Consistency and Viability of Capitalist Economic Systems

J. Marangos

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137080875
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

Consistency and Viability of Capitalist Economic Systems develops an original analytical framework to understand the relationship between the economic, political, and ideological structures, the external environment, and the process of reform that give rise to certain economic systems by establishing consistency.

CHAPTER 1

Introduction

If we are to understand, and form an opinion about, the restructuring process in any economy, it is essential to view the economic system in a broad social science context that incorporates economic and political relationships, as well as ideology, the external environment, and the process of reforms. To understand changes in an economic system, it is essential to analyze all the relationships that influence economic choices; therefore, we must examine the structure of the political authorities and the state, the prevailing ideology, and the external environment and the process of reform. The purpose of the analytical framework developed in this text is to remedy this neglect of the political and ideological elements, the external environment, and the process of reform, which has been explicit or implicit in the study of economic systems. By placing these structures endogenously in an analytical framework, we can incorporate all the elements that influence economic choices, decisions, and outcomes.

Viewing economic analysis and policy from a broad social science perspective is crucial, since the economic structure of a society does not exist in a vacuum. Societies cannot exist only based on economic relationships. Engels in a letter to J. Block on September 21–22, 1870, reaffirms this argument: “according to the materialist conception of history, the ultimate determining element in history is the production and reproduction of real life. Neither Marx nor I have asserted more than this. Therefore if somebody twists this into saying that the economic factor is the only determining one, he is transforming that proportion into a meaningless, abstract, absurd phase” (Marx and Engels 1977, 75). Hence, equally as important as economic factors are the political institutions, ideology, the external environment, and the process of reform. This is because there is an intimate connection between these elements, and societies are cohesive by the equiproportionate development of these structures and elements.

Hence, the success of an economic system depends not only on specifying the necessary economic conditions, but also on whether certain conditions were satisfied with respect to the non-economic elements. Differences in historical background, national culture, economic and political structures, and international aspirations can affect growth patterns (Ofer 1987, 1768). For this reason, the analysis adopted in this text is in the tradition of “political economy.” This framework takes into consideration economic relationships—the interaction between political institutions, social consciousness, and ideas. The changing of an economic system is a holistic, historical, dynamic, and comparative process and, as such, a political economy methodology would seem appropriate: “Political economy is necessarily procedural, human, institutional and environmental in its scope” (O’Hara 1999, 128). Political economy stresses that making economic sense and understanding economic relationships is not feasible without explicit awareness of power, institutions, and values. In particular, political economy maintains that politics and economics are not reducible to one another. However, a political economy approach eventuates in disagreement and in alternative economic systems. Different views on “social reality” and “what is a good society?” and different speeds of implementing reform give rise to alternative economic systems.

This book will develop an analytical framework that requires that all the elements of the economic system (economic structure, political structure, ideology, external environment, and the process of reform) must be interconnected and thus evaluated in terms of achieving “consistency.” By viewing the economic system in its totality, the terms of analysis are not narrow, economic “independent” variables, but rather the analysis encompasses the complete economic-politico-ideological spectrum. Nevertheless, this analytical framework does not dismiss developing economic systems based on different priorities and sequencing of the elements of the reform program.

Exposition of the economic system in economic literature appears to oversimplify the complexities involved. In most cases, economists writing on economic systems have reduced it to an isolated variable of the economic sphere. The economic system has been “pigeon-holed” into thematic subcategories such as pricing policy, government expenditure, investment policy, and unemployment, thus ignoring the interrelated nature of economic policies, institutions, and behavior. These economists provide a solution to any economic problem by sometimes explicitly, but mostly implicitly, assuming specific behavioral assumptions and/or economic relationships. These assumptions result in presenting and defending a predetermined position as the only feasible one. Thus, economists modeling in this way offer a view of the economic system that is highly subjective and based on value judgments; comparing economic systems while ignoring these aspects is meaningless.

Every society is governed by the need for equiproportionate development of the economic, political, and ideological structures joined with the external environment and the process of reform. An economy consists of a group of people who are located within a specific geographical area, have a common historical and political entity, and are producing and consuming goods and services. A fundamental dilemma in any economic system is the scarcity of resources relative to wants. Decisions need to be made on how a given volume of resources is made accessible to production, what production technique is used, and how the income derived from production is distributed among various production factors (capital, labor, and land). Human wants, if not unlimited, are at least indefinitely expansible. However, the goods and services that can satisfy these wants are not indefinitely expansible, and neither are the factors of production that can produce the desired goods and services. These productive factors also usually have alternative uses in the production of any number of different goods and services. Every economic system must allocate limited productive resources that have alternative uses, to the satisfaction of increasing and unlimited wants.

