uno | dos | tres | cuatro
1. classical economy
2. neoclassical economy
3. Karl Marx
4. Joseph Schumpeter
5. ordoliberalism6. keynesianism
7. critical rationalism
8.philosophical criticism
9. monetarism
5. ordoliberalism 5.2 Alfred Müller-Armack Alfred Müller - Armack is an economist completely unknown outside Germany. Who is looking for som biographical data can find them, not very surprising, in wikipedia: Alfred Müller - Armack. He coined the term social market economy something that at least the germans believe to be something very specific german, althought it exists in almost all developed country.
The idea is very simple. It is the market who decides how something is produced, what is produced, for whom it is produced and who produces it, but afterwards the result of the market is redistributed, see homo oeconomicus.
That is obviously the opposite of a socialist state, where a central planning commission decides who produces something, how it is produces, what is produced and for who it is produced.
However in practise things are more complicated and the term social market economy is actually meaningless. It is true that the impact on the allocation of resources is lesser if the government doesn't interfere in the production structure, however it is equally clear, that the incentive for entrepreneurship is cero if all the differences in income are afterwards eliminated by social transfers. The crucial questions, how much social transfer and in which form are therefore as little resolved under this economic order as in any other country who guarantees a certain living standards to all its citizens.
The limits between neoliberalism, ordoliberalism, austrian school and social market economy are not very clear. The difference is not a completely different economic theory. The difference consists more in the importance assigned to different characteristics of market economies, but there is no difference concerning the characteristics themselves.
They all agree that only the market mechanism can exerce an effective control over the use of resources and they all agree, that a minimal standard of living should be granted, but there are big differences concerning the level of this minimal standard, the way it is provided and the consequences for the individuum living of social transfers.
Hayek and Friedman focus on the lack of incentives to work if social transfers are to high, Eucken and Müller-Armack on the need to grant social cohesion. That is not actually a different theory about economic causal chaines, but there is a big difference in the tone.
All this lines of thinking stresses the importance of the market mechanisms in the allocation of resources and the function of prices as a signal of scarcity, see allocation of resources and all these lines of thinking assign the government the task to maintain the intensity of competition high enough.
However there is a difference in the scope. For Milton Friedman and Friedrich Hayek the market economy is guarantor of personal freedom: Cooperation without coercion, see Milton Friedman on Voluntary Cooperation as a Necessity of the Free Market. With that logic we have a problem. If the market economy pursues two goals, efficiency and personal freedom, it would be preferable even in the case that it is less efficient than an economy where the government intervenes in the economy, because it guarantees greater personal freedom.
The idea of a market economiy as the guarantor of personal freedom plays almost no role in the theory of Walter Eucken and Alfred Müller-Armack, hower the latters focus on the role to be played by the government in maintaining the intensity of competition high enough.
The actual situation concerning social policy in most developed countries has little to do with abstract theories. In most countries, for instance in Germany, throughout history were passed a lot of isolated laws which covered different aspects of social problems, unemployment, illness, orphans, old age provision etc. and these isolated laws were finally codified in one big social system. Social legislation is nothing that was born in the mind of a lonesome thinker. Social legislation is the result of a historic process. It is therefore nonsense to call Alfred Müller-Armack the "father" of the social market economy and actually social market economy is another word for welfare state. The laws that regulates social transfers existed long before him and similar laws existed and exist in any developed country and are continually modified.
However the term was politically useful in the post world war II period. The CDU, which had its origins in the Zentrumspartei of Weimar, needed a slogan that allowed to appeal a majority of people, something not possible with the Zentrumspartei, a national catholic party with little suport of the "working class". The term social market economy suggested that the conflict between "labour" and "capital" was resolved with this "new" economic order and that helped the CDU to win the elections.
Neoliberalism as well as ordoliberalism / social market economy assign to the government the role to keep competition alive, however there is a difference. Neoliberalism, Milton Friedman and Friedrich Hayek, although they assign the government the role of an arbitrator, consider the government more than a potential threat to freedom. If the government intervenes in the economy, it attracts economic resources and therefore power. That's why Milton Friedman and Friedrich Hayek are more critical as well concerning breaking monopolistic structures.
(A fear that is not completely unfounded. The attacks of the european monopoly commission against microsoft and google seem to be more motivated by the desire to earn money than by the desire to keep competition alive.)
The basic problem with all these lines of thinking is that there are very vague. It is easy to find situations where governmental intervention is useful and equally easy it is to find examples where it is not useful at all. We can find examples where a monopilistic structure should be broken and other examples, where that is not useful. We can find examples where everybody would agree that social transfers are fair and cases where everybody would consider it an abuse.
All the aspects addressed by these lines of thinking, the risks of governmental intervention, maintenance of a sufficient high degree of competition, social balance, the market mechanisms as a means to guarantee the optimal allocation of resources, are to be taken into account when it comes to analyse a real world problem, but in a real world situation normally other aspects are to be taken into account as well and therefore the evaluation of a situation will differ depending on the concrete situation. We will return on the topic in the chapter about Milton Friedman.
(As we already said very often, a lot of things can be said about Milton Friedman, but we can't say that he is inconcrete and vague as all the others authors from this or similar lines fo thinking, see Free to Choose Part 2: The Tyranny of Control, Featuring Milton Friedman. The video addresses some issues discussed above.).
All these lines of thinking share the classical concept about capital, interest rates, money and savings and these concepts are completely wrong, see interest rates, and by criticising these notions Keynes addressed a more fundamental problem, although he never denied that the aspects mentioned before have to be taken into account. We will return on the issue in the chapter about Keynes.
Alfred Müller - Armack is as vague and imprecise as Hayek, although less fanatic.
Wir sprechen von "Sozialer Marktwirtschaft", um diese dritte wirtschaftspolitische Form zu kennzeichnen. Es bedeutet dies, wie aus allem bisher gesagten zur Genüge hervorging, daß uns die Marktwirtschaft notwendig als das tragende Gerüst der künftigen Wirtschaftsordnung erscheint, nur dass dies eben keine sich selbst überlassene, liberale Marktwirtschaft, sondern eine bewußt gesteuerte, und zwar sozial gesteuerte Marktwirtschaft sein soll. |
We use the term "social market economy" to describe this third form of an economic order. That means, as it can be concluded from what has been said until now, that we consider the market economy the basic framework of the future market order, although it will not be a liberal market economy abandoned to itself, but a conscioulsy steered and steered to comply with social standards. |
This means concretely nothing and most of all it is nothing new. Some kind of social welfare existed everywhere at all times, although at a very low level.
The only thing we can deduce from this paragraph is that he assumes that the only problem of a market economy is the social question and beside that the economy should be left alone. It is a stunning phenomenon that nor Alfred Müller-Armack nor Walther Eucken felt any need to discuss the underlying assumptions of this theory, in other words, to discuss the function of interest rates, savings, money and capital. In other words, they saw the problems of planned economies, but they didn't see the problems addressed by Keynes.
[Keynesianism started to play a role in Germany only in the sixties; the Law to Promote Economic Stability and Growth from 1967 is based on keynesian theory.]
Alfred Müller-Armack considers a market economy as kind of a machines, that allocates the resources in an optimal way and produces therefore the maximal output under given circumstances. ( The language is a little bit weird. What he wants to say is described in the chapter optimal allocation of resources or natural price / market price.)
Begreifen wir die Marktwirtschaft als variablen Rechnungs- und Signalapparat, so ist in dieser formalen Bestimmung ihres Wesens gleichzeitig gesagt, dass dieser Apparat das Ziel des Wirtschaftens nicht von sich aus bestimmt, sondern als ein Datum hinnimmt. Ob wir die durch die marktwirtschaftliche Einkommensverteilung gegebenen Bedarfsgrößen einfach annehmen oder sie durch eine Einkommensumschaltung verändern, ist für den Rechnungsapparat gleichgültig. So gesehen, ist er ein formales Verfahren, welche in den verschiedensten sozialen Rahmen zu funktionieren vermag. |
If we understand the market economy as a variable calculating and signal machine, than this formal definition includes that this machine doesn't define the goal of the economic activities, but takes these goals as a given data. If we accept the distribution of the national income as it arises from the market, or if we change this distribution afterwards, doesn't make any difference for the machines. Viewed like this it is a pure formal process that can work in very different social contexts. |
What he wants to say is simple. The market mechanisms guarantees the optimal allocation of resoureces, view this way, it is just a machine that can be used for any goals, something like a hammer, that can be used for a lot of very different things.
It is crystal clear that this is not correct. It is not enough that the prices signal scarcity and therefore the possibility for profitable invevstments. We need as well someone willing to reduce this scarcity and this someone needs an incentive. It the social transfers leads to a complete levelling of income, this incentive doesn't exist anymore.
