Conditions for Achieving Lasting Optimal Social Welfare
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?
Table of Contents
If there is one single criterion to which the purpose of a future-proof economic policy can be narrowed down, it’s sustainable social welfare. Therefore, every measure of economic policy must be questioned that does not unequivocally aim at welfare. The advantage of directing the economy at achieving this overriding aim also consists of the fact, that the aim, a purposeful definition provided (see below), is beyond the usual left-right pattern of political debates. That is, an economic policy committed to welfare is superior in its viability even to the most sophisticated compromise between »left« and »right« notions. In short: The future lies in the pursuit of optimum social welfare!
Incidentally, it was the English philosopher Jeremy Bentham who, at the end of the 18th century, established the radical utilitarian ethics and phrased a rationale for the general wellbeing: »It is the greatest happiness of the greatest number that is the measure of right and wrong«.
Ever since a neoliberal economic dogma has spread around the globe towards the end of the 20th century, even the left-right pattern produces nothing but cowardly compromises. The reason is, that the social and environmental interests are – more extreme than ever before in economic history – subordinated to the self-interest of a minority of industrial, political and economic science players. The provisions in this article are also designed to clear the fog produced by the neoliberal indoctrination and to press forward to the criteria, conditions and measures for a sustainable economic policy obliged to promote welfare.
To get straight to the point: Economists and economic policy-makers who are seeking lasting success, have to be committed to the well-being of mankind and nature. Any daviation from this obligation will inevitably lead to irreparable damages.
2. Preliminary Remarks
The conventional scientific attempts to mathematically determine the optimal social welfare for individuals and national economies have not attained any practical relevance, because the applied methodologies were confined within limited parameters of the tangible benefits of goods and services. The most well known works were published as early as in the first half of the 20th century by economists Vilfredo Pareto, Nicholas Kalder, John Richard Hicks and Paul Anthony Samuelson, and – amazingly enough – are still an integral part of today’s economics curricula.
Since the said economists equated welfare with material benefits, therefore at best sought to determine prosperity, and since they ignored precautionary economic, social and environmental conditions and regulations, their attempts can only be ranked among the long list of unrealistic economic theories, which are still doing their foul work in a social and ecological vacuum.
This gives cause for a comparison of the terms welfare and prosperity:
Welfare, especially the optimum welfare, cannot be comprehended as a static state, but rather refers to a dynamic social development that seeks to ensure the continuing viability of a society under the best possible conditions to be maintained through socio-political, economic and environmental policies. In short, the term welfare stands for a sustainable social development. Welfare and sustainability are quasi-synonyms; welfare without sustainability is unthinkable.
Prosperity, by contrast, simply refers to a state characterized by a high level of satisfaction of material needs, regardless of whether or not the social and environmental conditions under which prosperity is achieved are sustainable. Besides, prosperity is usually accounted for as a statistical average, so that a possible unequal distribution in society is disregarded. The current prosperity, which is based on the neoliberal-doctrinaire exploitation of social and natural resources, is an extremely bad example: It is not sustainable, meaning it is destructive, even self-destructive.
It is crucial for the understanding of the optimum welfare that it is not related to a certain level of availability and utilization of material goods. That is, given optimum welfare, the level of material prosperity can by tradition be both low or high. Indigenous peoples as well as industrial societies can live in a state of optimal social welfare. However, in each case the sustainable use of social and natural resources is an indispensable condition. Specifically, the optimum welfare relies on two objectives: the participation in economic life of all citizens willing to work (full employment), including a fair share of the economic outturn for all citizens (performance-related justice and solidarity), as well as the permanent substance conservation of natural resources. Expressed in economic terms it means that in the dynamic state of optimum welfare social and environmental costs are kept as low as possible, and, ideally, social and environmental returns are achieved.
