A BETTER MIXED ECONOMY
An unpublished article by Douglas Korty
The world is filled with mixed economies, but some of the mixes are better than others. A number of terms have been used to describe economies that mix capitalist with socialist features, e.g., mixed economy, welfare state, social democracy, Third Way , market socialism, social market economy. Jonas Pontusson in his book, Inequality and Prosperity, delineates two types of mixed economies and names them Social Market Economies (SMEs) and Liberal Market Economies (LMEs). His analysis and comparisons of these types is extremely useful for understanding mixed economies. It is presented below.
STATE CAPITALISM
A third type of mixed economy yields an important contrast to the two other types. “Authoritarian governments in Russia , China , Saudi Arabia and other countries allow an active private economy in order to protect their monopoly hold on political power. Entrepreneurial energies and innovation create economic growth which sustains the political system. These countries now control three quarters of the world's crude oil reserves. State owned and associated privately owned companies intervene strongly in global markets. The states own enormous investment funds. The state plays the role of leading economic actor.”[i] Large militaries in these state capitalist countries add to their similarities to the fascist countries of last century. They have extremely low rankings on indexes of democracy, income distribution, life expectancy, education and corruption.
State capitalism may have many imitators. The number of democratic countries expanded after WWII but the spread of democracy came to a halt. In 2010, EIU (Economist Intelligence Unit) classified 30 countries as "full democracies" 50 as "flawed democracies", and 87 (accounting for about half the world's population) as either hybrid democracies or authoritarian states.[ii] State capitalism poses a great threat to democracy and peace in the world.
SOCIAL MARKET ECONOMIES
Pontusson demonstrates that social democracy involves far more than welfare. “Based primarily on the Scandinavian experience, the core components of the social democratic approach to economic and social policy might be summarized as follows:
1) wage solidarity as an instrument of industrial policy as well as of redistributive policy
2) active labor market policies designed to promote labor mobility and more efficient allocation of labor
3) public investment in education
4) family policies designed to facilitate female labor force participation
5) universalism in the provision of social welfare” [iii]
“The SMEs are distinguished by densely organized business communities…coordinated business. Second, they are distinguished by strong unions and by highly institutionalized bargaining systems. Third, the social market economies are distinguished by extensive public provision of social welfare and employment protection. In the SMEs, worker participation in management decision making is prescribed by law…institutionalized economy-wide bargaining between unions and employers is a distinctive feature of the SMEs. Relative to the continental SMEs, the Nordic SMEs are distinguished by higher levels of union density, more universalistic welfare states, and greater reliance on the public sector (services) in the provision of social welfare.”[iv]
COMPARISONS, SMEs vs. LMEs
The table presents comparisons of Social Market Economies (divided into Nordic and Continental) vs. Liberal Market Economies. Three of the factors which define SMEs are presented in the first three columns, and social indicators are presented in the other three columns. The table shows substantial differences in the defining factors and in distribution of disposable household income (gini coefficient). Other social indicators show similar advantage for the SMEs. The last two columns, GDP/Hour and Unemployment rate are included because claims have often been made that social democracies underperform in economic performance. Pontusson shows that this is not the case, that the conventional comparison of unemployment rates is flawed because it treats the EU as a proxy for "Social Europe". Also, in some comparisons, the exceptional circumstances of German unification need to be taken into account. The growth of civilian employment is lower in SMEs. Pontusson argues that this is due to higher growth in the LME labor force, larger youth cohorts, more immigration, more female participation, and smaller decreases in labor force participation, not to different social policies.
