The Social Contract: Theories and Practices (2)

Vietnam Case study: reflections on the role of the State in the Economy – What form of governance?

Note (1): Excerpt from my doctoral thesis “La Restructuration des Entreprises publiques au Vietnam”. English translation by myself.

The main trend noted in the literature on political economy and economic policy and the role of the State in the economy are, on the one hand, the regime of liberalism, practiced by market economies, which take precedence over laissez-faire, while on the other hand, Keynesianism, a form of state interventionism in liberal economies, and Marxism, an extreme form of interventionism with a totalitarian tendency, are often practiced in socialist or communist economies.

The science of political economy proposes actions to achieve the conditions necessary to meet the needs of society such as full employment, price stability, a better distribution of income, while economic policy is the set of interventions of the state in economic life. Walras (29) the author of “Elements of pure political economy or theory of social wealth” was the first to propose an economic model, which explains the formation of prices, followed by a series of increasingly complex models with two goods or several types of goods, production, growth, money for its model. The general equilibrium tries to give an all-encompassing explanation of the whole economy in a so-called bottom-up or “foundation” approach.

On the role of the State in the economy, classical authors support the principle of laissez-faire, which allows free trade between economic partners in a context where the intervention of the State in the economy is weak, because the role of the State is to ensure the greatest freedom of economic agents and to ensure the proper functioning of the markets while ensuring the maintenance of a situation of competition.

Followers of the Austrian school like Menger (30), Hayek (31) and Rothbard (32) have helped to clarify the relationship between labor, money and the state. Menger (30) develops a subjective conception of value, considering that this is not inherent in goods and is based on work as proclaimed by the followers of the classical school, but that it is based on the marginal utility of the good, which depends on its user and its subjective conditions. On the question of State interventionism, he considers that it is not a question of excluding the State, but of better defining its role and functions in the economy. Hayek (31) is considered a social theorist as well as a major political thinker of the 20th century. In “The Road to Serfdom“, he argues that state interventionism always tends to encroach more on individual freedoms and that it can progressively lead to totalitarianism, that is to say to the servitude of people. He attributes the economic and financial crises to investments poorly directed by a policy of excess credit, in contrast to Keynes’ recommendations (37). His account of how changing prices communicate information to buyers by helping them coordinate their plans is widely regarded as a significant achievement in economics. Rothbard (32) developed in “The Ethics of Liberty” the theory of anarcho-capitalism based on natural law. As an economist, he used praxeology, Ludwig von Mises’ theory of human action to expose the functioning of a market without any state intervention and to develop a refutation of current rationalizations of the economy state intervention. His influence was considerable on the libertarian movement in general. In particular, his contribution on the theory of value by differentiating between decreasing marginal utility and total utility, rekindles the debate that began with Adam Smith, Ricardo, Marx, Walras, Menger and recently Piketty (33) on how to distribute the profit coming from the surplus value of labor over the money invested.

Friedman (34) plays a predominant role in economic policy to money. He explains the chronic and cyclical problems linked to inflation and economic crises and proposes to reduce the money supply to eliminate inflation, which is harmful in the long term to the economy. Based on his study of consumption, he explains the permanent income theory whereby people make decisions based on how much income they anticipate in the long term, not what they have in the short term. His argument goes against interventionist authors, especially Keynes, because an economy that lives on state subsidies does not allow consumption growth and can have consequences on the performance of economic entities. In the case of a strong concentration of power in the hands of a privileged minority, corrupt practices are an obstacle to the principles of justice and transparency of a rule of law.

In practice, the experience of the countries of the former Soviet bloc shows that its political instability was the consequence of long decades of oligarchs who were ruining the country. According to Anders (35) and other authors who have dealt with issues of the transition process, the late reforms that Gorbachev had tried to put in place could no longer save the system.

The break-up of the former Soviet Union  triggered a domino effect on the rest of the system, allowing a social transformation of the Eastern countries emerging from the Soviet yoke. The freedom of action has enabled the citizens of these countries to rebuild a new economy based on liberal and democratic principles, which allows better integration into the international economic system. As a matter of fact, since 2007, the European Union has welcomed nine new member countries, namely Estonia, Latvia, Lithuania, Hungary, Poland, Czech Republic, Slovenia, Slovakia and Malta.

Liberalism and the Market Economy

‘Liberalism’ is defined by the Dictionary of Economic Sciences as a doctrine, which affirms the fundamental character of individual freedom in political and economic fields and which seeks to limit the action and influence of the state. Another definition defines this term as being “a set of ideas, doctrines, sometimes very different theories, applying to aspects of human life in society – such as ethics, politics, economic – based on the primary affirmation of the principle of freedom.”

