Volume 53, Issue 1

For many years Germany has been living beyond her means. The coming generation will have to bear the financial consequences. Not only the high budget deficits of the Federal Government but also the financial crisis of the social security system and the uncertain financing of public officials’ pensions are at issue. Moreover, public investment is inexcusably neglected. Intergenerational income redistribution has assumed alarming proportions and will undoubtedly overcharge our children and grand-children. Unlike governments of other countries German politicians do practically nothing to inform people of these problems, much less to take steps to solve them. According to an OECD report Germany has the highest sustainability gap of all countries. Government continues to put new burdens on the future generation without making financial provisions. The article outlines the present situation of public finance in Germany and discusses the ever increasing burden on the coming generation and ways and means to overcome the sustainability gap in public finance.

The critical position of economic policy in a democratic welfare state like Germany will be explained by three factors: (1) the notorious lack of steering knowledge, (2) the constraints imposed on political actors by the requirement of becoming re-elected, and (3) by the frustrating position of scientific policy advice, suffering from the two aforementioned handicaps. The plan of the paper is as follows: To begin with (part II), the example of stabilisation policy will be considered. This will be followed (part HI) by an examination of structural policy. Then (part IV) labour market policy will be taken up. Thereafter (part V) the findings made so far will be considered from the point of view of political economy or public choice. Then (part VI) conclusions will be drawn regarding policy advice. Finally (part VII) possible ways out of the critical situation of economic policy will be exposed.

With the beginning of EMU in 1999 the Eurosystem is responsible for the single monetary policy in the Euro-area. But will the Eurosystem take over the role as a power that ensures the market order by giving EMU the status of a stability community with an Euro underpinning a competitive network? In the light of von Hayek’s proposition of a currency competition there seems little space for optimism, because the introduction of the Euro virtually is a restriction of currency-competition. With the priority of price stability and the political and legal independence of the Eurosystem important prerequisites are established to avoid the Hayek-problem. Because a European central government does not exist the danger of corresponding pressures cannot arise. But pressures from national economic policies and from interest groups behind them will remain. Until now the Eurosystem altogether with the ECB was successful in defending its monetary policy and anchoring a piece of stability culture in the member countries of EMU.

During the so-called student movement after 1968 German governments accepted and promoted the partial transformation of German universities into political organizations. Some of the new regulations proved to be unconstitutional. During a phase of consolidation a continuous flow of ever-changing and contradictory bureaucratic interventions was intended to combat the outcome of the first destabilizing period. At the same time universities with their not sufficiently adapted capacity had to accept heavily growing numbers of students. In the meantime policy-makers changed their mind by stressing now only the economic functions of the universities as professional schools and producers of directly marketable new knowledge. The working conditions of professors and other scientists deteriorated more or less in all three phases, while they were pressed to improve their efficiency. The errors behind this policy are analyzed in detail: universities are neither political institutions nor firms only selling products on the market. At least much more important is their capacity to develop new methods and to find new basic knowledge. The resulting indirect growth of productivity is the main contribution of the universities also from an economic point of view. Teaching at universities should remain connected with research as far as possible. German policy tries to improve the efficiency of universities by unsuitable methods.

The author analyses the economic consequences of social rights on the effectiveness of private asset building and the viability of the market system. He distinguishes two types of social rights: those which allow freedom, individual property and a competitive market system, and those which compete with the major market institutions for prime position. It is the second type on which this article focuses. Social rights of this type have been expanding at a tremendous rate for decades in Germany. This in turn has restricted the field in which human ability and resources can prosper. The intellectual and political forces that have made this possible are examined critically under the aspect of their relationship to the market system and in the context of the associated economic and social failures. Successful approaches to reform require that social rights are seen in connection with the institutions of the market system. The author therefore compares individual asset building and social rights with a view on their respective effects on human motivation, potential and control of action, thus on the specific effects which enable the market system to adjust to the changing requirements of the environment. In examining control of action special attention is paid to the Federal Constitutional Court’s position on property and the „Doctrine of Provision for Life“, on which this position is primarily based. In the final section the author examines the advantages of integrating social rights into the market system. In Germany suitable perspectives are seen especially in the growing individualisation and market orientation of the old age pension scheme connected with the name of the Federal Minister of Labour, Herr Riester. However, the author sees in the accompanying regulatory concept a starting point to establish new social rights which would have a disintegrative effect on the market system.