In any system, large amounts of capital will not be available for use in production unless there is a process of saving and capital formation. This process is fundamentally the same in all economies. It cannot operate unless the available productive resources are more than adequate to provide at least a subsistence living for the people. Once the subsistence level is within reach, the capital production process involves the spending part of the income of an economy for capital goods rather than consumer goods. In other words, saving and capital formation require the allocation of a part of productive resources of the economy to producing capital goods rather than consumer goods. The cost of obtaining capital goods is the same in all economic systems: the best value alternative foregone produced of the quantities of consumer goods and services by the factors of production (opportunity cost).

To understand how an economic system works, it is necessary to be aware of the institutional arrangements. Societies continue to exhibit fundamental differences in their institutional structures, notwithstanding the growing trade and capital flows and increasing economic interdependence that apparently generate significant pressures toward convergence in economic systems (Matthijs 2011, 6). An institutional arrangement is a practice, convention, or custom that is part of life and is a persistent element of the culture within an economy. Notably, an economy functions according to certain rules, customs, and laws that underpin the institutional framework within which the people live. The most interesting aspect of comparative economic systems is the comparison of the institutional frameworks that exist within differing economies. Economic institutions arise in reaction to certain economic and social phenomena that economies have to face. Some economic institutions become justified based on custom, while others are formally recognized and enforced through legislation. Institutions matter because they maintain order. Whenever there are rules of behavior, there must be a means of enforcing these rules. Thus, institutions consist not only of the rules themselves, but also of the means of their enforcement. When classifying different economic systems, we need to consider the endless variety of institutional frameworks.

Thus, there is a need within the institutional context of the economic system to identify a few key variables and specify a finite number of relationships to construct an analytical framework. This analytical framework is useful for classifying and comparing economies, as well as determining the process of change. The goal of the analytical framework developed in this text is to understand the relationship between economic, political, and ideological structures in conjunction with the external environment and the process of reform within an economic system. This analytical framework embodies the view that non-economic factors partly influence the behavior of individuals. Consequently, an institutional approach in conjunction with an evolutionary methodology is the foundation of the analytical framework used in this text to examine elements of an economy, as well as change and reform of economic systems. Put simply, the text adopts an institutional and evolutionary approach to economic systems.

Theoretically, we can combine the aforementioned different elements in many different ways; nevertheless, only certain combinations prove functionally workable, thus giving rise to certain economic systems. A hypothesis has been developed that the survival of every society depends on whether it is able to develop interrelationships, mechanisms, and institutions that facilitate the achievement of its citizens’ goals. Thus, consistency requires the development of an economic system that facilitates the achievement of the economic goals of its members. This book develops the hypothesis that whilst the economic, political, and ideological structures, the external environment, and the process of reform are interconnected, they must be consistent with each other to maintain functionality. The establishment of a consistent economic system has several conditions. The first condition is consistency within the economic structure between property, organizational relations, and motivational relations. The second condition is consistency between the economic and political structures. The third condition is consistency between the prevailing ideology and the economic-politico structures. Fourth, there must be consistency between the economic-politico-ideological structures and the external environment; and finally there must be a consistent process of implementing reforms. Consistency, however, is not enough. An economic system may be consistent in the short run but not in the long run.

Economic systems are not static. Even a quick look at history, especially the history of merely the last three decades, reveals that change in the structure of economic systems is relatively frequent. A social science perspective that embodies an institutional and evolutionary approach produces the view of economic systems exemplified by ongoing processes of dynamic transformation. The goals of the society and its members change with the passage of time; the society must initiate changes appropriate to the new goals. Consequently, economies are fluid over time, not static, because institutions are subject to modification. Why do economic systems change? Because changes take place in social reality, in what exists. Hence, a consistent economic system must be flexible and be able to adapt to changes in social reality, change under changing economic conditions, thus making possible its survival over time. In other words, the economic system in this case achieves viability. Viability requires the establishment of a consistent economic system that is able to facilitate reforms toward satisfying the new needs of society. This includes the ability to sustain an adequate rate of increase in material production and making those exercising power accountable to the people. Thus, the economic system, in its broad social science context based on an institutional and evolutionary approach, must be both consistent and viable.

Through these two concepts, we are able to view the economic system in its totality. Our attention then is not at narrow economic relationships but rather at the complete economic-politico-ideological and international spectrum. A consequence of viewing the economic system in this way is that it becomes apparent that changes within the economic structure has to initiate changes in other structures; this is necessary in order to maintain consistency. However, the ultimate aim of the reforms should be not only the achievement of consistency but also viability: the establishment of an economic system that has the capacity to change under changing conditions.

