Preproceedings 2006 - Austrian Ludwig Wittgenstein Society

An economist’s reflections on some recent trends in European culture. - Y.S. Brenner
several important services can hardly be improved by
labour-time-reducing innovations considering that they
require the simultaneous attendance of consumer and
provider, and because their quality depends on duration,
for example patients and doctors and pupils and teachers.
This, again, appeared to confirm the metaphysical
foundation of economic theory. An "invisible hand" was
leading the economy toward full employment equilibrium. It
was an illusion. In fact, old and new monopolistic practices
prevented prices from falling in line with labour input, and
many services, which were expected to provide the new
employment opportunities, fell prey to automatization.
Together with this, the cost of the services where labourtime
could not be reduced, greatly increased in
comparison with the cost of the goods where new
technologies could be applied. Obviously, if two cars can
be produced with the labour input previously required to
produce one car, and the time required by a hairdresser to
serve a customer remains as before, then, compared to
the cost of a car, a haircut becomes expensive. The
problem with this was that the relative rising cost
happened mainly in the state funded services. 15
In other words, relative to the decreasing costs of goods
produced by the private sector, the services provided by
the public sector became dearer. This was one reason for
the rising cost of the Welfare State but not the only reason
for the relatively high taxes and the growing public debt.
Equally important were the profound changes in the
lifestyle of the increasingly more affluent societies, and the
increasing complexity of the economic system. The
widespread ideological commitment to greater social and
economic equity placed with the state many of the
obligations which traditionally rested with the family. The
customary responsibility for the aged, and for healthcare
and education, shifted from the household to the public
sphere. But people accustomed to assigning social status
to private ownership of property tend to forget that even if
these needs were met by the family rather than the state
the share of the national income allocated to their
satisfaction would still be high and rising. The aged and
infirm would still have to be housed and fed; medical care
would still have to be paid for, teachers would still want to
be remunerated. In this respect, the difference between a
regulated and deregulated economy is inconsequential,
but the distribution of the burden is significantly different.
Under a system of progressive taxation, the rich, while
being the least dependent on its services, are obliged to
pay more than the poor to maintain the provisions of the
Welfare State. This then, is the crux of the matter. The rich
are allergic to subsidizing the "undeserving poor".
In practice, although everyone was entitled to free
healthcare, state pensions; free education including higher
education, unemployment benefit, and many other
advantages, it was the large middle class which gained
most from the State. It had better access than the poorer
members of society to advantages provided by the state. 16
Yet, the cultural legacy of old-style capitalism prevented
the majority of the members of this class from recognizing
this. Their eyes were focussed on taxes and other
deductions from their incomes and not on the advantages
they got in return.
Next to this, government became more costly
because the economic system became more complex and
more prone to monopolistic influences. It had to finance
the construction and maintenance of new national
communication networks (which at least initially were too
expensive to be constructed and maintained by private
enterprise alone), new sources of energy, new means of
protecting the public from epidemic diseases, from
pollution of air and water, and, in the shadow of the Cold
War and later threats, new expensive investments in
defence related goods and services.
The power of monster conglomerates 17 , and their
power to influence prices, is well known and needs here
no elaboration But while there was little new in the
tendency toward monopoly, the stimulus it received in the
1980s from technological developments ushered in a new
market structure. Manufacturing production-technology,
and Computer Integrated Manufacturing (CIM), together
with changes in the world economy, caused a revision of
large corporations' market strategy. 18 From being
companies in many countries, important multinationals
became global concerns. 19
This new market structure rested on the presence of near
monopoly in certain semi-finished goods and particular
production processes. Each new investment in any of
these industries led to a greater output than an equivalent
investment did before, while the oligopolistic structures
prevented prices from falling. Consequently consumer
demand did not increase in line with rising productivity,
and profits could no longer be made in the market-place.
The result was that producers turned to process innovation
because in a sluggish or shrinking market the way to
preserve or increase profitability is to reduce production
costs. With this, competition shifted from markets to
innovation. The most efficient process innovator made the
highest profit. As process innovation (as well as product
innovation) usually involves high R&D expenditure and
costly new equipment, the new structure strengthened the
near monopoly of successful producers. It facilitated the
determination of prices in line with investment plans with
little regard for market competition. Variations in the
volume of demand did not influence prices but determined
the volume of production. The final outcome was growing
unemployment together with rising prices and rising rates
of interest. This then, was the phenomenon known as
stagflation. 20 In short, the market-mechanism of prices did
no longer function in the way it did before, or in the way
the pre-Keynesians expected it to function.
What the situation really required was a judicious
allocation of the fruits of the technologically generated
economic growth. Such an allocation of added value does
not imply less for the rich, but more for the poor and a little
less more for the rich. In other words, what was needed
was state intervention to sustain effective demand in line
with growing productivity, and measures to provide
sufficient capital to allow innovative investment to
continue. With stringent steps to reduce abuse of social
security, to restrain tax evasion and to restrict the ill-use of
public funds, this could probably have been achieved with
little or no inflation. But, since the mid-1970s, instead of
doing this, governments adopted economic policies
designed to stop inflation by wage restraint and by
stimulating the private sector. 21 Governments
featherbedded the rich in the hope that easy money will
encourage investment and revitalize demand for labour.
The result was that investment continued to increase, but
only in process innovation – in the replacement of human
labour by machines, and production was scaled down in
line with the resulting diminishing consumers' effective
demand, thus increasing unemployment. 22 Eventually,
after the collapse of the Soviet Union, an entirely new
economic structure was gradually developing in Western
Europe with investment moving to the East and labour
from the East into Western Europe. 23
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