3. Historical Development of the Awareness for Welfare
The awareness of the necessity for political governance of social welfare only emerged over the past 250 years, initially as a »byproduct« of the long struggle for human rights. Ever since, individual human rights and social welfare share the same fate: They have to be constantly defended against powerful political and economic interests. However, under the prevailing neoliberal doctrine, the defense of social welfare has to deal with a subtle, unprecedented indoctrination, which suggests that welfare could only be achieved through free trade in deregulated global markets. In other words, a national economy could only accomplish social welfare when proactively and successfully taking part in the current cutthroat competition. This indoctrination is particularly hazardous, because it undermines the imperative to implement autonomous economic policies targeted towards social welfare.
In the 19th century, the Catholic social teaching, which originated as an alternative to liberalism and marxism, establishes a connection between individual human rights and social welfare: The principle of human dignity puts people at the center stage of all societal concerns for the first time, the principle of solidarity enshrines the mutual obligations between the individual and society, and the principle of subsidiarity assigns an a-priori-selfresponsibility to the individual, the family and other groups of lower social levels, with the selfresponsibility only temporarily being suspended by the support of upper levels in case of emergency. Thus, the Catholic social teaching marks the transition from the feudal order – in which the individual was solely secured by the extended family and larger groups – to the industrial order in which the securing was transferred to legally legitimized institutions committed to anonymous social solidarity. This led to the establishment of public-funded health and pension funds in the second half of the 19th century.
As shown in the figure above, the Catholic social teaching can be further developed and updated, as specified below in more detail, by applying the principle of subsidiarity – which was originally just related to society – to the political, and even more decisive, to the economic sphere, and by adding the principle of sustainability, which refers to all human activities having social and environmental impacts.
Finally, sustainable social welfare can only be achieved if two conditions are met: (1) constitutional rule of law and democracy, and (2) a regulated market economy. Regulated market economy means above all that the derivative productive factor capital has to serve the primary factors labor and natural resources with no ifs or buts, so as to prevent capitalist excesses, i.e. the absolute primacy of capital returns (profits). It should be noted that capitalist excesses are characteristic for the current neoliberal system.
The awareness for human rights and social welfare as well as for democracy and market economy, that has been cultivated in Europe and the US over the centuries, is now serving as the foundation for a sustainable social development.
4. From Ethical to Economic Imperatives
The ethical imperatives regarding social welfare are based on the conviction that the meaning and purpose (the rationale) of economic activities consists solely in providing a better life for all citizens of a society. Thus, the economy performs a social function which is, however, exerted according to the cultural terms and conditions of a society. Just as the economy performs a social function, economics (the economic science) is therefore a social science – a fact that is consistently being questioned by today’s representatives of economics due to their neoliberal ideological blindness.
Nevertheless, a national economy can only exercise its social function if the individual economic interests, that constitute a significant driving force on the one hand, serve the common good on the other. It’s a clear sign of insufficient economic governance when individual interests gain the upper hand within a society.
The four economic imperatives regarding sustainable social welfare can be directly derived from the four ethical imperatives, as already briefly described in the above figure:
Under these, and only under these conditions, (1) the individual interests of economic stakeholders are brought in line with societal interests, (2) capitalist excesses are prevented, and (3) a sustainable social welfare development is ensured.
5. Welfare: Criteria, Conditions and Measures
5.1 Full Participation / Structures for Full Employment
Criteria: The universal right of individuals to participate in economic life is based on the principles of human dignity, solidarity and subsidiarity, all three being constituents of the social teaching developed in the 19th century. Accordingly, man alone is creator, supporter and beneficiary of all social institutions. In other words, all social institutions are created by man and for man. The universal right to participate applies to each and every citizen, both in its function as a consumer and producer (employee or entrepreneur). In the 20th century, the right to work (including the protection against unemployment) has been derived from the universal right to participate – at first for the United Nations Charter and in view of the dependence of most workers. Since the conditions to enforce this right, i.e. to achieve full employment, have not been established in any country yet, the Charter has not produced anything beyond the effect of an appeal on this issue.
