(Reprinted from HKCER Letters, Vol.46, September 1997)


Rethinking Economic Order

Junko Nakai


Dichotomy facilitates the grasp of complex issues by the uninitiated. Even some old hands never outgrow the simple world of dichotomy, with its diametrically opposed continents and a vast ocean between. Structuring an issue with a set of clearly itemized questions--to which one camp answers in the affirmative and the other in the negative--and consigning any idea that comes along to one of the two camps, greatly alleviates the burden of analysis for expert and layman alike. Occasionally, dichotomy is fueled by attempts to carve out territories, which open up through accentuating the differences in views. But the luxury of dichotomy is obtained at the expense of obscuring the crux of the problem at best, and at the expense of misrepresenting it at worst, resulting in wasted intellect, paper and ink.

It is thus quite remarkable that, while the collapse of the Soviet bloc has been hailed as the ultimate triumph of capitalism, the event has not prevented some self-examination by the very people who oppose communism and who benefit from the capitalist system. In our discussion, we must avoid the pitfall of labeling ourselves, and being labeled as, the flagbearers of either system. Although some noteworthy insights about our economic order have been voiced in recent times, they have seldom received due attention. Undeserved negligence is incurred as these observations are hastily tossed into one of the two bins, and important deviations from orthodoxy are not taken note of. Below we examine the demise of the Soviet bloc, formulate an apprehension of a recent trend among developed countries, and argue for the desirability of intimacy between economic and political systems, all with the aim to better our society and not to declare victory for either of the two extreme views about the organization of our economic activities.

Lessons from the Soviet Experience

It is an ironic coincidence that the two leading countries of the post World War II era, the Union of Soviet Socialist Republics and the United States, each portraying themselves as the best manifestation of their respective ideologies, came into existence with conscious efforts to be unlike any other country in the world. In that sense, the countries represent two of the greatest social experiments ever conducted. One has failed, and the other has received warning signals.

One of the lessons learned from the Soviet experience is that economic activities cannot be planned in their entirety and in complete detail. At any point in time, simply too much information is required for a modern economy to operate properly. We do not live in a static world, and hence there is literally no limit to the amount of information that has to be acquired by a central agency that wishes to run the economy. Well-studied plans could neither avert unexpected shortages of goods and services, nor meet the changing demands of ordinary citizens. We learned that adjustments are best made at the economy's periphery, which can provide better and more timely knowledge of its own local environment. Frequent local adjustment has been proved superior to centralized steering alone.

Another fact revealed by the Soviet experience is that people do not apply energy voluntarily if only collective welfare is involved. Relaxation of collective farm systems was accompanied by a non-trivial increase in agricultural production, leading to the realization that we are not and cannot be as selfless as soldier ants, which live exclusively for the colony to which they belong. In sum, a totalitarian economy tends to malfunction due to difficulty in collection and digestion of information, and economic improvement is achieved with great struggle, since there is no immediate link between collective welfare and individual welfare.

A Cloud Over Developed Economies

Lately, concerns have been voiced with increasing frequency regarding the capitalist based system adopted by most developed countries today; it may be evolving into a less desirable system as it has become more permissive towards the pursuit of individual welfare through markets. Such appears now to be the extent of this permissiveness that collective welfare is sacrificed for enhanced welfare of selected individuals. Income inequality--which is often a breeding ground for social discontent and unrest-- has been rising in many economies, most notably in the US, the trend-setter among developed countries. Put differently, we have come to delegate more and more of our social decisions to markets alone, whose aims do not include the attainment of income inequality that is considered appropriate and tolerable by society.

Obviously, we do not live in total isolation from one another. Almost all of us belong to a family and to a local community, which in turn belongs to a larger community; human beings have psychological needs for interaction among themselves. The current division of labor also makes it impossible to live in self-sufficiency, if modern material comfort is desired. One needs to engage other members of society for improvement of individual welfare. However, no one will come to the fore to provide such improvement if it entails individual welfare degeneration of the provider, save, perhaps zealots. Increase in income inequality cannot be endured long if many people regard themselves on the losing side. In other words, individual welfare has dim prospects of improvement in the long run if it does not progress in tandem with collective welfare.

Economic theory shows us that a complete laissez-faire system with independent individuals results in a Pareto efficient state (i.e., a situation in which any change that brings gain to one member incurs loss to others), but does not detail the duration or the condition of the transition period that is required before we reach that state. Moreover, Pareto efficient states do not guarantee a certain income distribution. Finally, economic theory is much less eloquent about a laissez-faire system inhabited by economic agents who interact for purposes other than the mere trading of goods and services.

We should also note that many of the arguments used in favor of unadulterated market systems are actually about a certain procedure, and not about an outcome. They are often likened to the spirit of fair play, but that spirit was meant for pupils in English public schools when playing rugby football or engaging in scholarly debates. The outcome of such activities did not affect anything as critical as national wealth, economic progress, or an individual's lifetime income.

Collectivism and Individualism

Putting aside the ethical debate of whether individual welfare should or should not assume dominance over collective welfare, we can say at least the following, drawing on the Soviet case. Betterment of individual welfare is one of the most powerful motivations we possess. Consequently, economic progress is at stake when people are not given the oppor-tunity to act upon it in productive ways. One of the possible interpretations of the widespread corruption seen in the USSR is that it was quite a natural phenomenon in the face of acute shortage of productive opportunities to improve individual welfare. Hence, we conclude that it is necessary to tolerate some inequality to give people incentives. In addition, social progress always finds its germination in deviations from the norm, and it is definitely not in anybody's interest to make people uniform. Totalitarianism forces the members of society to submit to an authority, and hence robs us twice: once of fundamental freedom to think on our own, and again of buds for social progress.

