Economic Subsidiarity

Self-Determination through Decentralized Economic Structures

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: Wirtschaftliche Subsidiarität

Table of Contents

  1. Abstract
  2. The Historical Development of the Concept
  3. The Social Subsidiarity
  4. The Political Subsidiarity
  5. The Economic Subsidiarity
  6. Subsidiarity in the European Union
  7. Subsidiarity in the Market Economy
    7.1 Subsidiarity of the Financial Sector
  8. External Economic Interfaces

1. Abstract

The principle of subsidiarity that focuses on both human self-determination and personal responsibility, was originally understood solely as social-ethical, however, in the 19th Century it was extended to a system of social and political norms. Today, as then, it is imperative to defend the principle against centralistic tendencies. In view of the devastations caused by the neoliberal globalization, the subsidiarity of political structures gains existential importance, and even more so the subsidiarity of economic structures. For the first time in economic history it becomes particularly obvious that prosperity and welfare can only be achieved through the interaction of social, political and economic subsidiarity.

2. The Historical Development of the Concept

SubsidiaritätJPG04The principle of subsidiarity focuses on both human self-determination and personal responsibility, making them important guarantors for a thriving social live. The principle has its origin in social-ethical comprehension, accordingly, larger and more capable social and governmental units should only intervene to provide support to smaller and less capable units when the forces of the latter are not sufficient to achieve a given vital objective. For example, when individuals, families or groups are overwhelmed with the care and support for children, the elderly or the sick.

The illustration shows the social and governmental units sorted by size resembling the shape of a cone (or concentric rings in two-dimensional representation). Responsibilities are assigned to the units according to their capabilities. Each unit is committed to self-determination and self-responsibility, that is: to act autonomously, but will be supported by the next larger unit in case its own resources are not sufficient for a particular task, thus ensuring that all social and governmental tasks are accomplished efficiently and as decentralized as possible where the parties affected and their interests are most closely related.

It should be noted however that each and every subsidiary system is at risk due to centralist efforts by larger units and that societies must deal with this danger in their own interest.

SubsidiaritySchum01In the 19th century, the Catholic social doctrine combined the principles of human dignity, subsidiarity and solidarity and further developed them into a system of social norms and structures in response to liberalism and Marxism. According to this system, the responsibility for any task has to be delegated to the smallest capable unit. The included solidarity is understood as a mutual commitment between each individual and society: Each individual supports the community to the best of his or her (financial) capability and will be supported by the community in case of personal hardship, when his or her strengths and endeavours are evidently not sufficient. The system was aimed to enable a development based on individual self-determination, individual responsibility and unhindered decentralized (local) development of individual skills. At the same time, the system was intended to ensure a fair distribution of income and property with respect to individual performance, as well as ensuring sustainable social welfare. The principle of sustainability, shown in red, was only brought to the attention of the public during the second half of the 20th century.

For a detailed description of the preconditions that must be met to induce social welfare and prosperity I recommend the article Sustainable Social Welfare).

3. The Social Subsidiarity

In the 19th century, industrialization caused intolerable social imbalances after a dependent working class had emerged that was no longer socially secured by families or guilds. Therefore, the obligation of superior institutions to financially back-up individual responsibilities, as anchored in both the principles of subsidiarity and solidarity, was additionally assigned to national pension schemes. Originating from Europe and the United States, this new social security system was initially limited to the risks of illness, unemployment, accident and old age, and was later expanded to include education, information and culture to promote the principle of equal opportunity as well. Today, the system also includes public infrastructure, nature conservation and environmental protection, as well as basic research as a long-term cross-functional activity. Now called »general-interest public services«, the facility is indispensable for the social justice and the inner peace of modern societies. However, the borderline between state and individual responsibilities has always been blurred and is therefore subject to ongoing political adjustment.

4. The Political Subsidiarity

The political subsidiarity was already anticipated in the Catholic social doctrine. However, the main objective of political subsidiarity is not to support smaller units in case of insufficient resources, but to ensure a reasonable subsidiary distribution of political decision-making power between the various political units or levels.

The political subsidiarity aims at assigning decision-making powers in each case to the smallest possible units where the required knowledge is available and people are directly affected so that they are motivated to contribute to political progress and are forced to assume full responsibility for their affairs. The local self-government in Germany (kommunale Selbstverwaltung) is an example of political subsidiarity in action, a system that is, however, more and more undermined by centralist political endeavours in the course of the neoliberal globalization and the European integration. For example, when transnational corporations take over regional or municipal utilities for water and energy supply, or when EU institutions interfere with national or local decision-making (see also the articles Economic Globalization, Transnational Corporations and EU: Federal Superstate or Confederation?).