[What is actually true is that marxism is nonsene. Not only because central planning doesn't work, but because an equal distribution could be levelled at any moment. There is no need for a revolution to do that.]
Sometimes he says, see paragraph below, although in an imprecise way, something correct. It is very true, see methodological approach, that the neoclassical theory doesn't not describe a market economy. The opposite is true. The methodological approach is very similar to the socialist approach. It is assumed that the general equilibrium can be predicted. If it can be predicted, it can be planned and the basic problem a market economy resolves best, insecurity, doesn't exist any more. There is no need for a somehow "chaotic" trial and error process, if the general equilibrium can be predicted, see also equilibrium in the short run and equilibrium in the long run.
[Beside that it can be questioned whether the equilibrium is the right paradigm. The equilibrium on the good markets is defined as a state where everybody who could and was willing to sell the commodity for the market price sold it and everybody who was able to buy the commodity and willing to pay the market price has bought it. The problem is, that this doesn't explain nor the production structure, nor the purchasing power of the people and that is what we actually wants to know. If people for instance didn't bought the amount of flour needed and died of hunger, we will reach a market equilibrium, because only those who were able to buy flour would survive. Furthermore following the neoclassical theory an equilibrium of the labour market is achieved if everybody who was willing to work for the (monetary) marginal ouput of labour has find a job, otherwise, if we assume that the (marginal) monetary output falls with an increase in output, the wages has to decrease until full employment is reached. This is actually true. If workers are willing to work for one dollar a week there is no unemployment, because they die of hunger and dead people are not unemployed, that's obvious.]
The paragraph is a little bit imprecise and must be interpreted, but that is a characteristic of all the texts from this line of thinking. If we take a closer look on the text, we will realise that Alfred Müller - Armack didn't understand either what a market economy is about.
Wenn wir die Marktwirtschaft so als eine variabel gestaltete Form der Wirtschaftsrechnung bezeichnen, enthält sie nichts spezifisch Liberales mehr an sich. Sie ist ein Instrument rechenhaften Wirtschaftens, das ich eigentlich nur dann abweisen kann, wenn ich, statt beweglich disponierend zu wirtschaften, zu einfacher verwaltungsmäßiger Verteilung übergehe, was zwar äußerlich noch wie Wirtschaft aussieht, es aber in einem anspruchsvolleren Sinn gar nicht ist. Wenn wir den Sinn der Marktwirtschaft ohne alles störendes Beiwerk nüchtern verstehen wollen, müssen wir auch darauf verzichten, in sie rätselhafte Gleichgewichtskräfte hineinzugeheimnissen. So aufschlussreich diese Ideen für die Geistesgeschichte des 19. Jahrhunderts sind, für die die Theorie der Marktwirtschaft bedeuten sie nur eine Last. An die Stelle des Harmonieglaubens lassen wir die Feststellung treten, daß zweifellos die Marktwirtschaft ein Rechnungs- und Signalsystem darstellt, welches erlaubt, den Wirtschaftskreislauf als Ganzes selbsttätig sich vollziehen zu lassen. |
If we consider the free market economy as a variable form of economic calculating it doesn't contain any more something specifically liberal. It becomes than an instrument that provides the needed calculations for the economic activities and this can only be refuted if we pass from a flexible handling of economic resources to a more simple and administrative one, something that looks like an economic process, but isn't it in a more demanding sense. If we want to understand the sense of a market economy putting aside everything incidental and irrelevant there is no need to look for enigmatical forces of equilibrium. Maybe that approach was useful in the 19 century, but nowadays this approach is a burden. Instead of a belief in harmony, we consider the market economy as a calculating and signaling system, that allows us to stay out of the economy and let it work alone. |
This is actually a little bit strange: " If we consider the free market economy as a variable form of economic calculating it doesn't contain any more something specifically liberal. It becomes than an instrument that provides the needed calculations for the economic activities and this can only be refuted if we pass from a flexible handling of economic resources to a more simple and administrative one, something that looks like an economic process, but isn't it in a more demanding sense."
The term liberal is not defined, that is a general problem with all the authors of this and similar kind of thinking. We have the same problem with Hayek, see a variation of a totalitarian theory. In this context we assume that he refers to economic freedom, in other words that the government intevervenes as little as possible in economic issues. However he assumes that the market allows little choices, that he gives clear signals and the entrepreneur has no choice but to react to this objective choices. In other words, he is not reall free. He has to obey to the market. Reality unfortunately very often is different. The signals of the market are very often very unclear and the entrepreneur only knows afterwards, when he is bankrupt or rich, if he interpreted the market signals correctly. The idea that there is no liberty because the market is only kind of signaling machine like the traffic light is wrong for two reasons. First, because entrepreneurs has unfortunately a lot of options between they are obliged to chose and second because he underestimates completely the role of insecurity, a basic problem addressed by Keynes.
The second part of the paragraph is as strange as the first one: "If we want to understand the sense of a market economy putting aside everything incidental and irrelevant there is no need to look for enigmatical forces of equilibrium. Maybe that approach was useful in the 19 century, but nowadays this approach is a burden. Instead of a belief in harmony, we consider the market economy as a calculating and signaling system, that allows us to stay out of the economy and let it work alone." The author assumes that he already said at least 1000 times that he is not very convinced that the different definitions of equilibriums make a lot of sense, see Vilfredo Pareto. However his "calculating machine" has an optimization algorithm and this algorithm lead to an equilibrium, at least as a tendency, see natural price / market price. His "calculating machine" allocates the productive factors in a way that the (monetary) marginal output is the same in any use, see natural price / market price. If that is reached, it is called general equilibrium. However the idea, that the 'calculating machine' works alone and that the entrepreneur only reacts on signals as the road-user reats on road sign is a misleading idea. If the economy would be as simple as that, central planning would be actually possible. He underestimates completely the impact of insecurity.
[The same error in thinking becames more relevant in the theory of Walter Eucken. Walter Eucken pleads for the unlimited liability of the managing director, in other words he pleads for the abolition of the capital companies. His argument is, that this will prevent the managing directors to take unresponsable risks. The point is that in a situation of insecurity someone has to take big risks and if the liability is unlimitid, nobody will do it. Furthermore everybody who cooperates with a capital company, as a lender, a donner of equity capital, supplier etc. knows what he is doing.]
Man braucht diesem heute verpönten Ausdruck einer gesellschaftlichen Automatik gar nicht so ängstlich aus dem Wege zu gehen, wenn man sich nur darüber klar ist, daß auch unsere besten Automaten einer gewissen Bedienung bedürfen, ja, in dieser Hinsicht ganz besondere Ansprüche stellen. Es war eine unkluge Übertreibung des wirtschaftspolitischen Liberalismus, die Tauschgesellschaft gleichsam als einen keiner Bedienung bedürftigen Vollautomaten zu nehmen. Wir können heute den Gedanken einer gewissen inneren Regulierung aufrechterhalten, ohne uns mit solch extremer Ansicht zu verbünden. |
There is no need to avoid anxiously the term so scorned today of a social automatism if one is aware that even our best machines need someone who operate them, that they even are demanding concerning that. It was an unwise exaggeration of the economic liberals to present the exchange society as a machine that doesn't need no one to operate it. Today we can stick to the idea that a certain internal regulation is needed without sharing this extreme position. |
This paragraph as well is somehow obscure. He assumes that liberalism means that the economy works without any governmenal intervention and that the "economic machine", a signaling systems, works perfectly. This is actually a strange view on economic issues. Liberalism means most of all that the entrepreneur can chose about several options, that he take risks. The entrepreneur in a free market society is for liberals more something like the schumpeterian creative destructor, than a road-user who respects the traffic regulations.
[This is actually the way Walter Eucken and the ordoliberalism imagine the ideal economic order. In this order the market player can move freely from A to B, but they have to respect the rules. However in practise this is almost meaningless, in other words, there is not much discussion about that. We need some rules, nobody questions that. But the idea that it is enough to establish the economic order is a misleading idea, when the main problem is the destination of the trip.The basic problem, insecurity, is not even addressed.]
Liberals from the Hayek or Friedman style are against any kind of intervention, while Müller-Armack assumes that "it was an unwise exaggeration of the economic liberals to present the exchange society as a machine that doesn't need no one to operate it" and therefore pleads for governmental intervention, although he doesn't explain clearly what that means in practice. We can assume that he refers to social transfers.
The problem with Hayek, Eucken and Müller-Armack is, that the term and notion used are unclear and never defined. There is therefore no way to discuss their conceps. That's what they distinguish from Milton Friedman, see for instance Milton Friedman - The Social Security Myth. There is no need to share his opinions, but at least he discusses some concrete issues.
