Private and Public Goods

Demarcation Between Private and Public Goods as One of 17 Principles of Regional Economic Order Under the Maxims Democracy and Market Economy.

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: Private und öffentliche Güter

Table of Contents

  1. Overview
  2. Preliminary Remarks
  3. Demarcation Between Private and Public Goods
    3.1 The Subsidiary Structuring of the Private and Public Economic Sector

Overview

regionaleordnung01In view of the threatening extent of the devastations caused by the neoliberal economic doctrine, the turning towards compatible economic principles becomes almost existential. But only when these principles are combined to form a model of sustainable regional and global economic order, can the urgently needed economic policy measures be derived.

All 6 global principles are summarized in the article Principles of Global Economic Order in the form of questions. The supplementary 17 regional principles are listed in the article Prinzipien regionaler Wirtschaftsordnung, also as questions.

In the context given here, the term »regional« refers to largely homogeneous entities, currently primarily nation states and supranational political and economic areas (unions), that meet all the requirements for political sovereignty and economic autonomy and are therefore in a position to form a viable foundation for the prosperous coalescence of the world. Hereafter, these entities are mostly referred to as economic areas.

The European Union (EU) and, in particular, the euro zone existing within the EU, can serve as a cautionary example here. Both are supranational entities that have emerged from the political and economic self-interest of powerful players, and whose inhomogeneity and centralism have since unfolded great destructive potential (as a supplement see the article Demokratie und europäische Integration).

Preliminary Remarks

In the course of the historical economic development in Europe and the USA democracy and market economy have emerged as useful and reliable Maximes of Economic Order. Both maxims have, however, been distorted by the neoliberal indoctrination since the 1990s to such an extent that the »natural principles« inherent in them are hardly perceived by the citizens any more. It is therefore essential to return to these principles and to combine them into a model of a sustainable regional and global economic order. See also the article Market and Market Economy.

In contrast to the centralistic structures produced by modern Neoliberalism, the model presented here is based on decentralized structures, or, better still: on subsidiary structures. Only if the citizens in as many countries as possible are recognizing democracy and market economy in their interaction again as convincing maxims, can a culture of political co-determination and economic self-determination return to society, politics and the economy and work towards social and ecological justice. Embedded in subsidiary structures, the citizens bear full responsibility for their actions and well-being, so that they are always brought to shape the conditions in their immediate environment in exchange with each other and at the same time create the preconditions and the foundation for global exchange.

Social and ecological justice, by the way, arise from a multitude of economic mechanisms: For example, the terms Efficiency and Productivity as well as specialization, which are wrongly defined in the neoliberal context, are redefined in the sense of social justice and ecological sustainability and are no longer subject to the arbitrariness of »liberalized« (unregulated) markets, but to economic policy control. The market thus regains the freedom it deserves, which enables it under meaningful and uniform framework conditions, rules and standards to allocate economic resources efficiently and equitably like no other mechanism.

Thus, the price is able to perform its original function again as the central information medium and control element of market transactions of individual economic players, because under the conditions of social and ecological justice and productivity it reflects all internal and external costs. By allowing the players to be guided by truthful prices resulting from the interplay of supply and demand, economic resources move – as if steered by an »invisible hand« – to where they provide the greatest benefit to individuals and, at the same time, to society as a whole. As a supplement see the article Economic Pricing.

Subsidiary structures ensure that prosperity and welfare are no longer at the mercy of the imponderables of a worldwide production quantity achieved under oligarchic rule and high capital concentration, but result automatically from the domestic production structure. The production structure alone is decisive for local and regional economic diversity and consequently for the level of employment, the performance-related equal distribution in society and the preservation of natural resources.

Unlike domestic competition, international competition can not, by its very nature, be granted the freedoms of regulated domestic markets. It must rather be based on bilateral trade agreements given the completely different traditions, standards and resources in the world. In these agreements the exchange rate must be set as the crucial trading link, supplemented by autonomous tariffs and trade quotas to balance out the differences and to grant trade profits to both sides. The primary objective of these agreements must be to ensure that imported products with their characteristics and prices are integrated into domestic competition in the most stimulating but harmless way possible.

