The Social Market Economists

The Social Market Economists

The 'social market economy' (Soziale Marktwirtschafi) was a term invented by the German economist and senior government adviser Alfred Miiller-Armack to denote a reconciliation of the free market economy with the demands of distributive justice.9 It is a useful term to describe the attitudes of a regiment of economic and social thinkers who have extended the concept of 'entitlement' to cover the right of every individual to a 'basic' standard of living and also to access to resources in order to develop their latent talents, for example through investment in their education and social environment (health and housing). At the same time, the choice of means for giving effect to these 'rights' should recognize the importance of developing individuals' capacity to choose for themselves and of expressing these choices through an efficiently operating market economy.

Space does not allow a discussion of the different approaches leading to the delineation of this extension of the concept of entitlement. It is sufficient to say that whether these entitlements are derived from a utilitarian view of economic welfare, based on the assumption that marginal utility falls as income rises, or from a Rawlsian view of social justice, based on maximizing the welfare of the least advantaged person (which does not require inter-personal comparisons of utility), the constraint of minimizing income redistribution no longer applies. This follows directly from the more positive commitment both to a basic standard of living and also to the funding of services designed to promote investment in human capital.

If there is any distinction to be made between the various social market economists, it lies in their view of the organization of production; and this is germane to the choice of practical measures matching their value judgments. One group does not specify in any detail how production should be organized, except to state that competition must be preserved within the market economy - how this is to be done is a separate question. There is another group, following John Stuart Mill, which would argue strongly in favour of much more equality in the ownership of capital. In Mill's case this extended to the proposition that the future of the market economy depended on the growth in labour-managed firms - 'an association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations and working under managers selected and removable by themselves'.10 The most distinguished contemporary exponent of attempts to reconcile conflicts between capital and labour is James Meade, who has developed a scheme based on joint holdings of risk capital in a company by both 'capitalists' and workers. However, the sharing of risks by labour and capital presupposes, according to Meade, an automatic entitlement by all individuals to 'a certain and reliable tax-free Social Dividend'. Social security income becomes the essential source of stable income alongside the fluctuating capital and wage income received by the worker.

As before, an attempt will be made to trace the connection between the philosophy of the welfare state and the level of benefits. The removal of the constraint on compulsory redistribution immediately suggests that social market economists (SMEs) would be more sympathetic to a minimum level of subsistence which depends on the growth in real GDP; in other words the 'poverty line' is a relative concept. (This is a logical necessity in the case of the utilitarian theory of income redistribution, provided that pre-tax/transfer income distribution remains unequal.) A more difficult question is how far SMEs are committed to a much more radical requirement, namely some proportional relation between income levels and benefits, as in the case of earnings-related pension schemes. The usual argument supporting the claim that such benefits should be earnings-related rests on the supposed 'consensus' between political parties in several European countries which lies behind the 'dynamic' pension schemes operating in such countries as Germany, Italy and the UK. 'Consensus' does not however imply that there is any logical connection between the SME's position and what happens to be agreed, if in fact it is, between different political factions. A more likely explanation of consensus is that offered by Barry,13 namely that, with no constitutional limitations, public expenditure decisions are taken which commit future generations. Earnings-related pensions become an 'electoral bribe' on a large scale and one which works because of the opportunities open to governments to disguise the long-run economic costs of pensions provision.

A more obvious difference between libertarians and SMEs lies in the firmer commitment of the latter to 'access' by poorer persons to education, health and housing facilities, which can, of course, be justified on the grounds that, in the long run, investment in human capital may reduce the incidence of poverty. This extension of 'entitlement' must be important in the devising of appropriate government measures to give effect to the objectives of policy, but it is difficult to give any precision to terms such as 'access' or 'entitlement' in trying to translate them into resource requirements. On such matters there is room for considerable variations in points of view amongst SMEs.

Turning to the choice between universality or selectivity of benefits, we observe again no logical necessity why SMEs should vote for one or the other, as a matter of principle. Indeed, much of the discussion concerns the danger that selectivity may defeat its own purpose by offering no incentive to beneficiaries to acquire the skills or make the effort to be able to fend for themselves; and this must be an empirical matter which can only be resolved, if at all, by scientific investigation. However, the more explicit commitment of SMEs to income redistribution removes a major objection to the use of universal income provision, e.g. some form of 'Social Dividend' for all, as a major means for eliminating poverty. Therefore, apart from the argument advanced above for a Social Dividend based on the need for a 'certain and reliable' component of income, the claims of the Social Dividend are extended as a way of remedying the perceived deficiencies of selective benefits.

