Building Subsidiary Economic Structures

Building Subsidiary Domestic Economic Structures under the Conditions of the Neoliberal Globalization as a Base for a Post-Neoliberal Economic Order

An Article in the Compendium of Market-Based Social-Ecological Economics


Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Aufbau subsidiärer Binnenstrukturen

Table of Contents

  1. Abstract
  2. The Current Option for Subsidiary Economic Structures
  3. Initial Steps towards Foreign Trade Adjustments
  4. Initial Steps towards Domestic Economic Subsidiarization
  5. Further Steps towards Foreign Trade Adjustments
  6. Further Steps towards Domestic Economic Subsidiarization
  7. The Advantages for Entrepreneurs and Employees
  8. Concluding Remarks

1. Abstract

EinführungSubsidiarität01The design of subsidiary economic structures is the way to be followed towards a sustainable, future-proof economic order and sustainable social welfare. The economic subsidiarity and the process of subsidiarization of economic structures are to be understood as a qualified decentralization. However, the key and the necessary prerequisite to subsidiarily transform and operate a domestic economy free from hostile encroachments of other economic areas is the regulation of foreign trade.

By the way, the term economic area is used here as a synonym for nation-state, because currently only the nation states are largely homogeneous regarding their material and intellectual economic resources, and because a homogenous supranational economic area does not exist at present – which is particularly true for the euro zone.

Ideally, under a future post-neoliberal economic order, the regulation of foreign trade is laid down in bilateral trade agreements. In particular, these trade agreements must contain the mechanism for the calculation of price-neutralizing exchange rates, and concede mutual autonomy in the determination of tariffs and trade quotas, so that foreign trade and international competition are based on relative price advantages and absolute quality advantages, thus enabling mutual welfare gains instead of provoking instant crowding-out effects.

The present article deals with the urgently required entry into the transitional phase, whose purpose is to switch over from the current neoliberal to a post-neoliberal, future-proof economic order geared towards sustainable welfare.

2. The Current Option for Subsidiary Economic Structures

EinführungSubsidiarität04Since waiting for bilateral understandings or a global consensus is futile under the neoliberal economic dogma, economic areas currently only have the option to autonomously and unilaterally follow the path towards a sustainable future-proof domestic economic order and sustainable social welfare by virtue of their economic sovereignty. It requires the pioneering work of at least one economic area to initiate the switchover, and thereby also give the decisive impetus for the necessary global rethinking. A pioneer who proceeds uncompromisingly will succeed, will break the ice, and will encourage other countries to bilaterally join him.

The path towards subsidiary domestic structures, which is dependent on the preceding adjustment of foreign trade interfaces, and which can exemplarily only be taken unilaterally, is the decisive step to overcome the neoliberal economic order.

3. Initial Steps towards Foreign Trade Adjustments

Foreign Trade adjustment means to compensate for the natural differences between economic areas in their endowment of material and intellectual economic resources through pricing measures, so that economic areas can, although differing in productivity, conduct mutually profitable trade. In order to minimize the resistance of domestic and foreign players, including the World Trade Organization (see World Trade Organization (WTO)), and to produce quick results, a prudent approach in small steps is recommended for a pioneer. Concretely, this means that initially not more than one branch should be adjusted simultaneously and in accordance with one trading partner, and industries should be selected that have survived global predatory competition to an extent that enables them to return to their old strength in a short period of time, also because they can still access the potential of required workers’ skills in the labor market.

In practice, foreign trade adjustment initially means to raise the import prices of selected products of an industry to the domestic price level by means of customs duties in order to prevent any further crowding-out of domestic suppliers, and, at the same time, to ensure an adequate diversity in the mix of imports and domestic products. The competition is thereby transformed from a pure price competition in dollars or euros into a competition for product qualities, initially however on the pioneer’s domestic market only. In the next step the pioneer can subsidize its relatively expensive products that are exposed to crowding-out and thus provide incentives for the trading partner to import them. This leads to a balanced intra-industry trade between the partners from which both sides benefit.