The separation into regional and global order thus results quite naturally from the principle difference between domestic and foreign trade. Besides, this explains why there can be no superordinate, all-dominant, self-regulating and self-stabilizing world economic order in a desirably diverse and democratic world. For more details see the article Future-Proof Foreign Trade.

Among politically sovereign and economically autonomous nation-states and economic areas, the global order is reduced to agreements of norms of conduct, especially regarding norms of international trade and cooperation. By applying these norms, economic subsidiarity can be extended beyond national borders and find its perfection at the global level in the form of projects of global interest and scale.

With domestic and cross-border subsidiarity the doctrinal practice of transferring economic powers from lower to higher levels (especially nonstate) is overcome, of which neoliberal protagonists claim it would bring about »more appropriate« and »more efficient« decisions. Along with overcoming this practice, the justification is removed for a World Trade Organization, which is entrusted by its current 164 member states as the guardian of the Grail of global cut-throat competition based on dumping prices in lead currency (i.e. US dollar or euro). This is an unprecedented event in economic history, especially because the condition for membership is the (voluntary) renunciation of national economic autonomy.

It should be noted that the demarcation of the specific functions of the various economic levels, i.e. the subsidiary structure of autonomous nation-states and economic areas both domestically and beyond their borders, is absolutely crucial for the future viability of economically autonomous entities and for the global economy as a whole:

Functioning regionality is a prerequisite for sustainable globality. Globality is the complement of functional regionality.

In what follows, is the plea for the demarcation between private and public goods as one of 17 principles of regional economic order:

3. Demarcation Between Private and Public Goods

PrivateÖffentlicheJPG02The complementary division of tasks between market and state requires not only state control of the market structure aimed at social and ecological productivity, but also a clear demarcation between the market economy and the public part of the economy, i.e. between private and public goods. The two types of goods differ most clearly in the processes by which they are created: While the production and distribution of private-sector goods and services takes place under economic policy conditions and rules solely through the market mechanism, the provision of public goods is without exception tied to political decisions. It follows that all essential goods that cannot be provided at all or cannot be provided optimally via the market mechanism are automatically defined as public goods and must therefore be subject to political decision.

Although the complementary division of tasks between market and state is indispensable, private companies can and should be involved as far as possible in the provision of public goods – notably only if public control continues to be guaranteed and the underlying political decisions are not thwarted. Since a citizen-centered provision of public goods is the least expensive and most effective – and the same applies to public control – subsidiary structuring is virtually inevitable for this part of the economy as well. Local self-government, which is enshrined in Germany’s constitution, is therefore the preferred instrument for the local level to plan and monitor the provision of public goods.

The formal characteristics of public goods offered so far by economic teaching are contradictory and, if applied in practice, can lead to nonsensical and undesirable demarcations between the public and private spheres. They must therefore be supplemented by seven concrete selection criteria which, all in all, lead to a responsible, future-oriented provision of public goods. Public goods are …

  1. Goods that are part of the essential basic supply and must always be available area-wide, even in times of crisis – such as clean drinking water, reliable communication and energy supply, public transport and a monetary economy accessible to all citizens.
  2. Goods whose provision is associated with damage to and scarcity of the free goods air, water and landscape – such as building construction and civil engineering (damage can be minimized by aiming at an appropiate balance between settlement, transport, agricultural and natural areas).
  3. Goods which serve general safety – such as road and air traffic regulations and flood protection.
  4. Goods that provide objective and reliable information – such as public broadcasting and public statistics.
  5. Goods that provide objective and reliable consultancy, mediation and administration – such as debt counselling and property administration.
  6. Goods that serve to permanently secure livelihoods (services of general interest) – such as research and development programs aimed at social and ecological sustainability.
  7. Goods that are described as meritorious because under market conditions they do not guarantee the socially desirable penetration rate – such as school education, health care and culture.

To avoid misunderstandings, the example of civil engineering illustrates well the interaction between private sector provision and public control: All work, such as the construction of a road, is of course suitable without restriction for being carried out by private companies. In this case, the public good is first and foremost the land used for the project, which by its very nature is always scarce and ecologically valuable, and whose »consumption« must therefore be reserved for political decision. After completion, the road will of course also receive the status of a public good, but can also be maintained or even operated privately, analogous to the construction activities.