His assumptions that 'liberals', in other words people like Hayek, consider the market as kind of calculating machine and a signaling system is wrong. This conception of the economy would fit to the conceptions of Léon Walras and Vilfredo Pareto, but
von Mises and the austrian school in general refute this conception. If the economy were so simple that its signals are clear, it could be planned, see methodological approach.
If we compare Hayek with Müller-Armack we have the problem that both are vague and it is difficult to compare two only vaguely defined systems. We can only say, that government intervention is perceived more critically by Hayek than by Müller-Armack. For Hayek any kind of government intervention is a road to serfdom, see a variation of a totalitarism theory, while some government intervention is needed in the perception of Müller-Armack.
He didn't mention Hayek in the following paragraph, but it is clear that the critique, although very smooth, refers to Hayek.
The problem of Müller-Armack is that sovial transfers, something he pleads for, requires government intervention.
[More intelligent approach would have been, obviously, to discuss a concrete measure, something like a negative income tax, see Milton Friedman, negative income tax. We can only discuss about concrete measure. We have to take into account the basic principles presented throughout this website and find a compromise, but we can't discuss about abstract statementes.]
Es ist nicht so, als ob die geistige Freiheit und Unabhängigkeit schon durch die Marktwirtschaft als solche gesichert würden, in jedem Fall bedarf es dazu noch des Mutes, der auf seiner Freiheit besteht. Aber es scheint uns aussichtslos zu sein, von einer wirtschaftlich unfrei organisierten Gesellschaft auf die Dauer erwarten zu wollen, dass sie sich den Sinn für ihre Ideale bewahrt. In der Vergangenheit waren der deutsche Patriarchalstaat und das preußische Beamtenregiment schlechte Schulen freiheitlicher Gesinnung. Wir haben einen hohen Preis dafür zahlen müssen. Können wir von einer total fortgeführten Wirtschaftslenkung etwas anderes erwarten als die Fortsetzung dieses Verhängnisses? |
The market economy alone doesn't guarantee personal freedom and independence, courage that insists on freedom is required as well. However it seems impossible to us that a society with no economic freedom will stick for a long time to its ideals. In the past the german patriarchical state and the prussian regime of officials were bad schools for liberal values. We had to pay a high price for that. Can we expect from totally planned economy something else than the continuation of this disaster? |
His explanation for ascension of the nazis, "...We had to pay a high price for that..." is not what we would call historically convincing. We had similar mouvement in other countries, but at least it is better than the explanation for this phenomenon given by Hayek.
However Müller-Armack has the same problem as Hayek. His theory is a strange mix of economics, sociology and psychology, but in none of these sciences he is really an expert. From an intellectual point of view we can't compare them with figures like Adorno, who actually give a psychological interpretation of totalitarism as well, see the authoritarian personality, but Adorno was an expert in psychology as well as in many other fields. There is no need to share the opinions of Adorno, but a more psychological approach allows perhaps some insights on totalitarism. (The authorian personality is even described in a novel, The loyal subject by Heinrich Mann.)
The problem is that sentences like "... the market economy alone doesn't guarantee personal freedom and independence, courage that insists on freedom is required as well. However it seems impossible to us that a society with no economic freedom will stick for a long time to its ideals..." are meaningless.
If the government intervenes to reduce the C02 emissions because that have a devastating effect on the clima some people will perceive that as an infringement to personal freedom. People who are negatively affected by climate change will see that in a different way. It can be discussed what are the best messures to reduce the CO2 emissions, selling pollution rights, subsidising new, less polluting technologies, prohibiting certain products etc. etc.. When is comes to discuss real world problems it is less a question of freedom or road to serfdom, but how to resolve a problem best.
As with all other terms used to summarise different authors under one term we run the risk to put together incompatible things, see as well classical theory. As we already said, the difference between neoliberalism, austrian school, ordoliberalism and social market economy lies not in clear differences concerning economic causal chaines, but in the differences given to the respective aspects to be taken into account. Some paragraphs, as the one below, would be strictly refuted by Hayek and Friedman.
(The first part, "...beside liberty there are other aspects..." refers to Hayek. The rest opens the way to what Hayek would call a road to serfdom.)
Gewiß gibt es neben der Sache der Freiheit noch andere Werte, auf deren Verwirklichung wir im Rahmen einer Wirtschaftsordnung nicht verzichten können, und es hängt Entscheidendes davon ab, wie weit die Marktwirtschaft in ihrer gesteuerten Form erlaubt, derartige Ziele zu erreichen. Wir bedürfen dringend einer harmonischen Sozialordnung, wir sind überzeugt, den Wirtschaftsraum und seine bauliche Gestaltung nicht dem persönlichen Belieben überlassen zu dürfen, wir hegen bestimmte Überzeugungen bezüglich eines gesunden Betriebsaufbaues. In bestimmten Bereichen erscheint uns der öffentliche Betrieb, in anderen eine starke Beteiligung von Klein- und Mittelbetrieben erforderlich. Auch die Agrar- Industriestruktur empfinden wir als eine Frage richtiger Lebensordnung, die gestaltet werden muß und nicht dem Belieben wirtschaftlicher Vorgänge anheimgegeben werden kann. |
Beside liberty there are other values to be taken into account in the foundation of an economic order and everything depend on the degree a market economy in its controlled form can be compatible with these values. A harmonic social order is urgently needed and we can't abandon its construction to arbitrary personal initiatives. We have a concrete vision concerning a sound economic order. In some cases a public run company seems us the best solution, in other we plead for the participation of small and medium sized enterprises. We perceive as well the structure of agriculture and industry as a question that touches the right way of living to be planned and not abandoned to arbitrary economic processes. |
The problem is obviously this obscure, pompous style. What he wants to say is simple. Without money there is very little liberty. People don't care about liberty, if they starve to death. The rest however is strange and actually not compitable with the basic idea of the social market economy whose inventor Müller-Armack is generally considered. Instead of simply redistribute the income as a result of the market, he wants to have run in some sectors the companies by the government and agriculture and industry is considered as a question of the right way of living and not only of efficiency. In some sectors he wants small or medium sized companies, that means, otherwise the sentence doesn't make any sense, that he wants to control the size of the companies. All that sounds very much like central planning.
The question is whether we have really a contradiction between efficiency <=> social transfers or liberty <=> social transfers or if more economic freedom leads to higher efficiency. These question can't be discussed abstractly. It depends on the concrete measures taken by the government.
In a lot of countries we have for instance the problem of rising prices for housing and this is due to the fact, that we have more speculation with existing appartments than money invested in building new ones. This could be resolved by increasing the taxes for already existing houses, lets say house older than fifty years and lower taxes or none for new houses. That would have the effect that it becomes less attractive buying an old houses and more attractive building a new one. This would be positive from a social point of view, with the higher supply the prices for houses would decrease and more efficient, real values would be created and less social transfere were needed. It would restrict as well economic freedom, but would be nevertheless more efficient.
If the supposed incompatibilies actually really exists depend on the measures taken.
It is unclear whether lines of thinking like neoliberalism, ordoliberalism, austrian school or social market believe that unemployment is possible. We don't know if they stick to the classical or neoclassical theory concerning this point, because there is no coherent and complete economic theory. Classical and neoclassical theory assumes that unemployment will disappear automatically in the long run.
Alfred Müller-Armack only tells us that a "harmonic" social order is needed.
If we stick to the keynesian theory, see the little book downloadable from the start site of this website, unemployment is possible and unemployed resources are a waste. It it is possible to activate them, for instance by lowering the interest rates, see interest rates,
there is neither an incompatibility between efficency and social justice nor a restriction of freedom. The opposite is true. It is more efficient and socially more balanced if this inactivate resourse are used and people who earn money have more freedom than people who has not.
The problem with Alfred Müller - Armack is that uncounsciously he has a certain idea about economics and assumes therefore that these kind of conflictive situation exist. If they really exist, depends on the economic theory one has.
To put it simple: Let's assume that the keynesian theory works. In this case there are no conflicts. An expansive fiscal policy, a possible conclusion that can be drawn from keynesian theory, reduces unemployment, diminishes social inequality, increases efficiency, because unemployed resoureces will be activated. There is no infringement in freedom, because nobody is obliged to cooperate with the government, but it is to be expected that companies who has free capacities will voluntarily cooperate. No conflict between any values nowhere.
In real life it doesn't make a lot of sense to speak about freedom and liberty in abstract terms, although the title of the book by Milton Freedman "Capitalism and Freedom" suggests that. Ordinary live is much more trivial and doesn't consist of a fight between the evil and the good. It is well possible that a natural monopoly (for instance water supply) run by the government, that is perhaps what Müller Armack refers to, "...In some cases a public run company seems us the best solution...", is less efficient than a private company, but they will put a market price. In this case the freedom of the entrepreneur can be restricted, because it wouldn't lead to a greater efficiency.