It might be thought that the extension of the definition of welfare provision and the more relaxed attitude to income redistribution would point towards major differences between libertarians and SMEs over the types of benefit provision, but this is not so. Tax allowances (or expenditure) were not specifically mentioned in Section II above, though it is conceivable that the libertarian position would support tax relief granted to charities directed at helping poorer persons. However, such relief becomes of some importance in the SMEs' scenario. This applies particularly to earnings-related pensions. Given the SMEs' interest in combining their views on social justice with an efficient market economy, there is no necessity for such a pension scheme to be nationalized. A pensions standard must be laid down, which could be either contribution-based or final-salary-based, and the employee could be a member of either an occupational or a personal pension scheme. It is an open question how much tax relief should be given alongside the compulsory requirement to meet the pension standard, and it must be borne in mind that such tax relief has to be given at the cost of either raising taxes elsewhere, given the level of public expenditure, or reducing the level of public expenditure, unless the government wishes to face the consequences of a growing public debt. There are three arguments in favour of tax allowances. The first is that SMEs are likely, as a matter of general philosophy, to wish to encourage private saving even at the cost of a reduction in government saving. Second, encouraging competition in the provision of pensions would fit with the SMEs' disposition to support the market economy. (This, of course, would suggest, in strict logic, preference for 'portable' personal rather than occupational pensions, which may be specifically designed to reduce occupational mobility.) Third, although this point is the subject of much argument, a state monopoly of pension provision runs the risk of being highly bureaucratic and therefore slow-moving and costly, because not subject to market pressures.

Clearly, money transfers are a major instrument of SME social policy particularly one wedded to a Social Dividend approach. The more interesting area of discourse on benefits concerns access to educational, health and housing services. The difference between libertarians and SMEs is more one of degree than of kind. For SMEs there is no reason why these services should have to be provided at zero cost by government institutions. Even if it is believed that some form of consumer protection is necessary because of the perceived inability of citizens to make sensible choices regarding education, health and housing, there is no case for turning them over to the government. Consumer protection can be afforded by regulation and by advisory services, with the latter if need be receiving public subsidy. The difference with libertarians will arise over the degree of 'entitlement' to such services, and is likely to be reflected not in the form of provision but in the method of financing. We should therefore expect SMEs to be in favour both of money transfers and also of educational, health and housing voucher systems, with the production of the associated services being left partly if not wholly in private hands, and perhaps with a bias towards co-operatives and non-profit-making institutions as suppliers.

Whereas the libertarian position takes 'the insurance principle' as the starting point and modifies it only to the extent necessary to prevent absolute poverty, the SMEs' positive emphasis on distributive justice severs the nexus between contribution and payment, at least in any strict way. SMEs may support the proposition that, as a matter of principle, every citizen should pay something towards the provision of public services, but there is no presumption that such payment should be earmarked for the payment of social security and associated services. At most, labelling finance of social security as 'contributions' or 'premiums' is only a sales pitch, and may contain the danger of deluding contributors into believing that they are paying in full for the benefits received.I4 It therefore comes as no surprise to find that SMEs have been closely concerned with attempts to amalgamate the personal tax and social security systems, particularly if some form of Social Dividend scheme is to become the cornerstone of the social security system. As is well known, if they are not amalgamated or at least not closely co-ordinated, those who move out of entitlement to benefits because they have become fit or have found jobs may be faced with such high marginal tax rates that they are worse off than if not working.

To sum up this section, there is some consonance between the libertarian and SME position, as found, for instance, in the wish to channel income support through the individual or family and to avoid collectivizing the services designed to alleviate poverty. However, the kind of 'life-cycle accounting' suggested above (pp. 65-6) as a logical consequence of libertarian financing arrangements would presumably be regarded by SMEs as neither desirable nor necessary. Individuals suffering from poverty are not considered as being 'in debt to society' as a result of being in this condition. Furthermore, in so far as individuals move from being poor to being better off, they acknowledge any 'debt to society' by the payment of a greater proportion of their incomes in taxes as they move up the income scale. This argument is only subject to dispute amongst SMEs if we adopt such a broad definition of social policy as to include access to higher education. Some would continue to argue that those undergoing higher education should not have to bear the cost, even if as a result their income prospects are enhanced - if that were the result then the fortunate graduates would pay higher taxes anyway. Others recognise a problem of horizontal equity between those obtaining free access to capital if they invest in themselves and those who have to borrow the capital if they invest in a business and initially are at the same income level. Here, the 'life-cycle accounting' concept seems to make sense, with students paying off loans used to finance their studies, though repayment might take into account the economic circumstances of the graduate.