5. The Economic Subsidiarity

In analogy to the cone of political subsidiarity, economic subsidiarity means that economic value creation is contributed by the smallest possible units in accordance with the technological requirements of production. Craftsman’s work, for example, would be provided by a large number of small workshops scattered across the country, whilst elaborate industrial productions would be based at a few central locations, and highly specialized research projects at a single European or even global location.

But keep in mind that economic subsidiarity is not to be confused with undifferentiated decentralization, it is rather an economy-politically controlled process to establish a socially and ecologically efficient hierarchy of economic production in accordance with technological capabilities. With this understanding, economic subsidiarity stands for decentralized economic self-determination and individual responsibility, including local responsibility for people and nature, and for widespread diversity of production technologies and products.

At the same time economic subsidiarity allows for horizontal competition between identical production technologies, and for vertical competition between labor-intensive and capital-intensive productions. And above all, it guarantees the diverse labor supply of the workforce to match with the equally diverse labor demand of economic enterprises, so that all citizens are assured self-determined participation in the economy and a fair share of the economic outturn in the form of wages and capital returns to earn their living. All in all that means: a subsidiary economic structure constitutes the basis for social and ecological yields manifesting themselves in full employment and environmental protection.

Subsidiarity07SubsidiaritySchum06Up to now, the need for economic subsidiarity is getting little attention from both politics and economics. If anything, it was assumed that the formation of functional economic structures was sufficiently ensured by efforts concerning political subsidiarity and by the market mechanism. In most cases even economic concentration was promoted, because economies of scale and economies of scope were equated with high and sustainable productivity, disregarding their negative social and environmental effects under centralist conditions. As a compliment see the article Scale Economies and Productivity.

The above-mentioned conditions for prosperity and welfare include the interaction of all three subsidiarities mentioned: the social, political, and economic subsidiarity.

The disregard of economic subsidiarity is due to the historical development: Prior to the era of industrialization, decentralized structures were taken as »natural« due to the limited technological options available and thus did not require economic governance. The effects of the concentration process induced by industrialization led to failing Marxist and socialistic experiments in the first half of the 20th century, and were later superimposed by high growth rates and a tolerable distribution of national products in market-oriented democracies up to the eighties of the 20th century. Only when he neoliberal globalization entered its »hot« phase in the mid-nineties, the concentration process and the resulting widespread de-industrialization mainly of peripheral areas with declining growth accelerated such that the social and ecological devastations became a political issue. Despite this development, both politics and economics still demonstrate a lack of understanding that the causes of the devastations are systemic.

The development demands a subsidiarization of economic structures, combined with a foreign trade based on the diverse value creation of these structures, as well as an international cooperation that extends the subsidiarity across national borders.

The uniform economic order that combines domestic subsidiary structures and foreign trade is described in the section External Economic Interfaces below.

As a complement I recommend the article Future-Proof Foreign Trade.

6. Subsidiarity in the European Union

In 1993, the Maastricht Treaty came into force and formally established a subsidiarity in the EU that was in conformity with the federal principle. With this treaty, the EU intended to bring Europe closer to its citizens and retain the national identities of its member states. In the draft constitution and in the following EU Reform Treaty (Lisbon Treaty) the principle of subsidiarity was mentioned again, but at the same time was nullified repeatedly by other clauses. In addition, the practical implementation still fails due to the centralistic and global economic ambitions and the self-empowerment of the EU bureaucracy (see the article Undemocratic EU Institutions). Local, regional and national sovereignties are more and more curtailed by regulations from Brussels. With a regulatory frenzy not recoiling of introducing the most ridiculous detail, the EU Institutions have established conditions under which three-quarters of national economic legislation have to follow binding guidelines of the EU (see also EU: Federal Superstate or Confederation?). Furthermore, legal economic powers, at first being transfered from the national to the EU level or arbitrarily demanded by the EU, immediately run the risk to be incorporated into the irreversible multilateralist agreements of the World Trade Organisation (WTO) or into free trade agreements between larger regions like the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States. As a complement see also the article World Trade Organization (WTO).

7. Subsidiarity in the Market Economy

SubsidiaritySchum08SubsidiaritySchum10In the market economy, decentralized responsibility is an indispensable prerequisite for both social justice (as shown above) and environmental sustainability. In practice, economic subsidiarity is introduced through a continuous process of redistribution and decentralization of business units governed by means of fiscal incentives.