Freedom can be restricted if it leads to a decrease of efficiency.
In this sense there exists actually a trade off between freedom and efficency. That explains while Milton Friedman views governmental intervention related to monitoring monopolies more critiqual, see Milton Friedman, Monopoly. In this concrete case Milton Friedman is obviously right. At a world wide level monopolies are inexistent. Instead of complicated anti trust laws we need free trade. However in other cases, for instance water supply, garbage collection, the rails of the railroad companies (the rails not the trains!) there is no world wide competition and it can be more efficient to prohibit private competition. (The author doesn't believe it really, but it is a theoretical possibility.)
The author would say, that it is completely impossible to establish general principles that can be applied to any situation. Principles are aspects of problem that should be taken into account when it comes to evaluate a situation, but nothing that could be applied blindly.
This very famous quote of Hayek, very often quoted, however without mentioning the source, is therefore a complete nonsense.
Freiheit kann nur erhalten werden, wenn sie nicht bloß aus Gründen der erkennbaren Nützlichkeit im Einzelfalle, sondern als Grundprinzip verteidigt wird, das der Erreichung bestimmter Zwecke halber nicht durchbrochen werden darf. |
Freedom can only be maintained if it is not defended for assessments of its usefulness but as a basic principles, that can not be disregarded in order to achieve certain goals. |
To illustrate that with another example. In Germany everybody is obliged to have a health insurance that covers ALL risks and that is quite expensive, so expensive, that a lot of people have a problem to pay it. At the other side what is actually needed is only an insurance that covers big risks, in other words if someone has to undergo a long and expensive treatment. Minor risks, for instance "normal" illnesses or problems with the teeths can be covered on an individual bases, but for the big risks individuals can't provide by themselves. We could therefore have an insurance similar to the car insurance. Dammages to persons or foreign cars are always covered, damages to ones own car not. The problem is that a health insurance that covers everything invites to abuse from both parts, the supply and the demand. An insurance that only covers the big risks, lets say beyond 5000 dollars a year, would be a good compromise and giving the fact that people pay it themselves, there would be more competition in the market and people would only go to the doctor if that is really necessary.
Some infringement in personal freedom is needed, because otherwise the whole risk must be beared by the society as a whole. However this infringement is lower, if people are only obliged to cover the risks they can't provide by themselves.
To say we don't care about usefulness if freedom is at stake, is nonsense and not feasible in the real world.
Problematic is this sentence: "We have a concrete vision concerning a sound economic order." The author supposes, that he had no concrete idea about the economic order and if he had one, it is even worse. It is impossible to design an ideal economic order on a sheet of paper. If the circumstances changes, and they change continuously, demographic changes, changes in the climate, new technologies, changes in culture and behaviour, for instance patchwork families, requires new answers.
If he has a "concrete vision" he committs the fatal error described by Karl Popper. He will be induced to impose his "vision". He will see little need to submit his "vision" to a democratic decision process.
The discussion about principles is not relevant any more. Nobody doubts that efficiency of the market, democracy, justness, freedom, social balance are aspects that are always to be taken into account. The question is how to balance these values in a concrete situation.
However it can be questioned that there is actually a trade off between these values, that a higher target attainment of one goal goes always at the expense of another goal. This is a widely discussed issue in the academic world and it is assumed that scientific research must freed from moral value judgements.
The author would say, that the basic economic problem, the problem that underlies any economic problem, is the spread of know how. If it were possible to reach an improvement in this area, the target attainment of all the goals could be improved at the same time.
It is well possible that Margaret Thatcher was inspired by Road to Serfdom and Ronald Reagan by Capitalism and Freedom of Milton Friedman, see Ronald Reagan Describes Milton Friedman, but it is very probable that these were the only books they had ever read about economics, because nor Friedrich Hayek nor Milton Friedman contributed something essentially new. Concerning Hayek, there is really nothing new, apart the song of freedom and the lyrics. Milton Friedman is more interesting, because he applied the principle of Adam Smith to tons of concrete problems. We will return on the topic in the chapter about Milton Friedman.
There are however differences in the style. Milton Friedman is easy and straightforward, Hayek, Eucken and Müller - Armack somehow obscure and the terms used not defined.
Hayek and Friedman presents the difference between a free market and a planned economy as the difference between the empire of the evil and the empire of the good, somehow like the fight between Sauron and the Elves & Company in the Lord of the Rings.
(The author knows that Tolkien strictly denied any relationship to real world mouvements, but concerning Sauron a lot of germans think of the nationalsocialism.)
The basic problem with that view is, that the emergence of totalitarian regimes have little to do with economic principles and not even with the content of the respective ideology. To assume that totalitarism is the result of a concrete ideology is like presuming that raper, murderer or bank robber etc.. needs an ideology to committ their crimes. The problem is, that this people don't need any justification to committ their crimes and totalitarian governments don't need any justification to stay in power. Even Goebbels, the nazi propaganda minister, was not so stupid as to believe what he was telling to the people. (Something easy to see if someone reads his diary, they can be found on the internet.)
It is to assume that marketing issues played a role in the selection of the titles, 'Capitalism and Freedom' and 'Road to Serfdom'. That sounds like big emotions and that's what people are looking for. The parts of 'Capitalism and Freedom' are interesting where Milton Friedman treats concrete issues. 'Road to Serfdom' is just trash.
'Road to Serfdom' is a book that belongs to the past, when economic issues where always mixed up with other things. It was not enough to say that a planned economy can't work, because the steering mechanism can't work, see homo oeconomicus. Socialists had to be as well atheist, antinational, pervers, malevolent etc.. In this tradition is Hayek. He connects 'socialism', a term he never defines, with 'totalitarism', a term he doesn't define either. This connection is wrong for two reason. There are a lot of very liberal nations, for instance Sweden, with a high govenment intervention in the economy and there are a lot of nations, for instance Turkey, with much less personal freedom. The second reason is, that the ideology of a totalitarian state is only a facade that can be changed at any moment, depending what suits best in certain circumstances.
Of course it is the same thing the other way round. For marxist thinkers it is not enough to discuss about the pillars of market economies and to criticise them. 'Capitalists', the term is actually wrong because 'capital' is actually money, see interest rates, are sharks, vulgar, greedy etc..
Since the fall of the wall of Berlin in 1989 both sides have disarmed verbally.
To put it short: Assuming that ideologies are characterised by their content as it is assumed by Karl Popper, and to believe that they can be criticised at a rational level is an infantil point of view. Ideolgies are more infernal machines and tickle much more basic instincts.
Müller-Armack assumes that his social market economy is a "third" way, something in between 'capitalism' and 'socialism'. However his social market economy is absolutely nothing new. Attempts to conciliate a market economy with social stability started well one hundred years befor, at different levels, reforms of the system and a a more radical critique that points to inherent economic problems, see Keynes.
[Milton Friedman, by the way, committ the same error. He believes that 'capitalism', actually he means a free market system, lead to the high standard of living we have nowaday's. That is true, but only because governmental intervention succeded in bringing social stability. A David Ricardo world, where eternal live of the masses at subsistence level was granted, wouldn't have been unstable and at times were the government was not able to establish social stability and fair chances for all, the system collapsed. Free markets were a pillar of economic development, but the defaults had been corrected. A system as imagined by Milton Friedman was never successful.]
The difference between Müller-Armack and Hayek is not really at a clear logical level, it is a difference in the tune. Where Müller - Armack says "Beside liberty there are other values to be taken into account in the foundation of an economic order and everything depend on the degree a market economy in its controlled form can be compatible with these values" Hayek writes.
Freiheit |
Liberty |
This is obviously nonsense even from a logical point of view. If the government only wants people to do things they would do anyway, there is no need for governmental intervention.
The way Hayek uses the term liberty it becomes kind of weapon for everybody who is against governmental intervention for any reason. It is not casual that all the 'think tanks', there are a lot of them all over the world, who are based on this kind of thinking, are sponsered by the industry. They want less controll, less protection of environment, less protection for workers, less taxes etc. and transform their personal interest in a fight for liberty.
There is no doubt that it can be discussed about the different options to protect the environment and if more protection of workers are needed or if taxes are too high, but the focus of the argumentation should be efficiency, not liberty. Everybody benifits from an increase of efficiency, but only some have an increase of liberty if the taxes are lower. To give an example.
