. So much so that the theoretical and methodological investigations into the theory of order which are conducted nowadays are more of a continuation and modification rather than search for a new paradigm. The purpose of this paper is to present the views of various schools of economic thought on the sources of the institutional order of economies. The premises of the theories of constituted and spontaneous economic orders are taken as the criteria on the basis of which the sources of an institutional order are identified. As suggested by Eucken, the author of the concept of made order, it is assumed here that the institutional order of an economy and the rules (institutions) which govern it are imposed from above by the state and are of exogenous nature. Similarly, as Hayek, the creator of the concept of spontaneous order, believed, it is assumed that the institutional framework of an economy and the rules (institutions) which govern it originate in spontaneous changes of endogenous character. It must be emphasised that neither of these authors was a rigid doctrinaire. They both acknowledged the existence of exceptions to their basic principles concerning the formation or auto-formation of socioeconomic orders. This is confirmed by the results of the existing research which proves that an institutional order encompasses both constituted and spontaneous rules (Grabska, Moszyński, Pysz 2014). On the one hand, it can be noticed that the rules of the economic game dictated top-down by political authorities have an influence on the behaviour of economic entities, and indirectly (through the course of market interactions) on the very way in which the rules of the spontaneous economic order are shaped. This interdependence also works in the opposite direction. The principles of the economic game, which belong to the realm of the spontaneous order, are not without influence on the rules of the made order; on the contrary, they force the state authorities to impose specific solutions. 4 In order to meet the research objectives, the paper will present, on the basis of the theoretical notions of constituted and spontaneous economic orders, the views on the sources of institutional order in capitalism within the last 250 years, i.e. from the times of Adam Smith until the present day. Classical English political economics Classical economics was the first to notice the framework within which economic processes occurred. Earlier scholars, including, e.g. the mediaeval Spanish scholastic philosophers from Salamanca, focused on search for answers to questions about fair prices or the moral aspects of lending money on interest. It was only Adam Smith, regarded as the founder of liberal economics in the The Theory of Moral Sentiments from 1750 (Smith 1989), and above all in An Inquiry into the Nature and Causes of the Wealth of Nations from 1776 (Smith 2007), who presented an analysis of conditions which a socio-economic order should provide for business processes to ensure that possibly all its participants benefit from it. Smith actually had a holistic view of the economy: he did not see it as a separate subsystem, but as a subsystem that functioned as part of the social system as a whole. In his debate with the representatives of mercantilism, a trend dominant in the 17th and 18th centuries, Smith developed the concept of an order whose objective was to guarantee proper conditions for the market mechanism ('the invisible hand'). In the short term, the market mechanism enables mutual adjustment of demand and supply for a given product, whereas in the long term, it makes it possible to match the structures of production to the needs of purchasers, which is an essential prerequisite for the financial gain of the participants of business processes. Motivated by his own interest and a willingness to maximise his profits, indirectly through division of labour, increase in productivity, and exchange interaction among market entities, every market player provides benefits to the entire society, even if he is only guided by self-interest. A thus defined market mechanism would be by itself capable of regulating business processes and catering for the needs of society, making it possible to limit the role of the state to an indispensable minimum. Consequently, from the point of view of the whole society, the most advantageous allocation of goods and resources would stem from the desire of individual persons to pursue their own business goals, with the smallest possible interference on the part of the state. By means of this future-oriented vision of the market, Smith renounced the contemporary reality of the mercantile market economy of 5 the 18th century, in many European countries, especially France (Colbertism), characterised by strong state interventionism. According to Smith, the following principles of socio-economic order ensure that a market mechanism functions smoothly: private ownership of production factors, freedom of those who participate in economic processes, competition, and free foreign exchange (Smith 2007, p. 343 and onwards). The role of the state in an economy should be restricted to making sure that the above-mentioned institutional conditions for proper functioning of the market mechanism are fulfilled. To this end, the formal rules of a socio-economic order should entitle the state to protect and enforce the principles binding a given society, i.e. to defend the existing order. It is a necessary minimum beyond which no state authority is allowed to encroach. This, in fact, means that the role of politics in a society is only confined to shaping a few, absolutely indispensable rules of economic order, with complete relinquishment of any interference in the course of business processes. To justify his views, Smith, similarly to Adam Ferguson and David Hume, points out that knowledge needed to ensure rationality on a social scale is not possessed by any one entity, e.g. a state institution, nor is it available in a condensed or integrated form, enabling management of the economic activity of an entire nation, but that it is dispersed among individual persons. The classical concept of a socio-economic order in which the role of the state is minimal assumes that all the participants of business processes act in a reasonable way and strive to maximise their profits. Such nature of market players entails the necessity to create rules which will allow for maximisation of individual entities’ satisfaction within the boundaries set by the right of the other players to increase their gains. According to John Stuart Mill, people should have the