As shown in the first figure, a distinction is made in each industry of the economic sectors between capital-intensive, balanced and labor-intensive production. The smallest possible enterprise unit for each production type is, with respect to technology, defined as the reference enterprise by applying four criteria (see second figure). Reference enterprises with capital-intensive production are most heavily taxed, while enterprises with labor-intensive production are the least heavily taxed units, thus ensuring equal competitive conditions between the various production types.

Firms that grow beyond their respective reference unit are, in addition, progressively taxed to provide incentives for the owners for splitting their enterprises into smaller units (hence the term dynamic subsidiarization). After splitting an enterprise, owners may only continue to operate one single split-off unit and are forced to sell the other(s), thereby regularly creating new opportunities for start-up entrepreneurs. By progressively taxing private income, owners are also highly motivated to invest proceeds from splittings in technological progress to boost productivity. Reference enterprises are redefined whenever the productivity increases within an industry or sector.

As also shown in the first figure, there is a steady and balanced horizontal competition within each type of production due to the progressive taxation and a steady and balanced vertical competition across production types also due to taxation.

In addition to optimal decentralization and distribution of entrepreneurial activity and capital, the dynamic process of subsidiarization guarantees an optimal performance-related distribution of private income and prosperity, thus targeting the social welfare optimum. The process needs to be an integral part of any market economy, because the market participants develop a natural tendency to concentrate as much power and capital in their hands as possible.

It goes without saying that the process of dynamic subsidiarization must include all industries of the three economic sectors: the primary sector with agriculture, handicraft and small businesses, the secondary sector with industrial production and the tertiary sector with services. Within the tertiary sector, the financial industry plays a special role because it provides all other sectors and their industries with credits (loans) and is therefore crucial for economic dynamism and economic and technological progress. For further details on the process of dynamic subsidiarization see the article Taxation of Enterprises.

7.1 Subsidiarity of the Financial Sector

The commercial banks in the financial industry are generally responsible for managing savings deposits of all economic subjects (lenders) and of granting interest-bearing loans to commercial enterprises and private individuals (borrowers). Interest income flows in part to lenders and partly to the commercial banks as profit.

In a subsidiary-structured economy, the process of dynamic subsidiarization must also include the commercial banks, so that the money circulation is in line with the general subsidiary structure. In other words, in order to ensure that lenders and borrowers are as closely linked locally as possible, lenders’ interest income must flow back into the local, regional and national economic cycles to stimulate consumption and further investment, complemented by borrowers’ loans stimulating the economic performance of local, regional and national markets, in particular the labour market.

This also means that commercial banks may only act internationally within the framework of economic policy decisions, i. e. decisions resulting from bilateral and multilateral agreements between trading partners. The aim of such agreements must be to allow cross-border movements of monetary capital only if they are profitable for all economies involved. The same applies to international movements of physical (real) capital, such as the relocation of production facilities.

What has been said also makes it imperative that each currency area must have its own independent central bank being responsible for the monetary policy in conjunction with the commercial banks, and that supranational central banks such as the European Central Bank (ECB) are ruled out, because they are not committed to any national Sovereign and are therefore not democratically legitimized. As a compliment see the article Money Creation and Destruction.

For an overview I recommend the following articles: Market and Market Economy and Economic Competition.

All in all, future viability can only be achieved, if the necessary structures for social, political and economic subsidiarity are designed and implemented in congruence with each other, so that conflicts between the three spheres in decision-making can be avoided from the start.

The effective building of subsidiary economic structures under the conditions of the neoliberal globalization as a base for a post-neoliberal economic order is addressed in the article Building Subsidiary Economic Structures.

8. External Economic Interfaces

SubsidiaritySchum14The dynamic subsidiarization of domestic economic structures can only be successfully conducted in close combination with foreign trade interfaces. These interfaces must ensure that the orderly development of domestic structures is not thwarted by hostile export strategies of foreign economic areas. In other words, the domestic and foreign trade components of an economic order must be absolutely coherent to form a foundation on which trade agreements with other economic areas can be negotiated sovereignly and on an equal footing. Bilateral exchange rates are the key element to be agreed upon with trading partners, and are to be calculated such that they neutralize the average gap in productivity and prices respectively, so that predatory competition caused by large price differences is practically excluded on average, supplemented on both sides by autonomous fine-tuning applying import quotas and import tariffs to constructively incorporate international into domestic competition. It is only under these controlled conditions that economically diverse economic areas are put in a position to mutually profit from trading with each other.

For further details of the external interfaces I recommend the articles Comparative Advantage – Upgraded and Future-Proof Foreign Trade.

The overall context of economic policy needs is briefly described in the article Ten Imperatives to Secure Our Future.

Click here for the German-language version: Wirtschaftliche Subsidiarität


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