There is a striking similarity between Friedrich Hayek and Vilfredo Pareto as well concerning their point of views regarding democracy, something Pareto called a religion. The pareto optimum, another description of an economic equilibrium and the only economic issue addressed by Pareto, describes voluntary exchange as the optimum, in another words exchange without government interference and therefore, similar to Hayek, there is little need for a democratic decision making proces and actually it is hard to see how a democratic decision making process could have any sense, if liberty is perceived as an absolute value that doesn't allow any restriction by another value, because democracy is always a compromise.
Hayek and Müller-Armack perceive liberty and social transfers as something contradictory, given that sovial transfers lead to an increase in taxes.
(The same opinion is expressed by Milton Friedman, see Milton Friedman - Whats wrong with welfare? and we can't even say that he is completely wrong. Some bureaucracies spent more money in the administration of the money that what they actually pay to the people in need.)
The author would say, that this is a question of intelligence. It makes for instance a big difference if social transfers consists just of handing out money
or if it flanked by training or even productive work. The government for instance pays very often a subsidy for families who can't pay their rent and at the same time he subsidizes the unemployment insurances. (In other words, in most countries it doesn't work as an insurance any more and has to be subsidized by the general tax payer, sometimes the subsidy is high, in Germany for instance, in some years, 40 billions of euro.) In this case it would be useful to pay more than the minimum granted by the unemployment insurance and construct houses. Instead of losing the money definitely, a value would created that would be profitable in the long run, because rents would decrease. Ideas of this kind can be combined with expansive fiscal or monetary policy, see Keynes.
In the next paragraph he says good bye to the ideas of Hayek and it becomes unclear why he admired Hayek and understandable, why the Mont Pélerin Society splittet up in two fraction, an american fraction with Friedman, Mises, Hayek and a german fraction with Eucken, Röpke, Müller-Armack.
We don't know to what 'values' and to what 'spiritual substance' Müller-Armack refers to and what he understand by the jewish-christian inheritance, but we know definitely that the market economy is not responsible for that and still less we can imagine what the government can and should do to promote this values, this spiritual substance or whatever.
It is very seldom, really very seldom that the author agrees with Hayek, but in this isolated case, the only one, the author would say that Hayek was right.
Die Marktwirtschaft ist ein formales und neutrales Organisationsmittel, welches selbst noch keine bestimmte Lebensgesinnung zum Inhalt hat. Es war ein folgenschwerer Irrtum des vergangenen Jahrhunderts, das Marktgefüge für eine ausreichende Gesamtordnung des Lebens zu halten. Man übersah dabei, wie sehr die im Wirtschaftsleben des 19. Jahrhunderts noch vorhandene seelische Substanz aus dem christlich-religiösen Erbe stammte, das in der rationalisierten Wirtschaftsgesellschaft gefährdet und von den Kräften des ökonomischen Denkens und des Wettbewerbs in Frage gestellt wurde. Die Aufgabe, Werte und sittliche Überzeugungen zu schaffen, kann einer solch formalen Ordnung schlechthin nicht zugemutet werden. Wir wollen uns der nüchternen Einsicht nicht verschließen, dass alle formal wirtschaftlichen Ordnungen, die Marktwirtschaft nicht weniger als die Lenkungswirtschaft, die kulturelle Substanz aufzehren. |
The markt economy is a formal and neutral mean of organisation, that by itself doesn't have vital intention. It was a fatal error of the last century to believe that the market alone can steer all the spheres of social live. The extent to which economic activities in the 19 century were based on the spiritual substance derived from the jewish-christian inheritance and that this substance was menaced by the forces of economic thinking was disregarded in the rational economic society and questioned by the forces of economic thinking and competition. A formal order like the market economy by itself cannot create values and ethital convictions. Any formal economic order, that is something we have to accept, the market economy as well as the planned economy, sap the cultural substance. |
If we want to resume that, we can say that the free market is only an intrument and an instrument can be used for just any goal.
The problem with texts of Alfred Müller-Armack and Friedrich Hayek is their obscurity. Obviously there are always a lot of problems in a society, but the assumption that the existince or absence of "social substance" is as meaningless as the assumption that governmental intervention is an infringement to freedom. It is possible that the social order in general or the economic order in particular give incentives that leads to undesired results, socially, psychologically, economically, culturally, but these negative side effects has to be explained and not insinuated in a somehow obscure way. We would even say that people who talk about a "social substance" are suffering from a lack of "social substance". A neutralised consciousness uses neutralised, meaningless words. We will return on the issue in the chapter about Theodor W. Adorno.
Although the paragraph is obscure, the differences between Hayek and Müller-Armack become obvious.
|
This doesn't resolve obviously any problem, but at least he admitts that there is a field of tension between coordination through the market and coordination through a democratic decision process.
Professional philosophers like Adorno would shiver when hearing terms like jewish-christian inheritance and if we take into account what has happened in the period before 1947, the first publication of Principles of the "Social Market Economy", we doubt that the jewish-christian inheritance had any impact. In a somehow obscure way Müller-Armack makes the descruction of "spiritual-substance" responsible for the catastrophe, however it remains unclear how.
The practical irrelevance of the freedom fighters and
their theories of the Hayek and Friedman type and a at a minor degree of Müller-Armack and Eucken is due to the fact that the practice is more advanced than their theories. The field of tension, if there is one, between freedom and social stability, efficiency and social transfers, is much better defined, by concrete regulation, in practice than they assume and is adapted to a chance in the circumstance by a democtratic decision making process. Milton Friedman assumes that countries like France, Germany, United Kingdom, Italy, who had a continuous economic growth stick to his model of the free market, see Milton Friedman Speaks - Is Capitalism Humane?. That's wrong. All this countries have and had mixed systems.
[There are a lot of errors in this speech, most of them has to do that economist are always very bad historians, what is due to the different approach. Economist look for general tendencies, historians try to understand a historical situation as the coincidence of singular casual circumstances. Economists look therefore for historical data that confirms their theses, although it is clear, that without any problem we can find other historical data that contradicts these thesis. Related to the speech: It is not big problem to find countries with total economic freedom and no personal freedom at all. For obvious reasons Milton Friedman prefers to name the countries with economic freedom and personal freedom, although post war Germany is a bad example, because social transfers are high.]
His obscure terms have another side effect. He circles around the central problems, without really resolving them. In the paragraph below he told us that the market economy, whose central pillar is competition, destroys the "spiritual substance". How he tries to convince us of the quality of competition, something nobody has ever questioned, although he doesn't really explain the function of competition in a market economy. We can even say, that competition is perfectly compatible with social stability, because it breaks power and keeps prices down.
However it can be doubted that there was a large campaign against competition. In post world war II Germany, we assume that this is the situation he refers to, there was a widespread reluctance against the large scale industry made responsable for the ascension of the nazis. This reluctance was shared by France, United Kingdom and the United States.
In the United States and the United Kingdom the situation was different. Keynesian ideas become more and more relevant and a possible conclusion of the keynesian theory is the expansive fiscal and monetary policy which indeed would lead to more governmental intervention, however Keynes never was opposed to competition.
Wer das sozialpolitische Schrifttum auch nur einigermaßen übersieht, weiß, wieviel dort gegen den Wettbewerb gesagt und polemisiert wird, ohne dass dass kaum je die Betrachtung sich zu volkwirtschaftlicher Einsicht in die Zusammenhänge erhebt. Die wenigen Ansätze einer tieferen Analyse sozialpolitischer Interventionen, wie Schumpeters "Grundprinzip der Verteilungslehre" und Adolf Webers "Kampf zwischen Kapital und Arbeit", blieben für den realen Gang der Dinge wirkungslos. Alle diejenigen, die sich als Politiker oder Wissenschaftler in erster Linie als Sozialpolitiker fühlen, halten sich heute in allen Richtungen und Parteien für verpflichtet, jegliches Eingehen auf marktwirtschaftliche Notwendigkeiten als überwundenen Liberalismus zu brandmarken und damit einer geistigen Auseinandersetzung auszuweichen, die heute dennoch unabwendbar ist. |
Everyone more ore less acquainted with the litterature knows how much it is said and polemized there against competition without an attempt to get more into detail of economic issues. The few attempts to analyse social-political interventions more in detail as "basic principles of distribution" by Schumpeter and "Capital and labour" by Adolf Weber had no impact on the real course of things. All politicians or scientists of any political orientations who considers themselves bound to social balance feel a necessity to stigmatise any mentioning of the necesities of a free market order as liberalism and therefore avoid any discussion though deeply needed nowadays. |
We assume that Müller-Armack refers to the situation in Germany after world war II, although it is hard to understand what he is talking about. In the first elections after world war II the parties fundamentally opposed to any kind of "socialism", CDU / CSU and FDP, got 43 percent of the votes, the SPD 29 percent, and the SPD, even in the Republick of Weimar, was never in favour of a complete socialisation of the means of production and still less against competition or a market economy.
