Broadly stated, there are two schools of economic thought which support capitalism: the Keynesian school and the Mainstream school. The Keynesian school popularized by the eponymous John Maynard Keynes, heavily relies on equilibrium modeling to argue that the government should play a pivotal role in the economy. This role of the government does not necessarily support socialism (complete government control of the economy) but promotes government intervention when deemed appropriate amid market failures.
The Mainstream school popularized by Ludwig von Mises and Friedrich Hayek constitute a more hands-off approach to the economy. The Mainstream view does not support anarcho-capitalism (zero government involvement in the economy) but promotes public policy choices which augment the liberty of the individual and market based coordination.
The two schools came to international attention in the early 20th century amid the Great Depression, with both schools attempting to solve the calculus of economic prosperity. But, if the Keynesian and Mainstream views aren’t esoteric and convoluted enough for you, then you’re in luck.
As computer based technologies are further integrated into the mechanisms of the economy some economists have claimed that the two traditional schools of economic thought are outdated. Wolfram Elsner (pictured right), an economist at Bremen University in Germany claims that the new economy is characterized as a “fragmented, deregulated and disembedded, net-based technological, uncertainty prone and spatially clustered” system (Elsner, 2005, p. 20).
The increased complexity of the economy has Elsner calling for a new age of economic policy. This new age of economic policy takes portions of the two traditional schools and make a sort of Frankonomics. Elsner attributes the growing complexity of the economy to three catalysts.
The first is the growing popularity of neoliberal policy – “a political and administrative project of selective strategies of de-regulation, liberalization and empowerment of capital and corporate concerns and of national and local regulation, bureaucratization and authoritarian control of more general societal concern” (as cited in Elsner, 2003).
As the economy becomes more deregulated the individuals in society are less incentivized to work together, thus becoming more self-interested. This fragmented social paradigm then leads to less opportunities for people to collectively find solutions to social dilemmas. As people become more insular, coordination fails.
Second, as the government becomes more hands off in the dealings of the market, international corporations and conglomerates develop a hierarchical dominance. Elsner labels the hierarchical corporate schemes as a “centralized hub&spoke supplier network” (Elsner 2005, 22).
A Hub and Spoke network Model
The hub&spoke networks evolve from basic business interactions. Eventually, one of the companies within the network begins to gain market dominance leaving the other companies as mere supply chain mechanisms for the dominating company.
Once these networks are formed the companies within only begin to trust one another. With strict allegiances put into place new companies outside the network lose out, regardless of lower prices offered by the outside companies, “because their recurrent and stable interactions lead them to develop parallel and similar ways of thinking” (Elsner 2005, p. 27). Coordination and innovation degrade as a result making society worse off.
Lastly, Elsner attributes the growing complexity of the economy to “digital, microelectronic and net-based technologies” (Elsner 2005, p. 23). Recent technological innovations have made information widely available. The wide availability turns information into a collective good, a good characterized as non-excludable (someone cannot be excluded from using it) and non-rivalrous (the use of the good by one person does not hinder another person from the good as well).
Information’s transition to becoming a collective good is certainly a positive change, however, the uses of information have become increasingly individualistic. Individual companies use the information to develop new goods and are quick to put patents on the new good. This then isolates the new information from public use. As each company develops its own form of the new good, the economy becomes more fragmented unless a standard is agreed upon. The development of a standard is particularly time consuming, creating lags to economic prosperity.
The culmination of these three catalysts causes a deregulated economy tp create a monopolistic economy. However, when it seems Elsner has lost all hope in deregulated markets he puts forth the “Linux paradigm”, a structure “characterized by decentralization, few power disparities and hubs which assume the minor role of technical organizers” (Elsner 2005, p. 28 – 29).
The Linux Logo
In this sense, the Linux paradigm parallels the discourse on common pool resources (CPRs) pioneered by Nobel Laureate, Eleanor Ostrum. The Linux paradigm and CPRs allow multiple agents in society to work in their own self-interest while creating benefits for all of society to reap.
In these scenarios, there is no central figure receiving disproportional gains, however, a central figure is present in the form of committees, non-profit public agencies, etc. With the success of Linux as an example, “spontaneous, decentralized, self-sustained private co-ordination” may meet the “complexity and co-ordination challenge of the “new” economy” (Elsner 2005, p. 30).
To Elsner, the Linux paradigm is only pertinent to the extent which people are dis-incentivized to act in their own short-term self-interest; spontaneous and deregulated systems are only effective if people trust the emergence of long term institution building. This sort of trust “will be feasible only when the future plays a sufficiently large role in relation to the incentive structure” (Elsner 2005, p. 34). This incentive structure is where the hubs come into play as a hybrid form of governance.
In a fully decentralized economy, self-interested individuals may be incentivized to work together to solve a social dilemma. However, the aforementioned coordination failures cause privatized solutions to fail. A hybrid governance system can remedy this result by providing a centralized authority which relies on the problem-solving abilities of private agents. The centralized public authority will not control the solution process but will facilitate an organized method for private individuals to the solve the problem. Elsner coins the solution process between public and private agents a “leaner policy” (Elsner 2005, p. 38).
But how will private agents ever agree on which solution is most apt? Elsner stipulates that the solution process will “be subject to social valuation or “meritorization”” (Elsner 2005, p.39). Thus, a public agent will ask private agents to contribute solutions to the social dilemma; once solutions are developed, the solutions are given to the community who then discern which solution is most apt. Amid meritorization the economy would essentially function as an ideal democracy.
Then, just in case any of the readers were questioning the pragmatic ramifications of this hybrid governance system, Elsner adds a case study to hush the naysayers. The case study accounts for the evolution of Bremen, Germany’s post Cold War economy. During the mid 20th century, Bremen’s economy was highly dependent on the defense industry. But, when the Cold War came to an end in the 1990’s the relevancy of the defense industry began to wane. With such a high dependency on the defense industry, Bremen looked to be heading toward economic turmoil.
The seemingly inevitable turmoil could have caused the regional public agent of Bremen to assume total control of the industrial transition. Instead, the regional public agent applied economic policies which “started in a conventional way to offer project subsidies for individual defence conversion and diversification projects” (Elsner 2005, p. 43). This economic policy approach allowed the people of the community to cultivate the industries which they felt was most apt for the future prosperity of Bremen. Ultimately, the transition was “acknowledged in the EU as a major success of regional industrial transition” (Elsner 2005, p. 41).
At the onset of the paper, Elsner condemns the pro-deregulation policies of Mainstream economics. To Elsner these policies promote a fragmented society and power hungry corporations. However, Elsner recognizes the ability of private individuals to solve complex social dilemmas. By taking both considerations into perspective, Elsner combines the necessity of a central hub with the ability of private agents in the hybrid governance system.
With the use of the Bremen case study, Elsner propounds the real-world applications of this system. In understanding that the development of the system is still in its infancy Elsner ends his discourse with recommendations for further analysis of structural interdependence, governance rules, incentive schemes, and the roles of centralized hegemony.
- Keynesian Economics – Investopedia
- Man, Economy, and State: A Treatise on Economic Principles – Ludwig von Mises
- Friedrich Hayek Society
- Facts about Friedrich Hayek – Nobel Prize website
- The Austrian School of Economics – Library of Economics and Liberty
- Mainstream Economics – Investopedia
- Ludwig von Mises – Foundation for Economic Education
- Does High Public Debt Consistently Stifle Economic Growth?