The right to participate resp. work is not bound by any obligation, so it remains at the discretion of each able-bodied citizen whether or not to claim the right. Whoever does not make use of it, although able to work, leaves the solidary community, violates the principle of subsidiary economic responsibility, and can not expect any solidary support in an emergency.
A high degree of participation in economic life is a guarantee for the diversity and robustness of an economy. For each individual, the participation is a prerequisite for social prestige and for the participation in all other social institutions, and it provides the foundation on which one can act as an independent, respected and responsible citizen and contribute to the social development. Therefore, the participation in economic life cannot be replaced by anything else, not even by the much debated unconditional basic income (called »bedingungsloses Grundeinkommen« in Germany).
Conditions: There is only one way to politically and economically ensure a high degree of participation of citizens in economic life (meaning full employment): namely through the subsidiarization of economic structures. This is performed in accordance with the above-mentioned principle of subsidiarity of the social teaching, that imposes a selfresponsibility upon the individual, the family and other small groups to secure their material existence, of which they are only temporarily relieved by the solidary community, and are only entitled to receive benefits in accordance with the principle of solidarity, in case they can present evidence of having lost their self-sufficiency.
Applied to the economic sphere this means that the economic value creation is assigned to the stakeholders at lower levels of production wherever appropriate – that is, in accordance with the level of technological development, first and foremost concerning production technologies – to geographically produce as decentralized and multifaceted as possible. Only productions imposing higher demands on human, capital and natural resources than can be satisfied locally are to be located more or less centrally at higher levels. This implies at the same time that technological research and development is to be focused on decentralized poduction from the start.
The subsidiarization ensures quite specifically that (1) the labor demand of enterprises matches with the labor supply of the labor force, that (2) a large number of suppliers and demanders emerges (polypolistic structures) so that monopolistic structures are prevented, that (3) social and environmental costs are internalized and taken into account in pricing, that (4) strong incentives are generated to invest in technologies optimized for local production rather than for centralized mass production, and that (5) progress in economic productivity is accompanied by social and environmental gains.
A fundamental prerequisite for the design of subsidiary economic structures is national autonomy in economic policy. This autonomy must be deployed primarily to adapt the external competition with other national economies to the internal competition, specifically to the domestic productivity level, by bilaterally agreeing on appropriate exchange rates and tariffs. Only such an adaptation can prevent the current international dumping and predatory competition that (1) causes concentration of economic power and capital, (2) floods global markets with low-priced dumped products, (3) incurs social and environmental costs as a result of unemployment, poverty and pollution, and (4) runs contrary to the subsidiarization of economic structures. In economic terms, private sector costs are externalized to the general public all over the globe under the prevailing neoliberal economic doctrine. In short, profits are privatized, while social and environmental costs are socialized.
Measures: The subsidiarization of economic structures is best implemented through business taxation that increases progressively with growing business size. Taxation is predefined per business sector to impose the lowest taxes on companies whose size corresponds to the minimum technical production requirements. These minimum requirements are defined through a fictitious sector-specific reference business and are determined by four criteria:
The four criteria are to be regularly adjusted according to the progress in technology and productivity .
When businesses are growing and exceeding the limits, the progressive taxation forces them to split into smaller, independent units once their competitiveness or profitability has fallen to a critical level as a consequence of the tax burden. These entrepreneurial »cell divisions« secure the economic decentralization and diversity and constantly create new opportunities for entrepreneurs to aquire split off business parts as a basis for new businesses with initially minimum production requirements, and to participate in horizontal competition (within their own level) as well as in vertical competition (between different levels).
Original businesses can primarily invest their proceeds from split-offs in technological development to contribute to general progress. Progress in turn regularly leads to redefinitions of the four criteria defining the reference businesses. Proceeds can alternatively be declared as private income, but are then subject to progressive income tax that ensures fair, performance-related distribution of income and general progress.
