CHAPTER SIX

CHAPTER SIX: THE AUTHORITATIVE DECISION MAKING SYSTEM

Introduction

Not only markets fail, the political system has even greater problems: it is clumsy: thumbs but no fingers.

Politics as analyzed in this book emphasizes the logic behind political allocation; or the logic behind the exercise of power as authority–legalized use of force.

Political economy understands political constraint as a clash over social values and resources which are scarce relative to needs.

Political constraint (the clash between social values) originates in the human condition of man as a social being.

Political constraint precludes any opportunity for mutual voluntary settlement.

Therefore, political constraint can only be settled through intervention by a third party, which at the state level is government.

Because it calls for third-party intervention, politics sets up a power relationship between the law-giver and the subject.

Private authority relies upon love relationship to ensure compliance.

At the state level, authority is backed by a legal punitive capacity with which to compel subjects to compliance.

In its broadest definition, therefore, authority systems are decision making processes based on the exercise of power or the exercise of legitimate force called authority.

The Perceived Inefficiency of Power

The political or authority system by itself cannot produce most goods and services as efficiently as the exchange or market system.

Politics is for the most part adopted in the allocative areas where economic efficiency as maximum waste reduction is not possible nor desired.

These forms of political allocation notwithstanding, there are many forms of political allocation such as the making of budget decisions where politics can be, and should be as concerned about waste reduction as economic exchange.

In public choice analysis, politics is presented as a marketplace where political goods are traded to the highest bidder just as in the economic marketplace.

Public budget making is now entrusted to leading economists, who rely on the same rigorous cost-benefit analysis that economists reply on to make economic marketplace decisions.

Yet still, government allocation is never quite able to shake its image as the less efficient of the two systems.

That is because by its very nature the exercise of authority does not lend itself to the rigors of rationality.

This is true of government under a capitalist state but especially bad under command economics where there is no market system to that the slack where the government fails.

Rationality and Considerations of Power

Compared to decision making in the exchange system decision making under authority systems is clumsy because it can not be subjected to the logic of rationality.

Rationality presupposes three things:

(a) choice; the availability of more than one value or resource

(b) ability to rank order the different values such that one is more desirable than the other; (c) and the selection of a higher ranked value over a lower one.

1 Under authority decision making, the individual consumer is not free to trade his resources to the highest bidder and so he is not the free sovereign he is in the marketplace, nor can he arrange his choices because others are involved.

Power relationships always presume some level of arbitrariness and imposition of wills, and therefore do not permit the kind of individually personal rationalization as in the marketplace.

A lot of political decisions are seen as inefficient precisely because they are not the result of unbiased and complete rationalization.

Rationality and Multiple Decision Makers

Rationality is only possible if the decision maker has to confront only one set of values – his own individual competing needs.

In the exchange system, there are only two decision makers each having to confront only his personal ranking of values

In authoritative decision making, there are too many decision makers and multiple criteria to consider.

The multiplicity of decision makers means the decision maker must attempt to satisfy a plurality of interests, forcing decision makers to settle for compromises.

Political decisions has too many finger prints all over them.

Unlike the invisible hand of the market that produces an outcome satisfactory to both the individuals directly involved as well as to society as a whole, political decisions tend to have clear winners and losers, and are at times made to satisfy only the personal power cravings of the law giver.

Limited Scope of Rationality in a Political Rationing strategy

Rationing is the apportionment of different amounts of a fixed resources, say budget dollars, based upon some arbitrary criteria set by the authority.

The determinants of political allocation are not clear nor verifiable.

Rationing of different amounts leads to charges of favoritism

Rationing of even equal amounts is still unsatisfactory to the parties to a political dispute, each of whom wants to win at the expense of its opponent

By contrast, the conditions for exchange to take place are very explicit and verifiable

a. At least two people

b. Each of whom has a need and a value

c. A's needs must match B's value.

Neither party to an exchange can satisfy his own needs.

