Volume 3, Issue 4

Globalization is often seen to result in a smaller (Lilliput) or larger (Leviathan) state. But future public activity will be more flexible. People have multiple identities. They can be citizens of sub- and supra-national jurisdictions, semi- and non-governmental organizations and private units, even profit-oriented firms. Such attachment may be temporary, multiple or partial. To actively choose strengthens loyalty and identification, which raises the willingness to pay for publicly supplied services (in the sense of quasi-voluntary taxation). On the supply side, Functional, Overlapping and Competing Jurisdictions (FOCJ) will develop. Such flexibility of future European integration will make it successful.

This paper reviews first the theoretical literature and then the empirical studies of interjurisdictional competition among governments. Of central interest is the normative question of whether fiscal and regulatory competition promotes a more efficient functioning of the public sector or whether it is the source of distortions in the public and private sectors. This is a contentious issue; both the theoretical and empirical literature, while providing some rich insights into the potential impact of such competition, do not give us an unambiguous answer to the general normative question. The concluding section offers the author's thoughts on all this with a leaning towards the view that such competition is, on balance, efficiency-enhancing.

While the old systems competition took place with closed borders, globalisation has brought about a new type of systems competition that is driven by the mobility of factors of production. The new systems competition will likely imply the erosion of the European welfare state, induce a race to the bottom in the sense that capital will not even pay for the infrastructure it uses, and erode national regulatory systems. In general, it will suffer from the same type of market failure which induced the respective government activity in the first place. The new systems competition may force inefficient governments to seek national efficiency, but national efficiency does not imply that systems competition will itself be efficient.

The lecture develops a theory which provides a basis for welfare economics after we give up the assumption of fixed preferences. It formulates a mathematical theorem by which the following can be developed. The concept of „progress“ can be maintained even in a world of endogenous preferences, i.e. in a world in which the measuring rod changes with the object to be measured. It is then shown that under the assumption of „adaptive preferences“ and certain other assumptions a complete ordering of the commodity space is possible according to the concept of progress. In other words: despite the endogenously changing normative measuring rod for states of the economy it is still possible to maintain the concept of progress. It is then shown how such welfare economics can be used in „evolutionary“ environments. Generalisations of the theory are discussed as well as the empirical validity of adaptive preferences in view of the new empirical and experimental findings concerning human behaviour. Finally it is shown that all modern social philosophy implicitly rests on an assumption which is basically identical to the assumption of adaptive preferences.