Even in its legal meaning, the term “property” has several distinguishable facets. The spectrum of possible concepts comprises property as an absolute right with respect to an object in private law, intellectual property and the distinct concept of property of the Constitution. The possibilities of using property on the one hand, and of legal protection of this property on the other hand, are correspondingly manifold. The question of the ethical legitimacy of private property was traditionally discussed as a problem of distributional justice. The viewpoints range from the unilateral acquisition of property through personal achievement (John Locke) and the freedom- oriented position of Immanuel Kant (“Occupational Theory”) to Karl Marx’ fundamental critique of the contemporary conditions of production and distribution. In von Hayek’s terms, the institutional arrangement of private property has in any event proven to be superior in the intersystem competition. The economic-functional foundation of property is based on value judgments. They can be summarized as the freedom argument, the efficiency argument, the democracy argument and the rule of law argument. This is a concept which simultaneously integrates Pareto efficiency, a contractually founded concept of freedom of action, law and efficiency. The variety of existing types of property and property rights can only be analysed by using more detailed theoretical approaches. The most important one is presumably the transaction cost approach. If a freedom-oriented approach is followed, the yardstick cannot consist in an exogenously posited welfare criterion. The question instead should be: Which institutional arrangement facilitates the realization of transactions?

Friedrich A. Lutz, a student of Walter Eucken and a lecturer at the University of Freiburg in the thirties was a member of the group of scholars - lawyers and economists - who later became known as the Freiburg school. From 1938 to 1953 he taught at Princeton University (New Jersey) and from 1953 on at the University of Zürich (Switzerland). The research program of the Freiburg school was published in 1937 under the heading „Our Task“. The article surveys along the lines of this program the contributions Lutz made to economic theory and policy. The objects of his study were the theory of investment, of interest and of money and the international monetary order.

This sketch of historical ideas shows the inevitability of the philosophy of order: all advanced civilisations have something important to contribute to this. Human behaviour is bound everywhere to rules which enable a certain co-ordination. The “wise men” of all periods have reflected on these rules. For close differentiation of the various rule systems, Hayek’s notions of “Cosmos” and “Taxis” (spontaneously and centrally constructed order) can provide a useful pioneering service. The discovery of the “spontaneous” order, especially the market order, is a particular achievement of the Occident. After antique beginnings and medieval relapses, the theory of spontaneous order fully developed for the first time in the Scottish School to reach a climax then in the Austrian School. Alongside this, there was always the line of “Taxis” thinking which did not experience its first catastrophe in the 20 th century when it exceeded the limits of usefulness.

The article investigates whether Hayek’s concept of „competition as a discovery procedure“ can be generalized to apply not only to the competitive market process, but also to competition in other social spheres. To this purpose, three distinct effects of competition are distinguished. It is shown that Hayek, in his „Competition as a Discovery Procedure“, emphasizes the disclosure effect and the ordering effect of competition, while he abstracts from the exploration effect of competition. On the basis of these different effects of competition, it is highlighted how competitive processes in science, in politics and in innovative user groups differ from competition in markets. Given the differences between the effects of competition stressed by Hayek and the actual effects of competition outside the markets for goods and productive factors, the generalization of his „competition as a discovery principle“ appears problematic.

Section I contains a survey of various theories and empirical investigations which might be helpful in explaining the „miracle of European music“. Section II distinguishes various transmission mechanisms by which competition among the rulers may have promoted the development of musical composition. Section HI demonstrates that the famous composers of baroque music changed their employer more frequently in the leading countries, Italy and Germany, than in England and France and that this difference is statistically significant. It is interpreted as a difference in the degree of competition on the demand side. Another factor is increasing competition among the churches after the reformation. Section IV analyzes musical competition in other centuries - including competition between the church and the state in the middle ages. It is shown that competition in Italy was even more intensive during the renaissance than in baroque times. The last section suggests that the style of European music may even be an expression of Europe’s competitive spirit.

