An alternative economic system - why and how by Fritz C. Holte [HA 2000:5]

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.

Three features of the economic system

In the Industrial Community economic activity and economic policy are organised in the following way:

Capitalism. Most of the production takes place in privately owned firms which sell their products in competition with products made by other privately owned firms.

Free trade and free capital transfer. Free trade and free capital transfer mean that a country's authorities try to reduce neither trade with other countries nor capital transfer to or from other countries.
To a large extent there is free trade and free capital transfer in the Community. The markets for goods and capital are therefore highly international.

National economic policy. In two ways economic policy is mainly national. One is that the measures which are used, are mainly used by the national authorities. The other is that the purpose of the policy is usually to improve domestic conditions.

THE MISERY

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.

THREE THESES

In the manuscript for the book I argue that it is almost sure that the following theses are true:

2. It is impossible to remove the Misery in the Industrial Community if capitalism, free trade and free capital transfer are retained. This implies that making the economic policy more international will not be sufficient to make it possible to remove the Misery.

3. Deplorable conditions in the developing countries cannot be avoided unless the industrial countries become capable of handling their unemployment, distribution and pollution problems. This implies that deplorable conditions in the developing countries cannot be avoided if either the Community's economic system is retained or is changed only by making economic policy more international.

TEN POLITICAL CONCLUSIONS

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.

My basis for a search for an alternative economic system

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.

System aspects which should be retained

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:

Such controls are difficult to administer. A firm may be forbidden to increase the price it charges for its washing machine model 70237. It can then phase out that model, introduce a "new" model 70238 with some minor variations, and increase its price. It is virtually impossible for the government to rule on each of the myriad of resulting cases.
There is another difficulty. Inflation is the price of all goods taken together. Even when there is little or no inflation in the overall price level, relative prices of different goods are constantly changing. The prices of computers have declined and the prices of haircuts have increased over the last twenty years. If price controls are to remain in force over any extended period of time, they must allow for these changes in relative prices. If they do not, shortages will develop for those goods whose prices are kept below their equilibrium level.

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.

System changes which ought to be made

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.

7. National and international authorities should be able to conduct their economic policy by making relatively few decisions and implementing them by using relatively small bureaucracies.

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.

8. Free trade and free international capital transfer ought to be replaced by a system for international economic contact which creates little or no fear for capital flight and weak competitive ability.

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:

1. Transfers made in order to profit from short-term changes in currency exchange rates, stock-exchange rates, etc.

2. Transfers made in order to make more or less long-term investments. People and institutions making such transfers may for instance build factories in foreign countries or buy shares in foreign companies with the intention to keep these shares for some time.

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.

Goals for the economic policy

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.

10. Making the development sustainable and avoiding mass unemployment, very unequal distribution and large injustices, should be more important goals for economic policy than rapod productivity growth, stable prices, low taxes and millimetre justice.

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.

THE ALTERNATIVE SYSTEM

Within each industrial county economic activities are organised as they are today.

The industrial countries are divided into groups.

Tariffs on imports and exports are used to reduce trade between the groups.

Within each group the countries co-operate in the setting of the internal exchange rates, i.e. in the setting of the exchange rates which determine how much a country's currency is worth compared to the currencies used in other countries in the group.

The system for setting the exchange rate is such that every country can be sure of this: the internal exchange rates will develop in such a way that, apart from temporary deviations, each country's ability to compete with other countries in its group remains acceptable.

Permits from national authorities are needed before capital can be transferred to or from other countries.

The Alternative System is consistent with the political conclusions sketched above

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.)

The Alternative System can be realised step by step.

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:

A group of countries "withdraw" from the Industrial Community and establish tariffs on the trade with the other countries and restrictions on the capital transfer with them.

The counties which have withdrawn organise the economic contact with each other in the way described in the sketch of the Alternative System.

High tariff barriers can be realised step by step. They can be low at first, and gradually increase.

The fact that the Alternative System can be realised step by step, makes it easier to start realising it.