a
|
b
|
c
|
d
|
e
|
f
| ||
coll barg
|
soc spnd
|
emp prot
|
gini
|
gdp/hr
|
unemp
| ||
Nordic SMEs
|
82.5
|
25.6
|
2.3
|
0.247
|
38.2
|
5.8
| |
80.0
|
27.7
|
1.8
|
0.236
|
36.8
|
4.8
| ||
90.0
|
23.9
|
2.1
|
0.247
|
31.1
|
9.3
| ||
70.0
|
23.1
|
2.6
|
0.251
|
50.5
|
3.9
| ||
90.0
|
27.5
|
2.6
|
0.252
|
34.4
|
5.3
| ||
Continental SMEs
|
74.6
|
24.8
|
2.2
|
0.265
|
35.1
|
5.2
| |
95.0
|
25.5
|
2.2
|
0.257
|
na
|
4.0
| ||
90.0
|
25.9
|
2.5
|
0.250
|
37.2
|
7.3
| ||
68.0
|
26.3
|
2.5
|
0.264
|
37.3
|
8.4
| ||
80.0
|
20.3
|
2.3
|
0.248
|
32.2
|
3.0
| ||
40.0
|
25.9
|
1.6
|
0.307
|
33.8
|
3.2
| ||
LMEs
|
36.2
|
17.0
|
1.2
|
0.330
|
33.3
|
5.6
| |
80.0
|
17.6
|
1.5
|
0.311
|
30.6
|
6.4
| ||
32.0
|
17.4
|
1.1
|
0.302
|
32.0
|
7.3
| ||
na
|
13.1
|
1.3
|
0.325
|
41.9
|
4.3
| ||
25.0
|
18.0
|
1.3
|
na
|
24.0
|
5.3
| ||
30.0
|
21.5
|
1.1
|
0.345
|
32.4
|
5.1
| ||
US
|
14.0
|
14.6
|
0.7
|
0.368
|
39.2
|
5.1
| |
a) collective bargaining coverage 2000 p26
| |||||||
b) social program spending 2001 p26
| |||||||
c) employment protection 2003 p 26
| |||||||
d) gini coefficient*, disposable household income, most recent p5
| |||||||
e) GDP per hour 2002 p12
| |||||||
f) unemployment rate 2000-2003 p70
| |||||||
*the Gini coefficient represents the percentage of total income that would have to be
| |||||||
redistributed in order to have perfect income equality
| |||||||
“The mainstream economist view posits a trade off between equality and efficiency…that inequality of rewards is necessary to motivate individuals to make productive investments, to innovate and to work hard. Setting the Irish case aside, there is no association whatsoever between inequality and GDP per capita growth…there is no association between income taxation and employment growth on a cross-national basis.
The public provision of social welfare strengthens the economy and improves its performance. While high payroll taxes seem to have held back employment growth in the 1990s, there is little evidence that income support for the unemployed seriously restricts the supply of labor.”[v]
“Market forces have been a source of rising inequality (in recent decades), while strong unions, institutionalized collective bargaining and the public provision of social welfare based on universalistic principles have counteracted these forces in both sets of (SME) countries.”[vi]
POLITICS
SMEs result from collective political action and political mobilization of workers. There is some evidence that the welfare states are retrenching. However “The core components of postwar welfare states, such as public health and public pension programs, remain intact and indeed, continue to enjoy strong support in public opinion polls. The British experience, e.g., despite seventeen consecutive years of government by conservatives committed to rolling back the welfare state, social spending increased from 17.6% of GDP in 1980 to 24.4% in 1998. In only four of our eighteen countries did total social spending account for a smaller share of GDP in 2001 than in 1980….substantial increases in quite a few countries.”[vii]
“Prompted by the Thatcherite revolution in the early 1980's, most Western European governments began to divest themselves of many state-owned companies in order to produce a short-term spike in government revenue and to generate higher growth rates.
Since the fall of communism, they've urged their Eastern European counterparts to do the same. The result over the past two decades has been the largest voluntary surrender of economic control in modern history.”[viii] Privatization in Eastern Europe was highly corrupt and undemocratic.
Planning in a mixed economy leaves most coordination to the market and assumes decentralization of most management decisions down to the enterprise. The Third Way associated with Tony Blair and Bill Clinton stressed freedom, entrepreneurship, and meritocracy. It backed away from many of the social policies of social democracy. Critics argue that third way politicians are in favor of ideas and policies that ultimately serve the interests of corporate power and the wealthy at the expense of the working class and the poor. Compensatory social policy and social insurance is offered rather than fundamental broadening of opportunity.