More specifically, ‘political liberalism’ is a doctrine and a system policy based on the civic equality of citizens, the recognition and implementation of public freedoms (freedom of assembly, of opinion, of information, of association) as well as a democratic system allowing the participation of different streams of thought and political programs. Political liberalism defends the freedom of individuals, political freedom, freedom of conscience, tolerance towards the opinions of others, while economic liberalism is an economic doctrine hostile to state intervention in economic life and social. Economic liberalism advocates free competition, free enterprise, free trade. Free competition implies regulation to prevent the creation of monopolies while limiting State intervention to the strict minimum so as not to hinder the free play of companies, which only take their orders from market mechanisms in perfect competition.

Economic liberalism is based on free trade, a commercial practice founded on the freedom of international trade and, consequently, on the removal of all trade barriers (laissez-faire principle). By extension, liberalism based on free trade is a liberal doctrine, which aims to remove any obstacle to international trade, while laissez-faire expresses the principle of internal liberalism (freedom of enterprise). The full version of internal and external liberalism is let the people do it and let the commodities pass. We also speak of ‘cultural liberalism’, which is an attitude that respects the freedom of others in matters of opinion and conduct and opposes authoritarianism and intransigence.

According to Smith, the principle of economic liberalism operates on the basis of the necessary and pre-established concordance between personal interest and collective interest. Enrichment is ‘the increase in labor productivity’, which is also a source of inequalities in the distribution of income between different social classes. The self-regulated economic process allows each actor in society to meet their own needs but also to serve the common good. Economic growth results from three factors: (1) the division of labor, which increases productivity and efficiency, (2) the accumulation of capital and machinery and (3) their reinvestment in production and the market or demand potential. The distinctions between the factors of production and the remuneration on the accumulation of capital explain the source of social inequalities by the existence of classes between 1) landowners who accumulate wealth through the appropriation of land; 2) the capitalists by the accumulation of capital; and 3) wage earners through the sale of their labor.

Ricardo and Malthus, among others, took up and developed the foundations of Smith’s work. Ricardo explains how the value of goods is determined and states the laws of the distribution of income and the inverse relationship between wages and profits, as well as the dynamic laws of the economic system and the march to the steady state, the theory of advantages comparative in international trade. Malthus’s (36) thesis is about the strong relationship between overpopulation and the economy. His work has inspired work on the impact of population on the economic and political power of a nation. China and India are two examples of this theory. These two countries consider that their strength and power come from the market potential of more than a third of the world’s population, and companies looking for new markets are also tempted to include these large markets in their business strategy. However, the more populated a nation, the more important is the duty of the State to ensure that the population has enough to eat, hence the importance of agricultural policy in any sound and responsible economic policy.

Liberal thinkers advocate the importance of private property, private enterprise, and private initiative and recognize the resulting social inequality as an engine of growth. For their part, the followers of socialism advocate collective property and material equality between citizens, and support the interventionist role of the state. In contrast, Keynes brings forward an argument supporting the interventionist role of the State without falling for all that into communist reasoning. He asserts that “in the liberal system, it is not demand that adjusts to employment, but it is the level of employment that is ruthlessly adjusted to the state of demand. The state of demand depends on the income of the mass of consumers and is always greater for the capitalist system to survive.”

The innovation of the Keynesian method is the macroeconomic approach of the environment that takes into account the different economic aggregates such as investments, unemployment, income, consumption, etc. and makes it possible to predict periods of recession or growth thanks to a global vision of the economy (macroeconomic approach), while liberal authors are more concerned with the interaction of economic actors at the microeconomic level.

The analysis of the functioning in an economic circuit (38) or “vertical and horizontal integration” is taken up by Management Sciences, which examine the interaction between market demand and the production of goods and services to meet this demand, as well as the impact created by it on the employment situation and purchasing power.

With the contribution of contemporary economists, the theory relating to a market economy has developed and been refined in several directions. Microeconomic analysis has developed on the theory of imperfect and monopolistic competition by Chamberlin (39) and by Robinson (40) in “The Economics of Imperfect Competition” while the classic liberalism was based primarily on the assumption of perfect competition. Market morphology has also been the subject of in-depth studies by Eucken and von Stackelberg (41)  in “Market Structure and Equilibrium”, reissued in 2010.