Unclear terms and confused ideas lead to strange opinions. We doubt, that government intervention leads necessarily to an infringement of personal freedom. We would say that in totalitarian regimes the wish to get and stay in power leads to the total control of the economy, but an intervention in the economy doesn't result in an infringement to personal freedom. Hayek and Müller-Armack confuse cause and effect.
However the case of Müller - Armack is diferent. He wants to interfere directly in cultural, esthetic and hygienic issues, spheres where there is no need for governmental intervention and that would indead lead to an infringement of personal freedom. We don't know what he actually means, when he mentions that the market alone doesn't provide a 'general order of living'. Perhaps something like the church. It is to assume that by giving more power to the church we would have indeed, that's what history shows, an infringement in personal freedom.
[We can discuss about the topic if the logic of the market leads to a restriction of the range of the experiences accesible to the individuals, see Theodor W. Adorno, but it is not the task of the government to teach cultural or esthetical values.]
Der Marktapparat ist ein formales Organisationsgefüge, ein geradezu unentbehrliches Instrument wirtschaftlicher Kooperation, aber wie sollte er als solch formales Instrument schon die Fähigkeit besitzen, jenen vielfältigen kulturellen, sozialen, ästhetischen und hygienischen Gesichtspunkten gerecht zu werden? Die Sünden des Bauliberalismus sind nicht der Marktwirtschaft zuzurechnen, sondern der staatlichen Führung, die es unterließ, der ungeheuer expansiven Bautätigkeit jener Zeit bestimmte Daten zu setzen, Richtungen zu weisen beziehungsweise Grenzen zu ziehen, um die Übereinstimmung des Bauens mit der kulturellen Gesamtüberzeugung zu sichern. Es mangelte jener Zeit noch die Einsicht, dass die Marktwirtschaft ihrem Wesen nach keine Gesamtlebensordnung zu sein vermag, sondern erst eines Rahmens bedarf, um in ihm ihre wirtschaftliche Leistungsstärke zu zeigen. |
The market machine is a formal order, an indispensable tool for economic cooperation, but how can he fulfil the different cultural, social, esthetic and hygienic needs? The sins of liberalism in the construction sector are not the fault of the market economy, but of the governmental leadership who omited to give a direction or to put limits to the expansive construction activities of these times in order to secure a concruence of the construction with the cultural convictions. In this time there was no awareness that the market order is not a a general living order and a framework is needed, inside which this economic order can prove its efficiency. |
We have no clue what he means by 'general order of living'. We could interpret that as something like "national community" given that Müller-Armack was a member of the NSDAP since 1933 and welcomed the arrival of Hitler to power. The nazis used terms like that. But actually we would say that he hadn't any concrete idea what he meant by that term. Alfred Müller-Armack, Friedrich Hayek, Walter Eucken were not professional philosophers and not intellectuals of the Adorno style, who weighted every word before using it and if he couldn't explain it rationally, it was at least charged with personal experience. Alfred Müller - Armack is more simple minded.
[However the use of words like patriotism, honour, race etc.. where the degree of emotions they inflame is inversely proportional to their informative value is a problem.]
It is quite obvious that in some cases the government intervenes in the "general living order", for instance in education. Someone has to specify the curricula of the education system. However,we steek to the definition of freedom as conceived by John Stuart Mill, the content of these curricula should be a compromise and the result of a democratic decision making process. That why the students will be obliged to question their personal point of views.
It is always very difficult to discuss about confused and vague texts. In the paragraph before he told us, that the construction industry before world war II didn't satisfied his estethical preferences and therefore the government has to intervene. Now he tells us that the supply of appartments shrinkens if the government fixes a maximal price, because in this case it becomes unprofitable to construct houses. This is perhaps not contradictionary, but normally the higher the estethical standards, the higher the costs of construction. In any case that's what is suggested by historical experience. When it was needed to construct many appartments in a very short time, for instance after a war, the standards are low.
Es gehört zu den gefährlichsten Illusionen der Wohnungswirtschaft, die Leichtigkeit, mit der sich eine Mietfixierung durchführen lässt, mit deren wirtschaftlicher Richtigkeit und Zweckmäßigkeit zu verwechseln. Die Stabilisierung der Mietpreisbildung gerade in Zeiten allgemein steigender Kaufkraft und Baukosten hat in den letzten Jahrzehnten zu Konsequenzen geführt, die man irrigerweise immer wieder als Ausdruck eines objektiv bestehenden Wohnungsmangels ansah, statt in ihr die notwendigen Konsequenzen einer fehlerhaften Lenkungspolitik zu sehen. |
It is on of the most dangerous illusions in the construction sector to confuse the easiness with which the rent can be fixed with economic reason and usefulness. The fixation of the rent in times of increasing purchasing power and increasing costs of construction has led in the last decades to consequences that has been considered as the expression of an objectivly existing lack of appartments instead of considering it as the consequences of a misleading steering policy. |
[We don't know what he means by 'the last decades'. In 1947, the year Wirschaftslenkung und Markwirtschaft was first published, the last decades were the years twenties, thirties and fourties. In these years more houses were destroyed than build. In the fourties now houses were constructed at all and purchasing power decreased. We quote from a version reprinted in 1990, but the text is the same.]
The construction sector is an interesting issue. The argumentation of Müller-Armack is easy, straightforward and classical. In a market economy the prices should reflect the preferences of the people. In other words, if people can spent their money in holidays, because due to governmental intervention the rents are low, people who need a flat wouldn't get one, because not enough flats will be constructed. In other words, the rents to be paid doesn't reflect really the preferences of the people who have already a flat and people who would pay the price that corresponds to their preferences wouldn't get one, because the productive resources will be used otherwise in a more profitable use.
It is chrystal clear that this is true in a situation of full employment. If the prices were free, rents would be higher and the productive resources would produce flats instead of, for instance cars, if the preferences for flats are higher that the preferences for cars. In a case of full employment there is a trade off. We can produce flats or, for instance cars, but not both things at the same time.
[It is a good idea to read now the chapter interest rates.]
The big question
is whether the situation is the same in a situation of unemployment. The classical theory, that the theory Müller-Armack presumtivly sticks to although he never discusses really his economic assumptions, would say yes, because capital, defined as not consumed income of the past, is needed and capital is scarce and being scarced it would flow to the most profitable use and this would be, in our example and under the given assumptions, the production of cars.
However if not capital in the classical sense is needed for investments but money, something that can be printed at any amount, the question is very different. The argument, that the conditions for investments is scarce and will therefore flow in the most profitable use is not true any more, because something that is not scarce can be used anywhere.
If water is scarce, we can only use it for drinking. If it is not scarce, we can use it for everything, even to wash our car. If water has to be produced, it has a price and first we will use it for drinking, than to irrigate the plants we need to survive, than to wash ourselves and finally to wash our car.
In a case of unemployment the logic of Müller - Armack and all the lines of thinking that are based on the concepts of classical theory are therefore wrong. The question is a completely different one. The question is not where the resources can be used best, because unemployed resources are not used at all. The question is, how much time can it take to destroy the money previously printed. It is crystal clear that the money created at the moment the loan was granted, has to be destroyed afterwards.
It is clear that the money can remain at most during the working life of the investment, but the working life of a house can be 150 years and more. If the money is not paid back in this period, it will be remain circulating eternally. That is not possible. But even if the money is eliminated during the working time of the investment, it expands the demand in general while it is circulating. That can lead to bottlenecks, as Keynes called them in other sectors and to inflation.
To put it short: The statement of Müller-Armack is based on certain assumptions he doesn't discuss and takes for granted. The actual situation is quite different. If money is kept scarce, the interest rate is a hindrance for investments. In other words, we have to choices: If the supply of flats doesn't satisfy the demand, we can raise the rent or lower the interest rates.
There is a fundamental error in thinking in the statement of Müller-Armack we find very often. He assumes that the interest rate is needed to allocate resources, that's not the case, not at all. This is only true in a situation of full employment by a somehow sophisiticated monetary transfer mechanism, see Keynes. Only if 'capital' is scarce, something assumed by the classical theory Müller-Armack sticks to, this is true, but 'capital' is not scarce, because it is actually money and money can be produced in just any amount. Even with an interest rate of zero, the most profitable investments will be able to attract the needed resources, because it allows a higher remuneration. However with an interest rate of zero, more productive resources can be employed. High interest rates stimulates investments in the classical theory, because they increase savings and therefore the 'capital' disposable for investments. In the keynesian theory they are just a hindrance for investments, see the little book about Keynes downloadable from the startsite of this website.