freedom to do what they wish, as long as they do not harm others. What guarantees the realisation of this idea is an order based on the principle of individualism and broadly understood freedom, which requires, among other things, legal protection of individuals and non-intervention of the state in business operations. It stems from the above that the wealth of a nation, which for Smith can be expanded through the market mechanism, is based on the doctrine of spontaneous harmony of individual interests (Blaug 1994, pp. 78-79), akin to Hayek’s concept of spontaneous order. Hayek claims that it was Smith who presented the advantages of the market as a process of a spontaneously developing economic order and discovered that the mutual adjustment of individual plans occurs thanks to negative feedback, and that the Smithian ‘invisible hand’ solves the problem of limited human knowledge (Godłów-Legiędź 2016, p. 56). Not only does it help optimal allocation of goods and resources, but is also conducive to gradual and 6 spontaneous bottom-up development of the economy. Top-down establishment of order should be confined to safeguarding the lives, freedom and property of the individual. The Marxist thought Marx and his followers rejected, as fundamentally false, the liberal economic views of Smith, Jean-Baptiste Say and Mill. They believed that capitalism facilitates, above all, exploiting the working classes in order to derive additional revenue from their labour to be taken over by the owners of production factors. It, therefore, mainly enables the parasitic class to become even richer. Marx described it in an evocative manner as the capitalists’ ‘wolfish hunger’ for extra profit. He claimed to have turned ‘from its head to its feet’ the idealist theory of mankind’s development created by the German philosopher Georg Friedrich Wilhelm Hegel, based on the dialectic method (thesis, antithesis, synthesis). He replaced it with historic materialism, calling it, rather boastfully, ‘the law of motion’ of modern society. ‘Historic determinism’ is the key component of the concept of historic materialism. It assumed that the humankind had evolved throughout its history from primitive, tribal communities, through slavery, feudalism, capitalism, to finally reach the stage of communism. According to this view, the socialist socio-economic order was to be the ultimate and most perfect stage in the development of mankind. Then and only then would an ideal socialist society of ‘equal and free’ people come into being. The visions of Marx and his disciples as regards the development of the socio-economic order of a socialist society are very general, vague and expressed implicitly rather than explicitly. He described himself as a critic of capitalism, who nevertheless refrained from unscientific predictions as to the specific ways in which the socialist societies of the future would emerge and function. He repeatedly criticised the futuristic visions of other socialistoriented scholars, e.g. Henri Saint-Simon, Charles Fourier, or Robert Owen. In order to emphasise his reservations about their opinions, he introduced a distinction between scientific socialism, which he himself represented and utopian socialism, which he criticised. According to Włodzimierz Brus, the views of Marx and Marxists on the future economic order under socialism – formulated, in fact, on an a contrario basis to capitalism – can be summarised as follows: ― collective ownership of the means of production, ― central planning and bureaucratic control of business processes, ― balancing business processes in natural units, 7 ― distribution of the manufactured products on the basis of the amount of labour contributed by particular individuals, ― elimination of market and money (Brus 1971, pp. 31-41). In an economy that would live up to the Marxist ideal, the socialist economic order would be shaped exclusively by top-down decisions of political authorities which ex definitione were supposed to represent the interests of society as a whole. Unlike Eucken's concept of a constituted economic order, it is an artificial order in which, after the elimination of the market and money as general mechanisms of co-ordination and allocation of goods and resources, there are no institutional conditions for grassroots self-formation of its spontaneous elements. In an ideal model of socialist economy envisioned by Marx, the top-down approach to decision-making does not only concern the elements of institutional order, but also what Hayek referred to as market activity order (von Hayek 2003, pp. 99-100). In other words, also business processes (co-ordination and allocation on a macroand micro-scale) are fully controlled from above by state authorities. Although Marx's concept of socialist economy was so completely out of touch with the realities of the economic life of the 19th and 20th centuries that it was essentially utopian, its author became widely hailed as a genius of economic and social thought who had achieved a synthesis of Hegelian historical dialectic with the legacy of the classical English political economics. That synthesis led him to inventing a new materialist theory of the development of human societies, on the basis of which he formulated the thesis of 'historic determinism': the inevitable transition of societies and economies from capitalism to socialism. This particular view of Marx's was accepted by several other thinkers, e.g. Josef Alois Schumpeter, the author of the notion of 'creative destruction': the driving force behind the development of the capitalist economy and society, which he believed, however, was to eventually result in the unavoidable downfall of the capitalist world order (Schumpeter 1993, pp. 509-525). In his valedictory speech given at Marx's funeral at the Highgate Cemetery in London in March 1883, Engels said: "(...) the greatest living thinker ceased to think. (...) Just as Darwin discovered the law of development of organic nature, so Marx discovered the law of development of human history (...)" (Brackmann 2017, p. 48). John Maynard Keynes John Maynard Keynes' theory of economic policy was developed after the great economic crisis of the years 1929-1933, and was expounded in detail in his book The General Theory of 8 Employment, Interest and Money (Keynes 2003). The Keynesian idea of socio-economic order, which assumes the freedom of individuals, private ownership of production means, and market co-ordination of business activity in combination with an active role of the state, differs fundamentally from both the classical and neo-classical models. The basic