Some political allocations produce painful zero-sum outcomes or where allocation results in clear winners and losers.

Areas where zero-sum allocation is unavoidable will include:

(a) the allocation of one-of-a-kind product or service;

(b) the allocation of mutually exclusive values like pro-choice versus pro-life;

(d) government redistributive efforts on behalf of the poor;

(e) allocation to satisfy the pure political desire to win at the expense of the opposition.

By contrast, all parties to a market exchange are winners.

Pareto Optimality is the claim that market exchange produces nothing but net gains.

Authority systems tend to be too large.

By contrast, market allocation requires as few as two decision makers: the consumer is king.

The solution is bureaucratization, eg. government, universities, and large corporations.

But bureaucratic decisions often lack rationality, ability to weight all the pros and cons of an issue.

By contrast, market allocation relies upon carefully rationalized conclusions.

Lack of rationalization can be caused by either the scantiness of information reaching each of many bureaucratic decision makers.

Or, by information overload, inability of bureaucratic heads to weigh all the information coming from their subdivisions forces bureaucratic heads to find ways to cut corners.

According to organization theory, these are the ways bureaucracies deal with information problems.

(a) adopt standard operating procedures or groupthink strategies, "what we normally do here"

(b) sacrifice profit maximization for convenience

(d) take decisions by fiat, not based on majority vote nor rational optimization.

Lack of rationality leads to government becoming a Leviathan, inability of government to shrink its size and cut redundant services .

By contrast, industry allocation and closure decisions are based on considerations of one clear criterion: the bottom line.

COMMAND ECONOMICS

Question:

What distinguishes the problems of command economics from the set of problems associated with authority systems in capitalist economies?

Answer:

The absence of any meaningful form of market exchange to take the pressure off whenever the authority system runs into trouble.

The characteristics of command economies:

# state ownership of property

# allocation through one hierarchical power structure headed by one central board

# gross inefficiency

3 advantages of command economies:

# state ownership of property facilitates the promotion of equity, therefore, command economies tend to be more egalitarian and more peaceful than capitalist systems.

# state budgeting is more conducive to development planning than allocation through the price system.

# the state can marshall all available resources to pursue its selected objective, thus avoiding the diversion of income from savings in a capaitalist economy.

# But its negatives out-match its benefits.

5 Disadvantages of Command economies:

1. economic choices are not based on rationality because:

# lacks a costs structure; and hence the ability to weigh the relative costs of production inputs to come to a rational decision.

# production decisions are based on the preferences of one's immediate boss not on consumer preferences; and so production decisions are made often to reflect the propaganda and party needs of the state.

# Budgeting from one central command post, the system fails to incorporate the diversity of consumer needs; too many of undesirable goods and too few of desirable goods are produced; hence production choice and outcomes are grossly inefficient.

# serious lags exist between problem identification and when authorities can come up with the necessary solutions.

2. Money values are not reliable.

# though the system uses money for payment, production decisions and production resources are not measured in terms of reliable and comparable money values. Because production inputs are sent directly from source to place of final good production without passing through a price market , they resulting production output do not have reliable unit costs; prices are arbitrarily set by the relevant authorities without reference to a competitive cost structure.

3. Lacks flexibility

Because producers in a command economy are under no compulsion to produce within any firm production cost targets, they feel no need to adopt cost-cutting measures including cheap but efficient technology, as a result, command economies lack innovation and fal several decades behind their capitalist counterparts.

4. Lacks incentives

# because paychecks are guaranteed irrespective of individual output, there is no incentive to work hard; and because production units are sent directly to the producer, he does not find it necessary to be efficient as is required of entrepreneurs in a capitalist market.

5. Diminishes the sense of value

Because value is measured in terms of the amount o oneself and one's other resources invested in the creation of the thing of value, the state locating itself between the entrepreneur and worker and their production robs them of the feeling sense of value that comes only through personal involvement in the objects of value.