Options in political systems such as capitalism, socialism, anarchism and other types of "-isms" are the concern of political scientists. Unfortunately, political scientists have allowed economists to become prominent in the discussion about the various ways individual transactions can be coordinated. This is unfortunate because economists have a limited perspective, based on costs and prices, and thus can offer only limited solutions.
Two hundred years ago the pioneer economist Adam Smith noted that allocation of resources could be governed by market forces or by the dictates of an authority system. Firms and governments represent authority systems which are generally, but not always, organized as a hierarchy. The result is a widespread and simplistic belief that markets and hierarchy represent the only two mechanisms for governing economic activities.
Socialism's failed reliance on transactions governed by hierarchy has created a blind faith in the market among many intellectuals and their acolytes. However, a private firm's most common form in a market economy is a hierarchical command-and-control system. So even in the most freely competitive market economies, authority systems prevail as a very efficient way to organize transactions.
Early economists were puzzled by the ability of hierarchies to organize productive activities more efficiently than a network of individuals governed by markets. This raised the question: should all economic transactions be organized by an authority system to create one big firm?
Those answering in the affirmative held the belief that a fairer as well as more efficient society could be created by allowing one big central hierarchy to govern all transactions. This belief provided the intellectual basis for communism.
Although millions of people died in wars fought to further this belief, it is no longer accepted. The failure of public sector command-and-control hierarchies to insure fair and efficient allocation of resources is now almost universally recognized. The result is that central and provincial governments around the world have embarked upon programs of privatization and are sub-contracting out as many of their activities as possible.
At the same time, however, the world is coming to an opposing realization-that there are limits to the processes of privatization and sub-contracting and limits to their ability to improve the quality of life.
Due to capitalism's victory in the ideological war with socialism, there is a growing willingness to consider the defects of market mechanisms and of private hierarchies to govern transactions efficiently, fairly and on a sustainable basis.
It is now widely assumed that the state should intervene to correct any market failure or defects in social organization created by businesses' self-interest. But this assumption in turn generates concern over the future of democracy, as thoughtfully articulated by Ralph Dahrendorf in an essay in the Summer 1995 issue of The Responsive Community. Dahrendorf sees the First World facing a set of perverse choices as it seeks to maintain "A Precarious Balance: Economic Opportunity, Civil Society, and Political Liberty" (which is the title of his essay).
The precarious balance between state intervention and a free society can be obviated by choosing options for governing society other than those centered on markets and hierarchies. However, these kinds of options are outside the discipline of economics since they involve cultural values, social relationships and the design principles of self-governing systems as identified in cybernetic analysis. It is also outside the domain of economics to explain the operations of nonprofit firms and of other types of institutions used to govern society.
Knowledge of these topics is also required to understand the operations of worker-owned firms and to grasp why firms can become more productive when employee ownership is introduced.
However, before considering alternate governance mechanisms, it is useful to consider how economists explain the existence of firms with an owner/manager or ownership by investors. According to accepted economic theory, these types of firms emerge as the result of markets failing to organize transactions efficiently. The presence of a central authority can reduce costs by directing production processes rather than letting outside individuals establish market prices. Prices do not provide effective information on how costs can be reduced by organizing production in a rational sequential manner. Neither do prices communicate information about social equity or ecological sustainability.
If both hierarchies and markets provide unsatisfactory and/or incomplete information for governing society, we must inquire as to the alternatives.
Humans, like many social animals, have various ways of communicating with each other. Not only do different animals rely on different senses to receive information, but they also communicate information in different ways to coordinate collective action.
To evaluate the alternatives it is useful to categorize social information and control systems into four types. In order of their evolutionary development they are:
The role played by monetary transactions in mediating transactions between the various domains is quite limited, as indicated in the diagram. Even within the limited sphere of economic transactions, most economists further limit their studies to the production and exchange of goods and services, as reported in national accounts as indicated in the dark area.
Other transactions in modern societies involve far greater values since they include the buying and selling of land, buildings, mortgages, bonds, corporate equities, commodities and various derivatives. The values of these transactions are not usually reported in national accounts, nor do they attract the interest of most economists. This explains why economists did not foresee the Third World debt crisis, which was in fact discovered by bankers trying to recover their money.
Those who believe that social transactions can only be mediated by markets and hierarchies are limited to the ways of governing society included in the top half of the diagram. But many vernacular cultures, such as Australian Aboriginals, did not use either money or command-and-control hierarchies to govern their societies. As nomads, Aboriginals were governed by their environment. In "A Design for an Ecological World Government" (World Citizen News, June 1993) I described Aboriginals as living in an environmental republic.
Australian Aboriginals maintained a mutually sustainable relationship between themselves and nature for longer than any other known culture. Modern society needs to follow their example. How this might be achieved will be developed in a following article.
Shann Turnbull is economic consultant to the World Government of World Citizens. He can be reached at P.O. Box 266, Woollahra, Sydney, NSW 2025, Australia.
