If the capitalist-based democratic system fails

Capitalism and alternatives

Giacomo Corneo

To person

Dr. Dr. habil., born in 1963; Chair of Public Finance, Department of Economics, Free University of Berlin, Boltzmannstrasse 20, 14195 Berlin. [email protected]

An economic system is a set of rules that controls the production and consumption processes of a society and enables their material reproduction. "Capitalism" is the term used to describe the economic system in which private ownership of the means of production and the market are the decisive institutions. Different variants of capitalism can also be defined, especially with regard to the scope of the state redistribution of market income. One of them is our social market economy, in which, in terms of value, almost half of the domestic product crosses the public purse. This allows very different results to be achieved than under laissez-faire - a variant of capitalism in which it is left to private initiative to cope with social problems. In particular, redistribution by the state cushions the uncertainty resulting from market processes and ensures a more even distribution of wealth.

Different variants are not only possible within the genre of capitalism: there are also alternatives to capitalism, i.e. economic systems that do not rely heavily on private property and markets. Since capitalism has been causing more and more income inequality and insecurity for about 30 years, its legitimation is currently the subject of controversial debate. In this context, many people ask the system question: Is there an alternative to capitalism - one that can satisfy our longing for a humane, just and efficient system?

Cooperation test and allocation test

The evaluation of alternative economic systems depends on the variant of capitalism that is chosen as a reference. I am taking the point of view of someone who was lucky enough to be born in the rich half of the planet and whose reference system is the social market economy. In this case, an alternative can only be considered promising if it can credibly promise to produce at least approximately the same level of prosperity as the social market economy. Because an economic system from which a slump in prosperity could be expected would never receive sufficient political support from the population. Only economic systems that, after careful consideration, prove to be economically viable can be considered serious alternatives to capitalism. [1]

How can one now properly assess whether an economic system that may never have existed is economically viable in the above sense? Economic systems have to fulfill two basic functions: First, they have to motivate people to conscientiously carry out the economic tasks assigned to them; second, the tasks assigned to them must make economic sense. The first function of an economic system is thus cooperation to bring about, that is, to achieve that people are willing to actively participate in the production process according to their abilities and to bring their consumption into harmony with the macroeconomic possibilities. The second function relates to the Allocation Scarce resources - such as human talent, land, raw materials - which should be done in such a way that as many needs as possible are satisfied and nothing is wasted. A promising alternative to capitalism must do at least as well as capitalism on the question of cooperation and the question of allocation, so that it can be regarded as economically viable. It is therefore important to mentally carry out this double aptitude test with selected alternatives to capitalism and to use the social market economy as a benchmark. It is advisable not to assume any change in human character, because every alternative economic system would first have to get along with people as they are today.

Economic systems without private property and without markets

In a chronological order of the counterproposals to capitalism stands the economic system of general community of property at the top. It is an economic system without money and financial relationships, in which everything - especially the means of production - belongs to everyone. In contrast to the capitalist maxim of individual self-assertion in competition, this system is based on the need for social security and on the ability of people to feel empathy for their neighbor. About 500 years ago Thomas More wrote the most famous draft of such an economic system: "Utopia". Others followed, such as that of Piotr Kropotkin, who a good 100 years ago propagated community of property as the economic basis of his vision of anarchist communism. Instead of pursuing material self-interest, the system of community goods is driven by a gift logic: the individual gives his own work to the community and is given goods that others have produced with their work. In a democratic way, people decide how much they want to produce and consume. Accordingly, the community announces labor and consumption standards that all voluntarily adhere to.

From More's work the term "utopian" has entered the linguistic usage. It describes what most people think about a general community of property, namely that in such a system the individual would have no incentive to work for the community - i.e. to give. Rather, they would shirk their work and maximize their consumption regardless of leaving enough for the others. In other words, most believe that this system will fail the cooperation test mentioned above.

In fact, in a relatively anonymous society like today's, it would be difficult to generate such a degree of selfless willingness to cooperate so that every member of the community of goods brings with them the "gift" expected of them. This would require a far-reaching change in our way of life so that people live in small, stable communities as they did centuries ago, in which everyone knows everyone and can establish close social control. Furthermore, the new information technologies would have to create the "transparent citizen" in order to detect abuse in the community of property at an early stage and to prevent its possible spread in society. Intense moral pressure and a sharp stigmatization of deviants would also have to be accepted in order to consolidate the gift logic of the community of goods in everyday life.

Such a social change would be a high price to pay to bring about the necessary cooperation - especially for people who grew up in a free social order. Regardless of what you think about this price, the alternative of the general community of goods fails on the second part of the aptitude test - the allocation problem. This is because the existing drafts either neglect the question of how the resources are to be allocated to the various production and consumption options, or provide for a spontaneous allocation of resources - for example through so-called free agreements in Kropotkin's draft. In the best case, this would prevent the community of property from falling below a supply level that would secure the subsistence level. Certainly, however, a spontaneous allocation of resources could not ensure a meaningful allocation of resources: It would result in a rudimentary division of labor in which only simple technologies are used. Because in this system people would have no incentive to specialize in the production of a certain good. As noble as the ideals that inspired them may be, a general community of goods is not a promising alternative to the social market economy.

The proposal of the Planned economy can be interpreted as a reaction to this construction error of the community of goods, because the planned economy has a mechanism that is explicitly supposed to coordinate production and consumption processes across society: the central plan. It is true that this economic system has fallen into serious disrepute due to the experiences of the 20th century. But in perspective one can imagine a completely different planned economy than in the Eastern Bloc at that time. On the one hand, it could be embedded in a democratic political system in which competing parties offer voters macroeconomic plans with different priorities. On the other hand, unlike in the Eastern Bloc at the time, the planned economy could replace labor and consumer goods markets with collective allocations and try to implement the communist principle "each according to his abilities, each according to his needs" into reality.

Of course, the problem of cooperation would be just as difficult to solve in such a planned economy as it would be in the community of goods. But scientifically developed, participatory planning processes could control the allocation of resources and thus at least prevent society from sinking into economic chaos. Scientifically sound iterative planning methods were developed a few decades ago by the US economists and Nobel Prize winners Kenneth Arrow and Leonid Hurwicz.

On closer inspection, however, it is doubtful that such a modernized planned economy would pass the allocation test. First, the number of product variants would have to be significantly limited so that the macroeconomic planning problem can be overcome. In our age of product differentiation and bespoke production, the required range restriction would be a tough move. Second, this system lacks an adequate substitute for today's entrepreneur and thus for a powerful engine of innovation. Because far-reaching innovations are difficult to implement via a democratically drawn up central plan. In collective decisions, the forces of the status quo - such as comfort and fear of the new - usually prevail over those of change. That is why it would not be possible to achieve a similarly robust structural development in the planned economy as the obstinacy and willingness to take risks of some entrepreneurs produce in capitalism. It is precisely this structural change that is a prerequisite for a permanent increase in prosperity.