It is therefore a possible options that the government constructs houses with borrowed money at low interest rates. The market radicals would say that the increase of demand triggered by the income of the increase of people than working in the construction industry would lead to bottlenecks and these bottlenecks to inflation. In other words, that would be their argumentation, the fact that there is unemployment in some sectors of the labour market doesn't mean that the employment rate could be increased by an expanisve fiscal and monetary policy.
This statement is obviously wrong. It seems that the production potential of modern economies is so high, that it is almost imposible that the demand exceeds the supply. The most important increase in demand, unique in the history of mankind, was the increase of demand after the fall of the wall of Berlin in 1989. The economy of the former East-Germany ceased almost completely to produce anything and the whole demand was satisfied by West-Germany. This was really dramatic, because it happened in a very short time, a few weeks. After a few weeks the whole demand of 17 million people was satisfied by 63 million people. Everybody, even the most convicted keynesians would have said that this would lead to inflatin, but nothing, absolutely nothing happened. The only thing that happened is that the balance of payment
become negative for a while, something exceptional for Germany. In other words, West-Germany alone was not able to supply all the goods needed in such a short period of time.
We can therefore say that in a global economy, where goods and services can be delivered from everywhere, inflation is not a realistic scenario. We don't have seen that since 30 years. Inflation is only possible by a great external shock, for instance by an increase of prices of important raw materials like petrol.
The problem is the indebtedness of the governments and even that is not a big problem, if the increased indebtedness is balanced by an increase of assets. In our example: If the increase of indebtedness corresponds to the value created in the housing sector. That's the same thing than in any private company or household. Indebtedness is not a problem as long as it is backed by assets.
There are a lot of errors in the classical or neoclassical theory and the 'philosophy' of Müller - Armack, Hayek, Eucken and in part Milton Friedman is based on these misleading concepts, although they never discuss actually their basic assumptions.
Another basic assumption is that employment can increase by lowering the wage. This disregards completely that we don't have a homogeneous labour market. We have high qualified jobs, very well paid because demand exceeds supply and we have very low paid jobs, where at a given interest rate employment can't increase given a certain interest rate, because the (monetary) marginal output of this investments is very low. The classical / neoclassical advice that wages has to decrease is therefor nonsense. The top qualified people feels no need to lower their pretensions and the low qualified people can't lower them if they are already at the subsistence level.
The second error of the neoclassical theory is the assumption that the workers are paid with (monetary) marginal output of labour. That means, to keep it simple, companies will hire people as long as this is profitable and the lower the wages, the higher the amount of the product or service offered. This is true, if the demand is infinitely big, in other words, if it increases with a decreasing of prices. However in some branches, cleaning, guard duty, hairdressing etc.. the demand is fixed and therefore the supply of workforce exceeds the demand. The workers in these branches are not paid with the (monetary) marginal output of labour, but with the subsistence level. In these branches the supply of workforce is so abundant and the demand limited, that the workers will not get the (monetary) marginal revenue, but a wage at subsistence level.
[Obviously even in the case of an infinitive demand there is a limit for the wage. Wages can never fall beneath the subsistence level, because beyond this level people die and the neoclassical theory becomes a truism. Dead people are not unemployed, that's obvious.]
Subsidizing these kind of jobs, that was done in Germany for a while, doesn't make therefore any sense. That would only induce the companies to pay still less, because they know that the government will pay the rest necessary to make a living.
Müller-Armack affirms that there is a conflict between low rents and the supply for flats. He assumes, that more flats are only constructed if the higher rents were paid and the construction of rents becomes more profitable. Behind this simple statement there is a complete theory about economics, but it seems that Müller-Armack is not even aware of that.
With another theory we get to complete different results. The rent depends on the interest rate and the amortisation period of the loan and interest rates can be very low in a situation of unemployment, actually they only have to cover the risk and the administration costs of the banks, see interest rates,
and the amortisation time can be very long as well, up to 100 years and more, because houses can be used for a very long time. The next generation will have no problem if they inherit debts, if they inherit assets as well and the value of the assets is higher than the debts.
An increase in the amount of money affects obviously the interests of the savers. Institutional investors have problems at the moment, we are still in the year 2015, to find investments for the money handed over to them by savers. This is logical. There is little need for the money of the savers if the central banks print it at just any amount.
It is often argued in public that an expansive monetary policy 'expropriate' the savers. However this point of view is not compatible with a market economy. A pillar of the market economy is the optimal allocation of SCARCE resources, but it is not compatible with a market economy to keep a production factor artificially scarce in order to allow the owners of these resources to make a profit. Arguing that the central banks should follow a restrictive monetary policy is like saying that the government should maintain the production of potatoes low in order to keep prices and profits of the producers of potatoes hight.
There may be reasons for a restrictive monetary policy. Central banks for instance will keep interest rates high if they want to "cool down" the economy because of the existence of bottlenecks and an increase of inflation. But the argument, that the savers are expropriated is not a valid argument.
Based on the keynesian theory we can draw and actually must draw other conclusions to resolve this kind of problems, for instance the unsatisfying supply of flats and we can find solutions where there is no incompatibility between social balance and efficiency. It is even posible that social balance leads to more efficient solutions.
Müller-Armack assumes that the purchasing power has increased and therefore people can spent more for their rent and that a rent fixed by the government doesn't reflect the actual preferences. He means concretely that people should spent less money in other things an pay higher rent making the construction of flats more profitable. However that would have a negative impact on other branches and a decrease of employment in these branches.
Keynesian theory addresses the relevant issues. The relevant issue is the question whether there are or not idle resources. There is no need to augment unemployment in one sector of the economy in order to reduce it in another sector.
What actually happens in some countries, for instance Germany, doesn't make any sense. First people get unemployment benefit or welfare aid for doing nothing and second people get an aid from the government if they can't afford the rent.
[Something that helps the owners of the flat, because without a governmental aid they would be obliged to lower the rent in order to find tenants.]
It would be more intelligent to activate this idle resources by constructiong houses. That would reduce both kind of social transfers and would produce a value that could justify the debt burden. In the short run the expenditures would be higher than by paying simple social transfers, but in the long it would be cheaper. The government wouldn't be obliged to pay an aid for the people who can't afford to pay the rent and it would have an asset that they can sell. With the nowadays system the debt burden increases as well, but nothing productive is done.
The risk of bottlenecks is higher in less developed countries, because there production structure is weaker. In this case we need a mix between expansive fiscal and monetary policy and training. It doesn't make obviously any sense to estimulate the economy if the production structure can't satisfy the demand. It can even be useful to keep out foreign competition for a while until the national production structure is competitive or to oblige foreign countries to invest and produce the products in the country.
The arguments of Adam Smith are not valid in these case. If an expansive fiscal or monetarian policy would lead to a negative balance of payment because the increase of demand would be satified by imports, the country must defend itself. Otherwise an expansive fiscal and monetarian policy would only lead to an increase of the debt burden.
Müller - Armack affirms that there is a contradiction between the efficiency of the market and government interventions aiming to secure social balance. This is far away from being so obvious as he assumes. This is only true if we talk about social transfers in the sense that money is taken away from one group and given to another group for mere consumption purposes.
[And even in this case it is more complicated, because that means that we have an interference on the demand. If the 'rich' are taxed higher and the money given to the 'poor' we have obviously a lesser demand for luxury goods and a higher demand for daily goods. That means, that some branches will benefit and others will lose. The result is a redistribution between the "rich", because some companies will profit and others will lose.]
The fundamental errors of people like Müller-Armack, Hayek, Eucken are the complete misleading ideas about capital, interest rates, savings and money, see the little book downloadable from the startsite of this website. The case of Milton Friedman by the way is very different. Milton Friedman argues with keynesian monetary transfer mechanisms, but he assumed very special conditions and got therefore to similar results as the classical theory. Milton Friedman did understand what keynesianism is about, Hayek and his followers not.
Müller-Armack, Hayek and Eucken are nothing more than Adam Smith. The only difference is that Müller-Armack puts more emphasis on social balance than Adam Smith did, Hayek is Adam Smith plus fight for freedom, the market economy is not only the guarantor of efficient allocation of resources, but for personal freedom as well and Eucken puts more emphasis on the necessity to maintain the intensity of competition high as Adam Smith did. Adam Smith thought that impeding the entrepreneurs to lower the intensity of competition by price agreements, by forming trusts and through lobbying requires a strong infringement in their liberty and is therefore not possible. Nowadays we can say, that he was perhaps right and most monopolies are created by the government itself, see Milton Friedman, Monopoly.
These lines of thinking emphasis on different incompatibilities, efficiency <=> social balance in the case of Müller Armack, social balance <=> personal freedom in the case of Hayek, efficiency of the market mechanism <=> central planning in the case of Eucken and all these tendencies, especially Hayek, assumes that some possible measures that possibly are suggested by keynesian theory would decrease the degree of target attainment of the target they are fond of.