Macroeconomic losses do not occur because the pioneer’s customs duties and subsidies offset each other, and, on the other hand, because the trading partner increases its product diversity. Conversely, the same applies to the trading partner when it introduces customs duties and subsidies for vulnerable products on its part. However, suppliers on both sides who previously were able to act as monopolists – when competition was based on absolute prices – now have to compete with imports. But that is exactly the purpose of adjustments: To confine the price competition such that progress is induced and to move the focus to quality competition. Following the first adjustments, both partners can control the competition within the industry by means of import tariffs or export subsidies such that their suppliers are permanently motivated and forced to improve their productivity and product quality without the risk of definite crowding-out. When both partners proceed in this way, the trading relationship will be built upon mutual benefits within a short period of time, although initially only within one industry.

Basically, intended unilateral adjustments should be communicated and explained to trading partners concerned at an early stage in order to give them the opportunity to plan adjustments on their part. The explanation of adjustments should aim to attract the interest of trading partners for the ultimate international competition for relative price advantages based on well-calculated, price-neutralizing exchange rates, and possibly even to enter into negotiations on a corresponding trade agreement. The most convincing argument to present to trading partners is the prospect of mutual trading and welfare gains.

The first steps of the transitional phase can be conducted both within the euro zone and in global trade based on US dollars. Existing exchange rates between national currencies and the dollar or euro can be neglected, but the preferred currency can still be used to calculate trade balances. The price adjustments are initially attained solely through tariffs and subsidies in settlement currency. Or in other words: The targeted exchange rate system, in which exchange rates are calculated from bilateral product baskets such that they neutralize the prices of traded products on average, is initially simulated through import tariffs and export subsidies on products to the extent that is necessary.

4. Initial Steps towards Domestic Economic Subsidiarization

Existing structures of industries can be converted to decentralized, or more precisely: subsidiary structures as soon as their foreign trade has been adjusted. Subsidiarization aims at distributing companies of the smallest possible size and in the greatest possible number across an economic area to incorporate as many people locally under their own responsibility into the economic processes, and to let them have their share in the economic outturn – and it aims to eventually establish full employment and sustainable welfare. In economic terms, one could say: Subsidiarization aims to produce social gains and to cause the least possible environmental costs.

The subsidiarization requires a progressive taxation of company sizes to counteract the natural tendency of economic players to greedily grab more and more capital and power. Therefore, the smallest possible operation is defined for each industry with respect to production technology as a fictitious reference company, which is meant to be charged with the lowest taxes. That is, the tax burden increases with the size of operation, forcing the owners, as soon as the profitability is no longer feasible, to split and sell part of a company. Thus, the process of subsidiarization developes its own momentum in consistently providing opportunities for young people to prove themselves as entrepreneurs on the relatively solid ground laid down.

BuildingSubsidiarityPPT02As indicated above, the production technology decides on the minimum size of the reference company of an industry. The exact definition of reference companies for the purpose of tax progression is effected through four criteria on the basis of production technologies: (1) the maximum allowable use of land size, raw materials and energy, (2) the maximum allowable amount of harmful emissions and waste, (3) the maximum allowable number of employees, and (4) the maximum allowable weekly working hours.

BuildingSubsidiarityPPT03The progressive taxation generates a production-related subsidiary structure (or hierarchy). In other words, labor-intensive industries are represented areawide at lower levels, capital-intensive ones at middle and upper levels at central locations. Thereby, the subsidiary structure allows a horizontal competition at all levels between companies of similar labor and capital intensity. This horizontal competition is of course locally contained at lower levels. And the progressive taxation enables a vertical competition across all levels, regardless of the labor or capital-intensity of industries.

Regarding subsidiarity in general and the dynamic subsidiarization of economic structures as a prerequisite for social welfare, I recommend the articles: Economic Subsidiarity and Sustainable Social Welfare.

5. Further Steps towards Foreign Trade Adjustments

When two economic areas agree to adjust their entire foreign trade, they can start to do so without restrictions and at any time, even under the conditions of the neoliberal globalization. The initial aim is to determine the relative prices of all traded and particularly of all potentially tradable products. The potentially tradable products are important because their productions are in many cases already weakened by neoliberal predatory competition so much that they are no longer internationally competitive, or they have even been completely crowded out. So it’s all the more necessary to take them into account in planning early on and to quickly rebuild them.