The associated public planning and control for the construction of a road takes place in three steps:

First, suitable areas are assigned depending on the type of use.
Second, the maximum ecological impact and the operating life are determined and contractually agreed with the possibly private contractors, so that a new political decision can be made when the contract ends, for example, after fifty years.
Third, during use the predicted ecological burdens are monitored and countermeasures are taken if they are exceeded.

Other scarce resources also meet the criteria for remaining in public ownership: Especially, of course, the water sources for the water supply, but also, for example, the transmission frequencies for public and private broadcasting. Another key to success is the sovereignty for planning, regulation and monitoring public sector projects along with the necessary expert knowledge that has to remain with the public sector in all breadth and depth across the entire value chain of provision. This requires in-depth involvement and responsibility of publicly appointed experts. Finally, private companies engaged in the provision of public goods must be selected according to their willingness to assume responsibility for public concerns. Subsidiary structures and small-scale competition are ideal conditions for fruitful cooperation between private companies and the public sector.

3.1 The Subsidiary Structuring of the Private and Public Economic Sector

SubsidiarityPNG01Economic subsidiarity means, following social and political subsidiarity (see also Subsidiarily Structured Democracy), that entrepreneurial activities are only carried out by larger units (at higher levels) if smaller units (at lower levels) are not in a position to do so for reasons of production technology. Or to put it more simply: Every entrepreneurial provision of goods or services is carried out by the smallest unit capable of doing so. Since political responsibilities are also assigned to the lowest possible levels, and political as well as economic policy opinion-forming and decision-making take place accordingly from bottom to top, economic and political subsidiarity naturally go hand in hand under the conditions described here.

In practice, economic subsidiarity is ensured through a continuous process of redistribution and decentralization of entrepreneurial units through tax incentives. The purpose of this »dynamic subsidiarisation« is to achieve a decentralization of entrepreneurial activity and capital which is optimal for the wellbeing of society and the environment and which produces the largest possible number of independent companies in each industry in accordance with current production technology. This process requires economic policy control because the players in the market economy develop a natural endeavour to concentrate as much power and capital as possible in their hands. The public task of limiting this endeavour for the common good must be an integral part of every market economy order. Since the public sector, whose task is to provide public goods, also tends towards concentration, it must also be channelled in a similar way time and again into optimal subsidiary structures.

SubsidiarityPNG02A differentiated consideration reveals the manifold stabilizing effect the process of subsidiarization has on the market economy mechanisms: At each individual level of economic activity, horizontal competition takes place between the largest possible number of enterprises and their products of the same kind, limited, however, by geographical distances and transport costs. At the same time, companies within an industry that produce similar products but use different production technologies engage with each other across different levels in vertical competition. Typically, vertical competition takes place between labour-intensive lower-level enterprises and capital-intensive higher-level enterprises. Horizontal and vertical competition are most intense at the lower levels, where capital-intensive methods are increasingly spreading besides labour-intensive methods: Thus, small industrial productions – which have been crowded out under the neoliberal regime – can return area-wide in addition to craft trades.

Area-wide diversity and decentralized responsibility automatically ensure a high level of employment and careful use of natural resources. The efficient use of human and natural resources generates economic productivity geared to the needs of society and the environment, the progress of which results from qualitative growth. Research and development are focused on decentrally applicable technologies and create the basis for the advancement of decentralized productivity. Since productivity is measured solely by its benefits for society and the environment, it is socially and ecologically defined. And by being brought to its true purpose, it enables an order that is borne by social and ecological justice and geared towards optimal welfare (see also Efficiency and Productivity and Sustainable Social Welfare.

Due to subsidiarity, the greatest diversity is found at the local level with agriculture, crafts, small businesses, small-scale production and trade, while technologically more complex productions are located at higher levels. The subsidiary structure is continued as an international order in agreement between autonomous economic areas, so that at the international and global level, for example, very elaborate and long-term research and development projects are carried out – for example with regard to climate protection and the fight against HIV/AIDS.

As a supplement I recommend the article Economic Subsidiarity.

Click here for the German-language version: Private und öffentliche Güter.

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