AN ALTERNATIVE ECONOMIC SYSTEM - WHY AND HOWby
Fritz C. Holte
This article is a short version of a manuscript for a book which will be published in the spring 2001. The article contains the most important theses and conclusions of the manuscript with respect to trade, capital transfer and environmental protection, and also sketches an alternative to the prevailing economic system.
The industrial countries are in what follows the countries in Western Europe, as well as the USA, Canada, Australia and Japan.
Some more or less industrialised countries, among them Russia, are now in a transition from their previous economic systems to market economies. These countries are not included in the group which here is called industrial countries.
Today the economic ties linking the industrial countries to each other are so strong that in some connections it is reasonable to regard these countries as a community. That community will be called the Industrial Community in this article. Sometimes only the Community is used.
In the Industrial Community economic activity and economic policy are organised in the following way:
In the Community there has for several years been mass unemployment, very uneven distribution, and pollution which makes the future unsustainable. These three aspects of the conditions in the Community will below be called the Misery.
In the manuscript for the book I argue that it is almost sure that the following theses are true:
In what follows I present ten conclusions. They are based on economic theories, my political preferences, and experience from the industrial countries in the twentieth century.
We must get rid of the Misery, but this is impossible if the current economic system is retained. (Cf. Thesis 1.) Therefore the system should be changed.
I want to make the chance as good as possible that the system will be changed in a way which makes it possible to get rid of the Misery.
The smaller the proposed changes in the system are, the better are probably the chance that they will be accepted.
The basis for this conclusion is mainly experience. The centralised economy of the Soviet Union was an extreme alternative to a market economy. It failed, and that failure is an argument for having markets.
Other arguments can be found in the mixed economies. In even a small modern economy billions of economic decisions must be taken every year. The authorities are incapable of making more than a small part of these decisions satisfactorily.
Let us look at price-setting. Here is a slightly modified version of what Joseph Stiglitz say in his textbook Economics (1993) about trying to avoid inflation by means of price controls:
On the basis of these and other examples I conclude that most of the billions of economic decisions which are taken in a modern economy, should be taken by households and firms in their roles as buyers and sellers in markets.
Just as individuals can gain from exchange of goods between them, countries can gain from exchange of goods. These gains are derived from specialisation of countries in producing certain goods. Without the international trade we have today, the production per employed - and therefore also the average standard of living - would have been much lower; especially in the small industrial countries.
This is a strong argument for making it possible to have a considerable international trade.
There are several arguments for this conclusion. Here is one of them: Consider a poor country where the potential for savings is small, but where the potential for increasing production in profitable ways is large if extensive investments are made. A net inflow of capital to such a country may be an advantage for both those who provide the capital and the country which receives it.
Conclusion 5 differs in an important way from Conclusions 3 and 4. According to Conclusion 3 most economic decisions should be market decisions, and according to Conclusion 4 it should be possible to have considerable international trade. Conclusion 5 says nothing about the size of international capital transfers. I shall return to the size of those transfers in Conclusion 9.
We cannot get rid of the Misery under the current economic system. (Cf. Thesis 1.) It seems obvious, at any rate to me, that we will get rid of it only if somebody ensures that we will get rid of it, and that "somebody" must be national and/or international authorities.
The conclusion that the authorities should be able to govern important aspects of the economic development, does not imply that most the economic decisions ought to be transferred to the authorities. Doing that would not be a good solution; for reasons given above in the discussion of why there should be markets.
What I want is that the authorities by making relatively few political decisions and implementing those decisions by means of relatively small bureaucracies should be able to avoid the Misery.
We can take demand for products in a given year as an example. Most of the composition of that demand ought to be determined by billions of decisions made by households and
producers. However, in order to be able to avoid the Misery it must be possible for the authorities to determine approximately the size of the aggregate demand and ensure that its composition satisfies certain distributional and environmental goals.
Today the authorities' ability to govern economic development is weak. (Cf. Thesis 1.) Their ability to govern cannot be increased sufficiently only by making economic policy more international. (Cf. Thesis 2.) This implies that it is necessary to increase national governments' ability to govern. However, free trade and free capital transfer make national authorities fear capital flight and weak competitive ability. Their ability to govern will be limited as long as this fear exists.
From what is said above follows that free trade and free capital transfer ought to be replaced by a system for international economic contact which creates little or no fear of capital flight and weak competitive ability.
With some simplification international transfers of capital can be divided into:
The economic system ought to be changed in such a way that Group 1 is eliminated.
According to Conclusion 8 the current system ought to be replaced by a system which creates little or no fear of capital flight. This implies that the transfers of capital in Group 2 should be much smaller than they are today.
I will finally turn to what I believe should be the goals for the economic policy in an economic system where the authorities ability to govern is considerably larger than it is today.
Even if the authorities' ability to govern is increased considerably, they cannot ensure that all desirable goals are achieved. They must therefore decide that certain goals shall not be given top priority. Here are a few comments on that.
Rapid productivity growth is much less important in the industrial countries than it was a few generations ago when the average standard of living in those countries was much lower. Productivity growth should nevertheless be a goal, but only if certain other goals can be achieved.
If prices accelerate, this will in time lead to a price increase which will cause unacceptable problems. Such a development must therefore be avoided. There are also arguments for preferring stable or slowly rising prices to prices which rise fast. For one thing many economic decisions will be more difficult to make in a rational way if prices rise fast. Avoiding rapidly rising but not accelerating prices should nevertheless not be given top priority.
There are several arguments for letting the taxes be low.. But these arguments weigh less than the fact that high taxes will be necessary for financing in an acceptable way the most important elements of a welfare state.
Absolute justice should be a goal, but not an important goal. This implies that the government should feel free to create small injustices if they are unavoidable consequences of making the authorities' decisions simple to make and comparatively easy to implement. Tax policy can be used as an example here.
By the Alternative System I mean the following economic system:
Under the Alternative System it is possible for national authorities to ensure that the Community get rid of the Misery. (Cf. Conclusion 6.)
No changes are proposed in the organisation of the economic activities within each country. Nor is it proposed to organise international trade in a way which makes it necessary to establish large bureaucracies. This contributes to making the proposed changes small. (Cf. Conclusions 2 and 7.)
In the Alternative System the market mechanism plays an important role in the determination of the composition of imports and exports. (CF. Conclusion 3.)
By letting a considerable number of countries be included in each group, it could be made possible to have considerable international trade. (Cf. Conclusion 4. )
There will be some international transfer, but much less than today. (Cf. Conclusion 5 and 9.)
There is little or no fear of capital flight and weak competitive ability. (Cf. Conclusion 8.)
Critics of the current economic system often propose changes which presuppose co-operation between all countries which are major participants in international trade. This makes it difficult to realise their proposals.
The Alternative System can be realised step by step, geographically speaking. It is for instance possible that the following will happen:
High tariff barriers can be realised step by step. They can be low at first, and gradually increase.
Restrictions on capital transfer can also be introduced gradually.
The fact that the Alternative System can be realised step by step, makes it easier to start realising it.