The Neoliberal Vision and State Interventionism

At the level of social equality, already since antiquity, Plato’s ideas on equality between citizens had a strong influence on the social thinkers of the time. With the industrial revolution and the emergence of the modern proletariat, the critiques of society and the reform proposals become more and more concrete for social reforms and a redistribution of wealth to the community. Among them were William Godwin, William Thompson and especially Robert Owen. In France, there were Saint-Simon, Charles Fourrier, Louis Blanc as well as Auguste Blanqui.

According to these authors, state intervention aims to correct social inequalities, to encourage certain activities of general interest that are not very profitable with the help of subsidies, to help economically disadvantaged groups and regions, or to participate in reduction of unemployment by placing orders with companies, while for liberal authors, the principle of the “free market economy” system is based on economic decentralization with the market as a regulatory element, and ‘personal interest and pursuit of profit’ like an element of the motor. Agents who correctly interpret market signals are rewarded (profits, high wages); otherwise, they are sanctioned (losses, bankruptcy, unemployment). However, the State can intervene in the event of market imbalance to mitigate its negative effects.

In theory, the collectivist system is based on economic centralization, the regulating element of which is the ‘plan’, and the driving element, ‘the authority of the State’. Agents who meet the plan’s objectives are rewarded (promotion in the hierarchical ladder, bonuses); those who do not are sanctioned (degradation in the hierarchical scale, self-criticism, removal of bonuses). The advantages of this economic system as a model are cyclical stability, hence the non-existence of unemployment and an equitable distribution of income. Planning ensures the growth of the areas most important to the community. The State (or the Centrale) makes all the decisions at the macroeconomic level to help the actors at the microeconomic level to achieve the economic and socio-cultural objectives necessary to maintain social cohesion. Individuals are subordinate to it and do not enjoy property rights or personal freedoms.

The Marxist interpretation of social conflict is based on the unequal distribution of the surplus value of labor, which enriches the capitalist to the detriment of the worker. To restore social justice, workers are encouraged to take property by force from the hands of the capitalists through the dictatorship of the proletariat and establish a state that allows for an equal distribution of income and erases social inequality. Marxist theories have given rise to many interpretations such as Marxism-Leninism, Trotskyism, Stalinism, Maoism in particular are applied in China and its satellite countries in Asia, South America, and Africa.

Socialist thinkers such as Althusser (42) introduced the notion of the class struggle into philosophy itself through the primacy of the political. He defines the history of philosophy as a struggle of tendencies ‘determined by theoretical class positions’. Lecourt (43)  studied the effects of Stalinist idealism in the “transformation of nature” and the politicization of the biological sciences through the “Lysenko Affair”, while Balibar (44) did some work on historical materialism. Among the students of Althusser was Tran Duc Thao (47), a Vietnamese intellectual who became one of Ho Chi Minh’s political advisers at the start of the formation of the Democratic Republic of Vietnam in 1945 as recorded by Agustoni-Phan (45). Another adherent of the French Marxist school was Pol Pot or Saloth Sar, Prime Minister of Democratic Kampuchea between 1976-1979, and author of the Cambodian genocide in the post-1975 peace after the collapse of South Vietnam and departure of the American troops. The number of victims was estimated at around 1,7 million dead, accounting for more than twenty percent of the population at the time due to his blind application of Marxist theory on class struggle.

But among the greatest tragedies in the history of communism is the destruction of millions of human beings in the gulags of Siberia at the instigation of Stalinism, not to mention the consequences of Maoism causing the deaths of over thirty-six million. Chinese, victims of the Great Leap Forward policy of Mao Tse-Tung, according to Yang (46) who wrote an account of the great famine in China during the Great Leap Forward. Many scholars have exposed the catastrophic consequences of Marxist regimes through the implementation of the dictatorship of the proletariat. Numerous testimonies (47) and dissidents from these former dictatorships have confirmed the consequences of what Lenin called “the fusion of the workersmovement in Marxist theory“.

Between these two great ideological currents, which have influenced the economic policies of most of the countries, there are regimes who adopt the policy of ‘non-alignment’ such as Indonesia and some African countries. However, most of the economies of the developing countries constitute the grounds of the war of influence between superpowers, namely the United States, Soviet Union and lately China in their race to gain market share and economic/political supremacy in an increasingly affected world through globalization.

To be continued ./.

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Published by Anita H.

Expert in Intercultural Communication, navigating between 4 cultures and 5 languages which I use daily for work and leisure. Author of blogs on wordpress and blogspot on SBI Training Solutions Projects: vietnamhoc, yourvietnamexpert, yourvietbooks, sbi-training.com.

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