BuildingSubsidiarityPPT04When calculating relative prices a fictitious exchange rate is automatically revealed that can be introduced as the actual exchange under a post-neoliberal order. The calculation is very simple: Each of the two economic areas compiles a list of its bilateral trading products with prices in domestic currency, no matter in which reserve currency, such as dollars or euros, the trade is settled. Products that appear only in one of the two lists (that are actually or potentially traded in one direction only) should have an identical or similar product, including its price, entered into the list of the trading partner as a placeholder, so that both lists contain the same number of products, and realistic average prices can be calculated (sum of all product prices divided by number of items). The two realistic average prices automatically constitute the realistic fictitious exchange rate between the two economic areas. Finally, each economic area can use its average price to calculate its relative product prices by dividing the absolute price of each product by the average price.

BuildingSubsidiarityPPT05The comparison of relative product prices between the economic areas reveals the products that are relatively lower priced than those of the trading partner and therefore become an export candidate. In economic terms these price advantages are called relative comparative advantages because they are revealed through the comparison. When products that have a relative price advantage are exported, the importing country achieves a trading profit because the absolute price of their own product is higher than the absolute price of the imported product after the currency conversion.

Keep in mind though that I refer here to the conditions of a post-neoliberal order where calculated exchange rates will be inherently applied. Under these conditions, which are worth striving for, even economic areas with entirely different levels of productivity can quasi automatically achieve mutual trading profits on the basis of relative prices, and with no crowding-out taking place. For the fine tuning of trading profits and competitive effects on their domestic suppliers economic areas should in addition use import duties and quotas. The above illustration shows a corresponding bilateral trading between Germany and Greece.

As shown, the adjustments under the current neoliberal conditions must be conducted solely through import tariffs and export subsidies, since the existent exchange rates are subject to the interplay of free market sources and can not be set. What is described above as the first step for individual industries and products, can now be systematically implemented based on the comparison of relative prices for all industries and products involved in trading. To this end economic areas agree on a range of import and export candidates as well as the import tariffs and export subsidies required to neutralize prices. Thus the course is irrevocably set for the transition to a post-neoliberal order, and others may follow the example without risk.

The simulation of price-neutralizing exchange rates by means of import tariffs and export subsidies can also be applied within the euro zone without restriction. If euro-zone countries want to effectively implement the fictitious exchange rate later, they have to leave the euro zone and introduce their own national currencies. However, the fictitious exchange rate is nevertheless a useful indicator as it tells individual euro countries exactly how great the differences are in prices, and accordingly in productivities, between them and other euro countries. And in addition it proves that the euro zone is an extremely inhomogeneous economic area where the rich get richer and the poor get poorer when trading with each other in the so-called integrated European single market. Whereby the unequal distribution of wealth and income increases in all euro zone countries in synchrony with the centralization of economic structures. Germany and Greece are in many respects the most extreme examples.

Trading with relative comparative price advantages has a positive effect on the entire domestic economy and on international economic relations:

  1. Macro- and microeconomic trading profits can be achieved mutually and independently of the productivity levels of trading partners,
  2. the productivity and quality competition of enterprises can be guided by social and environmental criteria,
  3. international and domestic competition can be constructively coordinated to promote domestic productions,
  4. regional developments can be promoted independently and in accordance with society and the environment and can, at the same time, generate relative comparative advantages,
  5. the macroeconomic equilibrium, particular regarding productivity and wages, can be autonomously regulated and controlled by economic policy-making bodies,
  6. the diversity of domestic supplies and the trading profits can be optimized in multi-bilateral trading relations,
  7. the international cooperation, the development aid and the trade in intellectual property can be tailored independent from the constraints of the physical international trade.

For the understanding of the basics of future-proof foreign trade as a prerequisite for subsidiary domestic structures, I recommend the articles: Comparative Advantage – Upgraded and Future-Proof Foreign Trade.