Collectivism or individualism? We must transcend this futile question. It is rather naive to conclude that uniform income is the preferred alternative to income inequality. To repeat, a prospect of increase in personal welfare relative to the welfare of others is our most potent source of energy, and that needs to be preserved. Our society works best when its structure has the capability to satisfy, in addition to that prospect, two of its members' desires: one to associate congenially with other members, and the other to be respected as a superior member in one way or another. These desires are intertwined in the sense that the fulfillment of the second desire is conducive to that of the first. It is clear that totalitarianism or authoritarianism denies latitude in fulfillment of the second desire, but what is noted less is the denial of the same kind by markets. If we rely solely on markets for answers to many of our social problems, people with higher incomes will determine the course of our society, since a higher income translates into more power in markets. This is fairly close to, if not equivalent to, ranking ourselves strictly according to income.

Improvement of an individual's welfare requires that of others; individual welfare will be fettered in the long run without improvements in collective welfare. The converse is also true. If contemporary capitalism is paying scant attention to collective welfare--just as the Soviet-style communism neglected individual welfare-- then its future is far from bright, although it may not see the sudden collapse that the Soviet system did. If markets by themselves do not guarantee social progress (which stems from improvements in both individual and collective welfare), we need to supplement them with a body which provides what they fail to deliver: a coercive organization.

Role of Government

Governments are more than just organizations that take up tasks which profit-seeking firms are not willing to conduct but that are nonetheless necessary. They are also coordinators of various activities. Additionally, governments provide the legislative and judicial structure that is indispensable for efficient operation of society, and they have the power to make final decisions on countless issues. Governments are necessary for providing people with special services and for deciding on issues that ordinary citizens lack the resources to investigate and contemplate thoroughly. Such capacities allow the government to safeguard collective welfare, but do not restrict it to this role. In other words, endorsement of capitalism is neither necessary nor sufficient as an argument against active governments.

Any organization, including a society, requires some kind of hierarchy that bestows on members unequal decision-making power. It also requires a loosely defined line of communication. A hierarchy is necessary for efficient operation; chaos will ensue if all members have equal power and if there are no standard paths of communication. However, hierarchy is by no means limited to the type often seen in totalitarian societies. Neither is unequal power among members synonymous with absolute power embodied in very few members, nor need a fixed line of communication be rigid and one-way, a long chain from top to bottom. For the objectives of governments to mirror those of citizens closely, political appointees need to be chosen by the people. Therefore, the best option regarding formation of governments appears to be staffing them with political appointees chosen by the people and with bureaucrats who provide services to the political appointees, as is the case in most of democratic systems today.

If such a government in a democratic society heads in a direction that is grossly at odds with what people desire, then the system is not functioning adequately. Symptoms of that should not be interpreted as an indication of inherent incompetence of the government. Rather, it elucidates the inappropriate representation of the people in the government (who created unsatisfactory modus operandi for the government) in the past, or the inadequacy of the current representatives (who do not carry out their tasks in accordance with the people's desire). In a nutshell, we refrain from endorsing contemporary democracy as the best possible political system, but we endorse it as the one that provides the most acceptable framework for a better system.

Interdependence of Economic and Political Systems

Human beings, imperfect as they are, cannot fashion an impeccable government even if the election process and the voting rules were perfect. An infallible government is unrealizable by definition. It is also true that systems--democratic or undemocratic--cannot ever be rid of all shortcomings. However, that fact does not free the members of a democratic society from the responsibility of guiding and steering the government as necessary. Some assume that everything will be fine once a head of state from the preferred party is elected. This misperception is as erroneous as is the belief in universal evilness of government actions.

Although the complexity of modern life necessitates delegation of some tasks, it does not imply that the organizations entrusted with such tasks should be left without supervision or feedback. The same principle applies to governments in democratic societies. A democratic institution by itself does not guarantee the most desirable reflection of the society's view in the government. A democratic institution, too, needs incessant appraisal by the people in order to serve the people. The feedback requirement, moreover, is achieved only if the citizens actively practice the freedom of expression to make public their concerns and needs. In short, we give up some decision-making power for increased efficiency of the society, and abuse of the resultant unequal power can be kept in check only through the citizens' untiring surveillance and support. Undoubtedly, each culture will find a different mix of three items -- the size of government, the amount of trust that people have in it, and the amount of feedback people are willing to give -- most suitable. The common thread is that what seems to have emerged as a desirable economic system cannot be sustained without a supporting political system. It is widely accepted that economics and politics cannot be separated, but, in fact, their viability hinges on their mutual dependence.

History testifies to the proposition that social progress is best attained when people are allowed to act by dint of individual incentives, which leads to the conclusion that private property should not be denied. On the other hand, history also indicates that individual welfare cannot guard against erosion of collective welfare. We have to strike a balance between the two, and drifting to extremes can be prevented only by utilization of a coercive organization (which is often called a government), accompanied by freedom of expression and a democracy of active public participation. We must also take the responsibility to voice timely and aptly our civic concerns to the government, whose welfare-enhancing responsibilities are to coordinate our myriad activities, to make communal decisions on our behalf, and to represent people in the community.

Dr. Junko Nakai is assistant professor in the School of Economics and Finance, The University of Hong Kong.


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