As a compliment, I recommend the article Economic Subsidiarity.
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.
5.2 Existence-Securing Participation / Productivity-Related Income
Criteria: The universal right of individuals to receive a fair share of the economic outturn is also based on the principles of human dignity, solidarity and subsidiarity. That is, citizens participating in economic activities acquire the right to receive an equitable (solidary) share of the economic outturn proportionate to their individual performance and paid in local currency to secure their livelihoods. Solidarity and subsidiarity demand that the shares received allow participants a standard of living appropriate to current social standards (solidary, existence-securing participation).
Conditions: A condition for solidary, existence-securing participation is the above in point 5.1 mentioned subsidiarization of economic structures aimed to achieve a high degree of participation, in other words: full employment. To ensure that the earned income of participants corresponds to the respective social standards economic measures are indispensable to regularly adjust the wages of dependent employees to raising economic productivity levels. Solidarity demands that citizens incapacitated for work can just as well participate from general economic progress by equally adjusting their social benefits, this being justified with regard to their earlier contribution through employment or volunteer work like raising children and caring for dependents. Nevertheless, adjusting income to productivity levels also follows economic reason as it strengthens economic cycles on the part of consumption as well as investment (the latter due to reasonable savings rates) – which in turn benefits all economic agents.
A fundamental requirement to regularly adjust income to raising productivity levels are balanced power relationships between representatives of employers on the one hand and representatives of employees (trade unions) on the other. A precondition for this requirement is again national autonomy in matters of economic policy – especially in view of bilaterally agreed exchange rates and tariffs – which must be deployed to prevent international dumping and predatory competition based on low-priced products. Otherwise, the balance of power would shift in favor of employers and enable them to thwart wage adjustments by threatening with loss of competitiveness and jobs.
Incidentally, under the current neoliberal conditions with deregulated markets and dwindling autonomy of nation states it is hardly surprising that the gap between wage and productivity levels is increasingly opening up, weakening domestic economic cycles in all countries since the 80s of the last century.
Measures: Annual wage negotiations should take place between the representatives of employers and employees as is already the case in all western countries. However, as indicated above, there is no room for manœuvre anymore under the prevailing neoliberal conditions, which is statistically reflected in the fact that the average real net income of employees has been constantly decreasing since the turn of the millennium – and continues to do so. In the course of this development, the trade unions have – quite logically – almost completely lost their bargaining power and have to confine themselves to keeping the opening gap between earned income and productivity within just about tolerable limits.
Therefore I stress once again: To break the neoliberal deadlock the restoration of autonomy in all matters of economic policy has to be launched at all sub-national levels of the nation states. In Germany, full subsidiary autonomy at the federal level and at state and local levels must be restored. That is to say that powers already assigned to the European Union must be transferred back.
As a compliment I recommend the article Undemocratic EU Institutions.
Back to the future prospects: Under the condition of national autonomy and foreign trade agreements, primarily concerning exchange rates and tariffs, regular negotiations between independent national social parties are the appropriate way to maintain earned income and productivity in balance over time and to keep business cycles going. Negotiations should be carried out separately and independently per industry because incentives for productivity gains would wane if adjustments were applied uniformly across industries. Accordingly, the performance-based compensation refers to the performance of each individual employee in relation to all other employees within its industry. The competition between industries, mainly dealing with processes and technologies, ensures that productivities do not diverge too greatly within an economy.
Furthermore, it is crucial to the overall economic equilibrium (balance) to adjust the earned income of dependent employees to gains in productivity both by raising the monetary compensation and by reducing the weekly working time. Both methods can be combined depending on the economic situation. A reduction of weekly working time is particularly appropriate when markets are saturated and raised monetary compensation would only tempt suppliers to increase their prices.