The application of the analytical framework developed in this text is useful to examine the interrelationships between the economic, political, and ideological structures, the external environment, and the process of reform of specific economic systems. In view of the fact that capitalism has arisen as the victorious economic system in the ideological war between economic systems, an analysis of capitalism can reveal important interrelationships necessary for a consistent and viable economic system. Whether the shift from socialism to capitalism will be a permanent state of the world, an irreversible and linear evolution in economic systems, or merely a short-lived development, cannot be determined a priori. Nor can one assume that a favorable performance of capitalism will continue forever. Nevertheless, the fact that the struggle between capitalism and socialism is over for the time being does not mean that economic systems no longer matter. How a society organizes its economic-politico-ideological institutions in conjunction with the external environment and the process of reform continues to matter. In much the same way as individuals learn from the accomplishments and the mistakes of others, economic systems can learn from the successes and failures of other systems.

In such a context, there has been a transformation in the way that we view the subject matter of comparative economic systems. In the past, the contents of comparative economic systems texts emphasized the differences between capitalist and socialist societies. However, the subject itself is undergoing transformation. As the world economies have changed, comparative economic systems as a discipline has transformed as well. The ultimate goal, nowadays, of the study of comparative economic systems is to learn what is successful within differing arrangements and settings. Thus, the study of comparative economics has never been more important. Achieving a deep understanding of this transformation of the subject matter, I will argue, depends on adopting a social science perspective to economic systems. The social science approach embodies an institutional and evolutionary approach and thus allows the student of economics to understand how these historical transformations of economic systems take place.

The study of comparative economic systems addresses the effect of the whole system on economic performance. In recent years, the institutional settings have changed, as have economic systems themselves, providing important new perspectives on the nature and impact of differing economic systems in a global setting. Economists have a new interest in these issues. The objective of this book is to study comparative economic systems through a summary of selected representative “real” economies, describing each economy’s elements from a social science perspective, which embodies an institutional and evolutionary approach. In general, our focus is on the various types of market capitalism and the necessary institutional arrangements that foster consistency and viability. There are many varieties of market capitalism, and as various economic problems continue to trouble the world economy. The significance of these differences increases the global search for an efficient and humane economic system. Yet in all systems, the ultimate objective must be to achieve a consistent and viable economic system.

In order to understand and assess reforms in any other economic system, it is necessary to put them in a historical context. There is a need to understand how the interrelationships that developed give rise to the economic system and what outcomes in the process were accomplished. Using the concepts of consistency and viability as analytical tools, we are able to trace the development of economic systems. In fact, the changing and evolving systems demonstrate the need for a new and incisive way of looking at economic systems. This need calls for a social science perspective that embodies an institutional and evolutionary approach such as our analytical framework based on consistency and viability.

The objective is to introduce in a methodical way the student to real economic systems experienced in the world and the problems of transitioning from one system to another, in particular, the transition from centrally administered socialism to capitalism. The goal is to demonstrate the relevance of issues important in contemporary economic thought: institutions, corruption, principal–agent problem, regulation, market and government failure, culture, external conditions and social policy. From an institutional and evolutionary perspective, the tools of consistency and viability arise to provide an analytical framework that explicitly identifies an economy’s economic, political, ideological, international, and reform characteristics through history. “In order to understand the differences in institutional infrastructure between the advanced industrial countries, a more historical institutionalist perspective that takes into account the role of competing ideas during periods of crises would help fill that gap” (Matthijs 2011, 6). This framework also allows us to see how all of these elements interact to establish and modify the economy’s institutions. The consistency and viability framework is the most distinctive method of analysis of economic systems studied in this book. The framework is quite useful as an analytical device with which to understand and explain the path of development of all economic systems. It emphasizes that economies are fluid, and institutions are constantly subject to modification.

The analytical framework developed through the concepts of consistency and viability makes possible the examination of economic systems from a new and enlightening perspective. Through this institutional evolutionary approach, we are able to understand more accurately the collapse of centrally administered socialism, the success of capitalist economic systems, the struggle of Islamic economies as alternatives to capitalism, and the unsuccessful attempts of reforms in a broad social context. We enrich our understanding of what reformers and policy makers were and are trying to achieve and we are able to justify the initiation of change not only in the economic structure but also in the political structure, the ideology, and the external environment. Overall, the purpose of the consistency and viability framework is to provide a novel and realistic perspective in the study of comparative economic systems. It should be attractive to those seeking an innovative approach to study economies and societies, especially to anyone willing to recognize the contribution of relevant economic, political, ideological, international, and historical factors to the nature and evolution of economic systems.

In this introductory chapter, we explore the concept of an economic system from a social science perspective, which embod...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures
• List of Tables
• Preface
• Abbreviations
• 1. Introduction
• 2. Consistency and Viability of Economic Systems
• 3. Consistency and Viability of Market Capitalism
• 4. Great Britain: From Atlee’s Postwar Consensus and Welfare State to Thatcher’s Free Market Economy
• 5. Postwar Japan: From the Economic Miracle to the Bubble Economy
• 6. The European Union as an Economic System: From the European Coal and Steel Community to the Euro
• 7. Sweden: From “Third Way” to Joining the European Union
• Index