However these incompatibilities only exists under certain assumptions about how the economy works. A trade off between efficiency and social balance only exists if we assume that social transfers are needed to get more social balance. However keynesian theory doesn't suggest social transfers. Social transfers wouldn't increase the demand. Something would be taken from one group and given to another. The result would be zero, if we put aside that saving would perhaps decrease, what can have a positive impact. Expansive fiscal policy means that the demand is increased by an increase of governmental spending financed by loans and not by redistribution. The question is therefore whether the goverment succeds in activating idle resources in a productive way, in other words if the investments allow to pay back the loans. A contradiction between efficiency and social balance doesn't exist, if only resources are activated which would be otherwise be idle. A contradiction between social balance and personal freedom doesn't exist either, because the investments are realised by private companies. They can accept the offer the government or not and in the case that they have free capacities, they will accept it. The economic order is not at stake either, if the government activate idle resources.
All these contradictions only exists if we stick to the classical / neoclassical theory. If we assume, as Hayek did, that the economy left alone will reach full employment, there are no idle resources and governmental intervention would lead to a distortion of resources. Resources would used in a way the government believe to be the best used and not what the market believes to be the best use. This would distort the allocation of resources and decreas efficiency.
If we assume that investment must be financed by prior savings, not consumed income of the past, an expansiv monetary policy doesn't make any sense, because only 'capital', a reduction of consumption, can increase investments. This is true in a situation of full employment, but very untrue in a situation of underemployment, see interest rates. An expanisive monetary policy can only lead, under this assumption, to a distortion of the allocation.
If we assume full employement, the attempt of the government to attract resources in an infringement on the personal and economic freedom. The resources used by the goverment can't be used by private entrepreneurs. This is obviously not true if the government activates resources that weren't used at all.
All the philosophical statements of Hayek, Eucken and Müller - Armack are based on economic assumptions they never discussed and it can questioned if the conflicts they describe actually exists.
Müller-Armack assumes that the social market economy is a "third" way, a way between "capitalism" and "socialism', two term he never actually defines. The social market economy is not a "third" was, it is simply Adam Smith with more social transfers than suggested by Adam Smith. Concerning the underlying economic concepts there is no difference between Adam Smith and Müller-Armack.
Actually Müller-Armack committed the same errors as marxism. Based on a wrong economic theory they draw the conclusion that there is an eternal contradiction, where actually there is non. In the case of marxism the fundamental error is his concept of capital, what is actually money and there is no need to squeeze it out from the workers, because it can be printed. The 'capitalist' doesn't invest with machines, as Karl Marx implicetely assumed, but with money.
From a keynesian perspective there is no contradiction between efficiency, liberty and social balance. In contrary, by improving the degree of target attainment of social balance efficiency is increased, because not using productive resources is very inefficient.
A very different problem that is often mixed up with governmental intervention based on the keynesian theory is the fact that bureaucracies have their own interests. If bureaucracies inflate due to keynesian politics, we have a bad implementation of keynesian theory into practice, but bureaucracies can inflate without any keynesian policy at all.
It is chrysal clear that a bureaucracy that is not controlled by the market will inflate. A very illustrative example is the discussion paper industry in economics. There are thousands of publicly subsidized "research" centers on a regional, national and international level who produce and thousand of semi private "think tanks" who produce millions of discussion papers every year that a never discussed nor read, but costs the taxpayer hundred of millions of euros. The economists working in these institutions have a big interest to keep that system alive, because that's what they are living from. It is obvious that Milton Friedman is right on bureaucracy, see Milton Friedman, bureaucracy, but that is another story. Of fully description of the phenomenon are the laws of Parkinson.
However if the issue is simple enough like the construction of houses, road, infrastructure which are easy enough to organise if the real work is done by private enterprises, even public employees can handle them, at least if transparency is improved, see preliminnaries. To nobody it would occur to charge a bureaucracy with the production of cars, computers, smartphones or other things that requires creativity, commitement, entrepreneurship or things like that. But even bureaucracies can handle problems if these problems are clearly enough defined and easy to control.
If we take the example of Müller-Armack under the following conditions there can be another solution for the problem of a lack of supply in the housing sector. Beside that, his assumptions that people can afford a higher rent very often is not true. What is needed therefore is a solution that increases the supply without increasing the rent. This can be achieved with a keynesian theory.
a)
The ammortization time of the loan granted to the government must be long enough, but can't exceed the utilization period of the buildings. We can assume that the rentability of rental apartments are low. If the ammortization time is to short, it won't be possible to pay off the credit, if it is longer than the utilization period, the loan will never be paid back, because before the loan is paid back, more loans will be needed to substitute the old buildings. In relationship to public debts it is always argued with intergenerational justice. The argument is, that future generations will be obliged to pay back the loans, but get no profit out of that. (Actually it is not a question of 'intergenerational justice' but a question of distribution between the different groups of the next generation. Some will inherit government bonds and the others the duty to serve them.) The situation changes obviously if the next generation does not only inherit debts, but assets as well. The interest rate shouldn't be, in a situation of unemployment, higher than what is needed to cover the risk and the administration costs of the banks.
b) It is pretty obvious that keynesian theory won't work if the government increases demand in sectors that won't be able to satisfy that demand because there is no unemployment in these sectors or because the production structure is to week in this sectors and the goods will be imported. The only effect of a government induced increase of demand will be more inflation.
c) The primary impulse, for instance in the the construction sector will augment obviously the demand in all sectors and if there are bottlenecks, prices will rise. However it seems that this phenomenon disappeared. The production structur at least in industrialised countries is so flexible, that it can be satisfy just any demand and if the national industry can't satisfy a demand, the global industry can satisfy it. The problem is not inflation, the problem is an increase of the debt burden of the governments. The solution of the problem of Alfred Müller-Armack is therefore this: It must be possible to pay back the loan used for the construction of the flats in let's say 100 years and the rent must be low enough to guarantee that people always will be able to pay it. Market radicalist would say that this is an interference of the government that effects negatively the private housing sector, but this argument is wrong. The private housing sector was not willing to invest, because it didn't see to it profitabel enough.
d) Private companies can construct houses and make profit with them. It should therefore be possible for the government as well to do that. However the government doesn't depend completely on the income generated by the investment itself. The primary impulse will trigger secundary effects, less social transfers, less aid for the people who can't afford the rent, increase in tax revenue etc.. The multiplicator effects mentioned by Keynes may be low, but they help. However if all the secondary effects are realised in a foreign country, they get lost. It may therefore be necessary if the other governments do the opposite, in other words if they have a restrictive monetary and fiscal policy, to impose custom duties in order to keep the balance of payment adjusted. This is for instance a problem in Europe nowadays, we are still in the year 2015. Germany has large exceeds in its balance of payments, 200 billions a year, what is due to the fact that the other countries make a more expansive fiscal policy and Germany a beggar thy neighbor policy. This is not going to work in the long run.
Housing is one of the best examples where keynesian policy, in other works the possible conclusions from the keynesian theory, can work.
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To put it short: The whole 'philosophy' of Müller-Armack is based on the ideas of Adam Smith. Concerning housing we find actually almost the same argumentation in Wealth of Nations. One use of 'capital' competes with other uses and if the rent is low, the 'capital' will be used in more profitable sectors than housing and no more houses will be constructed. Therefore he sees a contradiction between efficiency and social welfare. However the whole 'philosophy' is based on an erroneous concept of capital, the contradiction between efficiency and social welfare doesn't exist in this case. The opposite is true. If it is possible to activate idle resources efficiency and social welfare will increase.
What is true for Müller-Armack is true as well for Hayek and Eucken. They didn't understood keynesian theory. A possible explanation could be that Müller-Armack and Eucken were cut off from the international development of economic thinking and Hayek was intellectually not able to understand the keynesian theory. The case of Milton Friedman is different. Milton Friedman argues with the monetarian transfer mechanisms of Keynes, but assumes some special conditions and get therefore to the same results as the classics. Concerning his critiques of bureaucracies it is to assume that Keynes would totally agree.
In a social market economy there is no interference of the government in the allocation of resources, but the result of the market is changed afterwards through social transfers
In contradictory to the austrian school there is place for democratic decision making process. In the philosophy of Hayek everything that has to be steered can be steered by the market and if things can't be steered by the market, there is no need to steer them. The philosophy of Müller-Armack is as confused and vague as the philosophy of Hayek, but at least he admits that the market can lead to a result that is incompatibel with social stability
The social market economy is considered as something special of Germany. That is not the case. All developed countries has similar systems and the process of balancing efficiency and social stability started long before