5.3 Performance-Based Distribution / Progressive Taxation
Criteria: With the imperative of performance-based equal distribution the universal right to participate in the economy is supplemented within the meaning of good economic sense. Accordingly, every citizen not only has the right to existence-securing participation, but beyond that the right to receive an equitable share of the national economic outturn at any time. This justness is based on the understanding that the contribution of every citizen to the economic outturn is provided on the foundation of the entirety of all social institutions, meaning that no isolated individual accomplishments can be achieved without this foundation.
Every citizen is obliged by this understanding to repay a portion of his/her income to society as a »dividend«. In order not to erode a society, neither bottom-up nor topdown, the »dividend« must be calculated to increase the overall economic benefit. That is, the higher the income, irrespective of the reason, the higher the dividend must be set to be payed back in the form of differentiated types of income taxation. The commitment to economic sense stringently requires a progressive taxation, so that a limited, but performance-enhancing spreading of incomes, assets and other possessions is put into effect. That means in concrete terms: The lowest and the highest after-tax income that can possibly be achieved should differ by no more than a factor of 10, preferably an even smaller factor.
Limiting the spreading of all types of income through progressive taxation follows economic reason because it additionally and significantly strengthens the purchasing power and savings rate of lower income groups and thus also promotes the business cycles. What is commonly, with a moral undertone, referred to as social solidarity, proofs to be an indispensable economic imperative.
Conditions: The two prerequisites for the performance-based equal distribution of the economic outturn are the (1) subsidiarization of economic structures (described above in point 5.1) and the (2) adjustment of earned income in line with productivity gains (described above in point 5.2). This includes the prerequisite to control foreign trade through bilaterally agreed exchange rates and tariffs by virtue of national autonomy in order to protect domestic competition against distortions caused by involuntary imports of low-priced products (this being a meaningful and justified protection, rather than protectionism). See also the article Protection and Protectionism.
To achieve an equal and uniform distribution that is conducive to sustainable social welfare progressive taxation should go beyond 90 percent at the upper end of income, so that a specific, socially acceptable maximum annual income is not exceeded, say 500,000 euros. The progressive taxation must, as I said, apply to all types of income and assets.
Measures: Suitable progressive tax tables have to be compiled for income from labor, capital and rental as well as for assets that exceed a certain threshold. To prevent speculation in real estate and to maintain a sustainable ecological balance between natural and cultivated lands, all land should remain in public ownership and basically be leased for limited periods for private, corporate and agricultural use. With temporary leasing intergenerational justice is established by providing young people the ongoing opportunity to lease land released by elderly citizens.
The ownership of financial and real capital must be subject to social obligations when it is used in economic production. The obligation to society results again from the fact that all productive capital is in principle generated on the basis of the entirety of all social institutions and with the direct and indirect assistance of many external players, and that as such productive capital is subject to the performance-based equal distribution. In this sense, the social obligation prevents that financial and real capital is inappropriately used for the private benefit of entrepreneurs or even transferred abroad and removed from social control.
Another important measure to achieve a performance-based equal distribution is the introduction of compulsory insurances covering illness, occupational disability, nursing care, and accident, namely for all citizens without exception (so-called solidarity-based citizens’ insurance, or in German: Bürgerversicherung). Practically this means that all citizens have to pay an identical percentage of their total net income as insurance premium, that is, there is no assessment ceiling, while every citizen will receive an identical amount of insurance payment whenever an insured event occurs.
5.4 Sustainable Resource Use / Closed Material Cycles
Criteria: The imperative of sustainable resource use is based on the sobering realization that the human economy is a subsystem of the biosphere, lithosphere and atmosphere, and that human welfare is linked, for better or worse, to the welfare of the three natural spheres. The imperative of sustainability creates the moral and existential foundation on which measures to limit and eventually completely avoid external environmental costs caused by economic activities are constituted and developed. The aim is to establish an economy that follows the example of biological recycling, that is, an economy that gets along without harmful emissions and waste. This aim requires the implementation of absolutely closed material cycles as well as the use of renewable energy. Ideally, when no environmental costs are incurred anymore, an economy can permanently obtain ecological yields through the use of recycled natural resources (renewable and non-renewable resources alike, see below).