6. Further Steps towards Domestic Economic Subsidiarization

Subsidiarity07Economic areas who have adjusted their entire foreign trade for price-neutralization, can subsequently finalize the subsidiarization of their domestic structures. The unbundling and decentralization of the entrepreneurial landscape is complex and expensive and requires determination and patience, also because the resistance from stakeholders of centralized productions has to be overcome. The arguments put forward by these neoliberal advocates are focused on economies of scale and scope that allow them to reduce their costs and increase their productivity (see the article Scale Economies and Productivity).

Scale economies, for example, arise when as many units of a product as possible are produced as centrally as possible, because then the overhead costs per unit decrease and the growing production experience reduces costs as well. However, only the individual production facility benefits from these economies, while the macroeconomic (national) costs rise as a result of higher unemployment, higher traffic volume and areawide de-industrialization. In economic terms, the profits flow to private enterprises, while the bulk of costs is externalized and to be borne by workers and the general public.

To sum up, economies of scale and scope only generate positive macroeconomic and positive business profits, and only contribute to social welfare, when they are put into effect within a framework of subsidiary economic structures.

Generally it should be noted that there are very few productions and services that have to be necessarily established at central locations in a country the size of Germany. Among the few are advanced research and development projects that require high capital expenditure and highly specialized workers. And by the way: The research and development of technologies suitable for decentralized use is an important supporting task for the subsidiarization of economic structures.

7. The Advantages for Entrepreneurs and Employees

The interplay between regulated foreign trade and regulated domestic structures generates unique individual benefits for entrepreneurs and employees.

These are the benefits for entrepreneurs:

  1. They can no longer be crowded out by foreign suppliers through unjustified price dumping,
  2. nevertheless, they do constructively compete with domestic and foreign suppliers on productivity, prices and quality,
  3. they are given the opportunity to gain market share through exports,
  4. they can participate in a trade in intellectual property rights that is independent from the trade in goods and services, since there are no more incentives internationally, for example, to violate foreign patents for the purpose of price-dumping,
  5. and start-ups can establish new businesses without the risk of immediate crowding-out, or acquire company split-ups that are disposed of in the course of progressive taxation.

These are the benefits for employees

  1. They have recourse to a large and diverse range of jobs, even at close proximity,
  2. their wages and other remuneration as well as their weekly working hours are regularly adjusted to the general growth of economic productivity,
  3. due to regular wage adjustments their purchasing power also increases with the general growth of productivity,
  4. they have access to a large and diverse range and high quality products of regional, national and foreign origin,
  5. and they can be confident that trade unions and employers’ representatives will negotiate over wages and working hours on an equal footing.

Finally, it seems justified to ask the question whether any disadvantages are caused by adjusting foreign trade and building subsidiary domestic structures: No, actual disadvantages do not arise, only apparent ones: Entrepreneurs can no longer accumulate any amount of productive capital and can no longer concentrate more and more economic power in their hands. And consumers have to abstain from low-priced imports.

8. Concluding Remarks

BuildingSubsidiarityPPT01The undesirable worldwide developments like de-industrialization, unemployment, inequality and environmental degradation caused by the neoliberal economic doctrine are not an inevitable fate. Countries who rely on the wisdom of supranational bodies and institutions will, however, not be able to escape their destiny. The situation is indeed historically unprecedented – because there have never been global linkages and dependencies of that kind – but is no reason for hopelessness and inaction. The momentum for change will have to come directly democratically from citizens who have retained enough independence, and from nonconformist, system-critical democratic parties. In any case it can not be expected of the designers, profiteers and apologists of neoliberalism to unnecessarily relinquish their almost absolute economic freedom, their economic power, and their power of disposal over economic resources.

This article reveals the path that can virtually be followed under the prevailing conditions of the neoliberal dogma. As illustrated above, a coherent economic order, that unfolds its positive effect beyond national borders, emerges from the combination of foreign trade interfaces and a solid domestic economic foundation. Thus the established talk about the neoliberal economy being without alternative is refuted. And also the stirring up of fear of the alleged dangers of national solo efforts proves to be part of the permanent neoliberal indoctrination.

Click here for the German-language version: Aufbau subsidiärer Binnenstrukturen

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