In economics, like in any social science, empirical tests of theoretical results face the problem that the economy cannot be reproduced in laboratories. Drawing on the experience of psychology, experimental economics nowadays uses stylised experiments to test at least the basic assumptions of the economic theory of human behavior. The article describes a simple classroom experiment that serves as an empirical test of Adam Smith’s invisible-hand hypothesis. It demonstrates that competition works as a discovery procedure. The experiment is of high didactical value, since the students gain insights into empirical research and experience how markets work.

The German electricity industry was totally liberalized in 1998. There are still two main problems concerning the competition policy in that field. First the right for all electricity companies to access the private mains must be reformed. Some of the rights to deny accessing the mains which the owners often invoke have to be abolished. Second the proposal to introduce a regulatory body determining the conditions of using the mains is objected. With regard to experiences of the last three years, the companies themselves should make agreements on the conditions the way they did before. The execution of these private agreements should be controlled by the competition authorities that must be staffed-up and that should be invested with more warrants.

The new German Insolvency Law came into effect January 1, 1999. The introduction took place at a time when there was a strong increase of business bankruptcies, which had begun already in the early 1990s, exceeding all earlier developments. The quantitative effects of the new Law on the development of bankruptcies cannot be verified yet, but its qualitative effects can be evaluated: Does the new Insolvency Law avoid, correct, or favor the deficiencies of market adjustments? First, the regulations of the new Insolvency Law are summarized. As main improvement to mention is the installation of the so called „insolvency plan“, which is supposed to create incentives for an efficient trade-off between liquidation and continuation of the business. Secondly, the development of the business bankruptcy filings is investigated. As one result of the new Law there had been an increase of the execution of orderly insolvency proceeding and less rejections because of no assets. It is agreed to be a positive signal from this perspective that the new proceedings obviously include an increased importance of market processes and private autonomy. The authors conclude that, considering the development of the bankruptcy filings in Germany, there still exists a strong necessity to remove in particular the structural and strategic kind of institutional market barriers.

Manifold real and monetary public transfers are offered extensively to subsidise Mega-Events in sports. The subsidisation of the latter can economically not be justified, neither by their alleged characteristics of a public good nor by the possible existence of positive externalities. Spectators can easily be excluded from the participation of sport events. Assumed technological externalities can be neglected or do not exist at all. Regionally restricted impacts on economic growth prevail in relation with Mega-Events in sports and thus can justify public subsidisation. Hence, independent local governments should be enabled to decide autonomously on their contribution with public funds to the realisation of Mega-Events in sports.

Under the influence of evolutionary models developed in the 1980s, which describe the development of mankind as intermittent and in ruptures, a model of institutional change which regards ruptures as essentially necessary for progress has gained in importance in economics. Two considerations form the basis of this model. First, institutions need to have a long-term dimension in order to offer orientation and relief to the individual. This is achieved by the stabilizing elements of culture, investments, uncertainty and interest. Secondly, institutions eventually become maladjusted to their environment in the long run because of this stability. In contrast to this position, the author postulates a differing theory: Because cognitive restrictions reduce the quantity of possible decisions, they encourage members of institutions to open the door and search for new solutions. Institutions do not need radical change. Their stability allows for gradual congruence with their environment - if they have the chance to adapt to competition. Within this framework the author reflects the ability of Japanese enterprises to change and adapt. Due to their long-term orientation, restrictions in terms of a high degree of uncertainty, specific investments and consolidated interests are immanent to them. But another perspective can also be added: the specific qualities of the Japanese culture in which their enterprises act. A culture that encourages long-term contracts - such as the Japanese culture - can contribute to the solution of a problem which has been identified by Hayek as the main problem of modern economies: the ability of institutions to adjust to a changing environment. Enterprises may gain new leeway of action, since a long-term oriented culture can reduce the prisoner’s dilemma and facilitate learning. A specific cultural orientation offers a potential that is difficult to construct, and in this sense the Japanese culture represents a comparative advantage of Japanese enterprises. This potential can, to be sure, be reduced. Other stabilizing factors such as uncertainty, investments and interests, as well as the impact on the formation of human relations induced by a culture oriented towards the long term, the preference of certain personal relations for example, make a more favourable orientation towards abstract and general rules difficult, on the political as well as on the enterprise level.