Ecological yields are, along with the social gains described above, a sine qua non for sustainable social welfare. In short: The optimal social welfare is achieved through sustainable full employment and sustainable environmental protection.
Conditions: A precondition for sustainable resource use is the subsidiarization of economic structures described above in point 5.1, including the implicit precondition to govern foreign trade by means of bilateral exchange rates and tariffs on the basis of national economic autonomy to prevent price distortions caused by low-priced imports that would result in domestic externalization of environmental (and social) costs.
The subsidiarization of economic structures is the method of choice for decentralizing the responsibility for a careful use of natural resources. Thus, conditions are created that assign the responsibility to the economic players, combined with clear rules and bans for their immediate environment so that they are motivated in their own interest to preserve their resources and prevent environmental costs. Besides, the players have no reason to shift costs to other regions, because, conversely, they need not fear to be burdened by activities from other regions.
Measures: To achieve sustainable resource use it is essential to distinguish between renewable and non-renewable resources. Renewable resources include all materials that fulfil a function within the biological cycle, such as humus, sea and surface water, as well as all substances that are withdrawn from the biosphere for human use, mainly food, but also building materials such as timber. Non-renewable resources include all substances withdrawn from the lithosphere and atmosphere for human use, such as minerals, deep-water, ice and air.
The requirement for optimal material cycles applies to both types: Renewable resources need to be won back after use with minimal effort, unpolluted and without loss of material, to be subsequently returned to the biological cycles. Solid substances must be completely compostable after use, sea and surface water must be returned unpolluted.
Non-renewable resources need to be deployed, from the outset, such that they can be permanently recycled after their use in production or products without loss of material and without having caused irreparable external damage. This requires precautions along the entire value-added chain (right from the start of production) to retain the purity of substances so that they can be recovered at the end of the life cycles of production facilities and products with minimal effort and in a pure state. Recovering substances without having applied continuous precautions, as is common today, is ineffective, macro-economically costly, and leads to what is called down-cycling, because substances end up as waste after just one or two cycles.
The imperative of optimal material cycles stringently leads to the imperative of unexceptional utilization of renewable energy, because the combustion of fossil fuels such as petroleum, natural gas and coal as well as the chain reaction of nuclear energy sources inevitably end up in harmful waste and waste heat. Renewable energy sources include all types of direct and indirect forms of solar energy as well as geothermal energy.
In order to avoid a widespread misunderstanding, I would like to emphasize that an economy based on sustainable resource use, closed material cycles and renewable energy does by no means necessitate sufficiency to generate lasting material welfare. Because energy consumption and material flow rates, which are determining factors for technological and economic progress and the life cycles of production facilities and products must, in analogy to the biosphere, by no means be limited under these conditions. The material abundance produced by the biological system can be analogously transferred to a closed circle economy without causing environmental damage.
6. An Economy without Capitalist Excesses
An economic system focused on sustainable social welfare is inherently free from capitalist excesses. Decentralized economic responsibility motivates the economic players to avoid social and environmental costs in their own environment and in their own interest. Therefore, returns on investment are no longer an end in itself to merely fuel personal enrichment, but are generated by the efficient allocation of the productive factors labor and natural resources so that productivity is always socially and environmentally defined and justified. The quantitative limits of natural growth are no longer exceeded and progress is infinitely fueled by qualitative growth: based on the inexhaustible opportunities for improvement of production processes and products (as a compliment see the article Excesses of Capitalism).
The measures of economic governance described here and in other articles, especially
generate and preserve a dynamic equilibrium (balance) between
that is a condition for sustainable social welfare.
Click here for the German-language version: Nachhaltige gesellschaftliche Wohlfahrt
- Michael Braungart: http://www.braungart.com/en/content/nice-see-you
- William McDonough: http://www.mcdonough.com/