MILOEK

Militärökonomische Forschung und Lehre
Research and Courses in Economics of Defense

Economics and the Economics of Defense IV

Based on these two principles the core of a SoME can be described as follows:        

• Each person should have the possibility to become market competent. I.e., an individual should ─ ideally ─ be familiar with the principles of economies and be capable to become an attractive actor to the (global) economy while still pursuing her / his own conception of life.
• Private property and regulated markets should create the possibility of a non-violent competition for scarce resources. In turn, this stimulates the self-interest of the members in ways that not only furthers their own goals, but strengthens the welfare of the whole society →Smith (1776).
• However, a SoME is not a paradise.
• The (governmentally guaranteed) right to receive support in becoming a “market competent actor” may be misused by rent seeking individuals or groups →Olson (1982). The reason: Such activities violating the principle of equal rights may lead to extra profits for the beneficiaries due to a decreased exposure to competition. Consequently, when it comes to governmental interventions to aid people or to subsidize companies beyond the basic requirements described above, a SoME employs the principle of subsidiary: Generally, an economic actor should be motivated to realize their own goals by their own means. Thus, a temporary or even permanent intervention by a social group / by the various levels of a federal state is only legitimate when this action also furthers the welfare of the society. For example, the political landscape of Switzerland currently struggles to determine the right level of protection for its national agriculture: How important are criteria like consumer protection by quality standards and national autarky?
• Competition also has a dark side. The introduction of new products, production methods (to minimize costs) or markets always imply a crisis to the competitors (and their stakeholders as well) on the supply side as well as on the demand side ─ ranging from individual to even global levels (→The rise and fall of the steel industry). But even the winners of these developments may be “haunted” by a phenomenon called speculative bubbles. As the bubble of the “New Economy” in 2000 illustrates, the market faces difficulties with the assessment of innovation. This can be explained by the winner’s curse ─ the highest bid for a specific resource comes from the bidder who has succumbed to the most (positively) biased assessment.

In conclusion, economics can show that a competitive market represents the best pricing tool procuring goods at minimal costs because the market is based on the credible effort of participants seeking to maximize their own self-interest. But it is still an institutional arrangement depending on human actors. Thus, the market ─ not very surprisingly ─ is not always right.

When stating “Do you believe in a government-centered society that provides more and more benefits or do you believe instead in a free-enterprise society where people are able to pursue their dreams?”, Mitt Romney has it right and wrong: The government has a moral obligation to help the people. On the one side, this can help to gain new actors, new capabilities and new markets. On the other side, due to informational asymmetries, it is also possible that a governmental intervention may deteriorate into a rent seeking activity.