difference consists in the fact that Keynes, unlike Smith, assumed that there was no compatibility between self-interest and the common good, which in turn required corrective action concerning the activity of individual business entities. In Keynes' opinion, it was the state that should be responsible for the corrective action, and that it had a right to interfere not only in business processes but also in re-distribution of wealth in order to minimise the negative consequences of excessive disparities of income and wealth and the curbing of involuntary unemployment (Godłów-Legiędź, Puliński 2008). Moreover, Keynes presented a model described by means of aggregate quantities at the level of a national economy, rejecting in this way a microeconomic approach from the perspective of individual participants of the economic process. Keynes also departed from the neoclassical view of the economy, treating the existence of an economic point of balance as a matter of secondary importance, assuming instead that instability was inherent in economies (Grzesiuk 2014, p. 268). As the focal point of his idea of socio-economic order he chose the process of change and development which occurs in the economy as a whole, as well as the activities which could have an impact on this process. According to Keynes, an active role of the state in a socio-economic order was an answer to the limited capacity of the market to ensure full utilisation of production factors. The lack of confidence in the market stemmed from Keynes' belief that the scale of the production factors involved in an economy was dependent on the volume of production, which, in turn, he saw as a function of insufficient demand. The state is responsible for compensating for the unsatisfactory level of demand by using the tools of fiscal policy to stimulate its various components. In the field of fiscal policy, Keynes proposed a redistributive tax system, aimed at shifting the revenue produced by affluent persons with relatively higher inclination to save money towards those who were more willing to devote it to consumption, as well as at implementing public investment projects to supplement insufficient private investments. Meanwhile, the activity of the state on the financial market should be reduced to lowering interest rates in order to stimulate private investment decisions (Keynes 2003). Both fiscal policy tools and monetary policy tools involve direct influence on business processes, which from the point of view of the theories of made and spontaneous orders means, in the long 15 market interaction. The state remains on the margins of business processes, at most paying the role of a 'night watchman'. Some of the more radical representatives of the modern Austrian school suggest, on the basis of the natural law, that the interference of the state in social business processes should possibly be eliminated altogether. Re: ii. The antithesis of the above ultraliberal model of economic order proposed by the classical and neoclassical schools is the consistently centralised model deriving from the Marxist tradition. In this model, both the principles of the economic order and, through state regulations and redistribution of goods and resources, the very processes of business making are managed top-down by political authorities. It is a model which involves the omnipotence of the state in terms of establishing the economic order and imposition of the business model. As Engels allegedly put it, after the centralised model has been implemented, the chaotic and anarchic market will be consigned to the 'dustbin of history'. Re: iii. The ordoliberal model of economic order is a synthesis of the strictly liberal and the centralised models. As regards the course of market interactions and the auto-formation of spontaneous rules of an economic order resulting from the market operations, it is a par exellence liberal concept. On the other hand, from the consistently centralised model it borrows the idea of top-down dictation of economic order principles by the political government. This synthesis constitutes ordoliberalism and implies a feedback between the constituted and spontaneous rules of economic order. In this concept, however, emphasis is placed unambiguously on the creation of an order. Spontaneous processes are only subsidiary to the rules imposed from above. Having attempted to assess the usefulness of the models of economic order discussed as ideal types, it can be concluded that they usually failed to fully meet Hayek’s criterion of long-term viability. Liberal market economy functioning according to the expectations of the neoclassical economists underwent one economic downturn after another, which, in the mass societies of the twentieth century, meant the necessity of interference of the unpopular ‘night watchman’, as according to Keynes’ theory the state is obliged to generate additional global revenue in times of crisis. Without this corrective mechanism, the neoclassical liberal model of economy would not have survived the previous century. Meanwhile, the fully centralised model of a state-controlled economy indeed failed to last that long. Unlike in the neoclassical model, in order to ensure its long existence it was not possible to resort to the Keynesian instruments and methods because socialist economies were characterised by an excess of demand over supply. Janos Kornai aptly described them as ‘shortage economies (Kornai 1985). 16 The ordoliberal economic model, thanks to the synthesis of the two above-discussed concepts of order, has managed to avoid the lopsidedness which prevented the survival of the centralised model and is still threatening the existence of the neoclassical one. This provides more favourable conditions for its long-term endurance. The empirical confirmation of this claim is provided by the German Social Market Economy of 1948-1966 introduced by the government of Ludwig Erhard, as well as the modern German economy which is only slightly different in terms of economic order, but still functions well in the spirit of the ordoliberal concept, both from the perspective of economic efficiency and the relatively high degree of respect for superior social values (Mączyńska, Pysz 2016). Because of the high level of economic and social functionality of this model, it is increasingly in the focus of interest of the academic authors and creators of economic policies. This also finds its expression in the constitutional regulations passed in numerous countries, including Poland and other European Union states. 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