GOVERNMENT ROLES
Almost all countries have mixed economies. Even in the least social democratic countries the government has extensive activity in the economy, for example:
military spending
trains
mail
health care
libraries and other information services
roads and other transportation services
social security for the aged and infirm
telephone and other communication services
schools and other education services
banks and other financial services
electricity and other energy services (e.g. oil, gas)
legal assistance
waste collection and treatment
policing.
airports
education
water systems
waste disposal
Typical government regulations:
government-granted monopolies to otherwise private businesses
mandatory insurance (example: automobile)
environmental regulation (example: toxins in land, water, air)
labor regulation including minimum wage laws
consumer regulation (example: product safety)
antitrust laws
intellectual property laws
incorporation laws
import and export controls, such as tariffs and quotas
taxes and fees
drug approval
Common Subsidies:
subsidies to agriculture
research and development
subsidies to business
social welfare payments
old age pensions
BUILDING ON SOCIAL DEMOCRACY
Pontusson suggests reforming SMEs to increase employment growth by reducing job protection while reinforcing public support and shifting the tax burden from payroll taxes to income taxes. He suggests the emphasis should be on employment security rather than job security. He argues for universal benefits to maintain popular support.[ix]
“Multinationals use their economic and political power to destroy competition from small and medium size businesses and to push national governments into easing labor or pollution standards.”[x] The top 100 multinationals accounted for one third of world economic output and two thirds of global trade. Our media has become increasingly concentrated. Conventional antitrust has been of little use in combating this concentration. Regulatory agencies are tied to business, the government role is to create price floors, exclude competition, provide research and development, marketing, subsidies.
The Left is more likely to make significant change by organizing for workplace democracy, and worker ownership, and promoting coops and small businesses.
Creating competition to decentralization of production and distribution and alliances of coops and small businesses for mutual support, such as BALLE and AMIBA, makes more sense than antitrust. There is a large cooperative alliance in Spain , Mondragon with total revenues over $7 billion, which is little known in this country and has much to teach us about developing independent economic power. Grameen and other micro credit organizations have shown that very small business startups can create a great deal of employment. Welfare has always been a bad compromise, low income without work instead of decent wage with work. Decentralization is possible in many areas since economies of scale in production have declined in many industries due to technology. Our economy already has many small firms, 99.8% of firms have less than 500 employees, half of total employment. It may be possible to decentralize many of the large corporations.
Labor’s bargaining power depends to a large degree upon full employment. Access to credit for starting small businesses and coops is crucial for this. More and stronger unions would increase bargaining power and accelerate workplace democracy. We should develop policies to increase employment by sharing unemployment with shorter hours, longer vacations, earlier retirement.
The Left is segmented -- labor, environmental, liberal, cultural, philanthropy with thousands of organizations and publications. We need to consolidate and make a clear statement of the Left program and agenda -- equal opportunity, full employment, health care, environment.
The split between private and public economic activities needs to be re-evaluated. The theory of natural monopoly and market failure can teach us where public ownership makes sense. One aspect of this is the question of which things should be provided to all vs. left to consumer purchase? The market or voting can be used to decide public vs. private split. More private activities belong into the public sphere, such as health insurance. However, in some cases market incentives can improve public institutions performance. Vouchers may be reasonable compromises which promote competition, with government funding, and a choice of business, cooperative, non-profit or public producers. A voucher system where provider groups compete on the basis of quality was proposed by Victor Fuchs, a prominent progressive health economist, for national health insurance.
If those of us on the Left seek substantial power in the political and economic life of this country, we need to start accomplishing important things, e.g. revive unions, create employment, real national health insurance, expand cooperatives, including credit unions. We need to end corporate constitutional rights, disallow money in politics and enact strict conflict of interest laws for politicians. We need to change the electoral system, instant runoff, fusion balloting, open primaries, free air time to make an effective third party possible. Angus Maddison, the great economic historian, found that important factors favoring economic growth include democracy and civil liberties. We need to remove the corruption from our politics and revive the political democracy.
The Left critique of welfare state is that it doesn't change fundamentals of power and incentives. For social democracy to achieve its goals -- equality, democracy, solidarity, it needs to have a serious critique of capitalism; we need ideas and policies for substantially improving the economy and society. The critique of capitalism should be specific and detailed, so that we can better understand what can be changed and how. The US Left needs to build upon the best versions of the European social democratic tradition.
Bremmer, Ian, The End of the Free Market: Who Wins the War Between States and Corporations, Portfolio, 2010
http://democraticmixedeconomy.blogspot.com/
Pontusson, Jonas, Inequality and Progress: Social Europe vs. Liberal America , Cornell University
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