Introduction

Earlier chapters have analyzed a series of decision modes, each of which is based upon a particular combination of individual and collective decision-making authority. Each has advantages and shortcomings, which theoretical analysis can assist in understanding, but actual experience is also necessary in order to reach judgements about their relative desirability. The decision mode deemed most appropriate for particular economic activities may not be most appropriate for others. Furthermore, for any particular activity, the decision mode deemed most appropriate at one time may not be considered so when circumstances change. Technology may advance; income levels and distributions may alter; consumer preferences may shift; the administrative capability of government may improve; and science may learn to quantify externality impacts with more precision.

At any point in time, each society adopts a combination of decision modes, and this combination forms the society's economic system. This choice involves trade-offs. The judgement involved in such choice must be subjective to some degree, and differences of opinion may develop within each society as to the most appropriate combination and tradeoffs. Of importance is the process through which a society arrives at its economic system. To some degree, we can view these choices and processes as experimentation. The use and evaluation of several of the decision modes is relatively recent. Furthermore, rapid economic growth, increases in population, and the spread of urbanization have all combined to increase the significance of externality impacts in ways that have led to greater emphasis on the collective decision modes. So too has the vast mushrooming of human knowledge and the expansion of public involvement in education, research, and technological innovation. Much about the individual-collective decision-making choice has changed. It is only through practical experience that wiser social judgements can be made. Consequently, each society will be continually altering its economic system. From this perspective, the study of comparative economic systems takes on a new significance: It is not simply an academic exercise; rather it is an essential element in the process of intelligent choice.

The phrase economic system refers to the organizational arrangements and processes through which a society makes its production and consumption decisions. In creating and modifying its economic system, each society chooses among alternative objectives and alternative decision modes. Many objectives may be seen as desirable, and we shall focus in Part I on efficiency, growth, liberty, and equality. An underlying theme is that these objectives frequently involve inconsistencies and trade-offs. The more complete attainment of anyone objective may involve a partial sacrifice of another. The emphasis placed on various objectives has differed among societies, and for each society the emphasis has changed over time.

In the pursuit of its objectives, each society uses a combination of decision modes, and we shall analyze six of these in Part II: free enterprise, price controls, subsidies, taxation, non-price regulations, and public enterprises. Each society leaves some economic decisions in the hands of individuals or groups, while establishing laws and incentives that govern such decentralized decision making. Each society also owns and operates some economic activities collectively. Some communist societies have created substantial planning structures to coordinate the activities of vast public enterprise networks; yet even within such systems individual initiative is expected and rewarded. For each society, the reliance upon different types of decision modes has varied from one economic activity to another, and for each society these choices have varied over time.

The procedures for choosing objectives and decision modes have also differed among societies, and Part III examines these. Reform of the economic system occurs continually, as each society evaluates its experiences, and frequently the modifications are so substantial that they are referred to as revolutions. With the closer integration of the new world economy, international trade and investment relationships constrain each society's choices in regard to modifying the economic system. An underlying reality is the limitation of human knowledge about the implications of alternative modes of decision making. Today, many societies are changing their economic systems in response to new judgements and new predictions about these implications. Consequently, a purpose of this book is to enable readers to participate more intelligently in their society's choice of economic system.

1. It remains to discern the specific functions of sovereign power and their noteworthy features. Most important here are the civil laws, which are the decrees of the sovereign civil authority [summi imperantis civilis], which enjoin upon the Citizens what they should do or not do in civil life.

2. There are two particular senses in which the word ‘civil’ is applied to law: with respect to authority and with respect to origin. In the former sense, all laws are called civil which are the bases for the giving of justice in the civil courts, whatever their origin. In the latter sense, those laws are called civil which proceed from the will of the sovereign and deal with matters which are undefined by natural and divine law but deeply affect the private interests of individual Citizens.

3. Though nothing should be regulated by the authority of the civil laws unless it has a bearing on the public interest, it is of the highest importance for the dignity and peace of civil life that Citizens should properly observe the natural law; and therefore it is a duty of sovereigns to lend it the force and effectiveness of civil law. For there is so much wickedness in the greater part of mankind that neither the obvious benefits of natural law nor fear of divine power is adequate to check it. The sovereign, therefore, may ensure preservation of the moral integrity of civil life by lending to natural laws the force of the civil laws.

4. The force of the civil laws consists in the addition of a penal sanction to precepts to do or not to do, or in defining the penalty in the courts that awaits one who has done what he ought not or not done what he ought. Violations of natural law which have no penal sanctions attached are beyond the reach of human justice, though the divine tribunal still Stands ready to punish.

5. Since civil life is too fragile to allow each man to exact what he believes to be his due by violent self-help, civil laws come to the aid of natural law in providing actions for the obligations of natural law.

Introduction

Subsidies have become an important decision mode within most economic systems. Subsidies may assist certain economic activities by reducing their production costs. Subsidies may assist individuals by reducing the price they pay for particular goods and services, and some cash subsidies are designed to raise the income levels of the poor. The objectives of production subsidies are generally to improve efficiency and to stimulate growth, whereas consumption and income subsidies generally pursue some aspect of equality. Nevertheless, some production subsidies are directed specifically at regions with higher than average unemployment, and these may be seen as an attempt to achieve a more equal distribution of opportunities and incomes geographically within the society. Some consumption and income subsidies, such as those to support education, may be seen as fostering efficient labour adjustment and growth. Hence, many subsidies may be advocated on the basis of each broad social objective.

Subsidies alter the price ratios that would result in a free, competitive marketplace. Consumption subsidies encourage people to purchase those goods and services whose prices are being subsidized. The business recipients of subsidies will likely offer their goods and services for sale at lower prices than would exist in the absence of subsidies, and so business subsidies may also alter consumption patterns. Foreign-based corporations may regard these lower prices as unfair competition. Hence international trade negotiations have come to focus on many of these subsidy programs as a trade distortion that should be limited by formal international agreements. The GAIT Tokyo round of negotiations resulted in subsidy codes for particular types of subsidies. Meanwhile, some countries impose special countervail duties if their corporations are being hurt by foreign subsidies. Hence the role of subsidies must be considered in the context of international trade negotiations. With current and projected reductions in tariff barriers, subsidies will become relatively more important as a trade-determining process. Hence, international trade negotiations will likely devote more attention to these government subsidies. In particular, discussions about freer trade will have to confront this issue, since the elimination of tariffs increases the vulnerability of a nation to the subsidies provided by its trading partners. Nevertheless, subsidies are implemented to pursue certain social objectives, and so an intergovernmental pact that limits subsidies may diminish, rather than improve, the well-being of signatories.

1. Treaties which are agreements made between independent sovereign rulers have a function both in wartime and in peacetime. They may be divided, on the basis of their content, into those which define the terms of reciprocal Performance of some duty already enjoined by natural law, and those which go beyond the duties of natural law, or at least put into specific terms what seems indefinite in natural law.

2. Treaties of the first type are those which form an agreement merely about practising simple humanity or refraining from doing harm. To this category belong also treaties which simply give formal expression to friendly relations without any requirements or which confirm the right of diplomacy and commerce insofar as it is laid down by natural law.

3. Treaties of the second type are either equal or unequal. An equal treaty is the same for both parties. It involves equality in the content of the promises made on each side, either simply or with due regard to differences of strength, and equality in the manner of the promises, so that neither party may be in an inferior position to the other or subject to him.

4. Treaties are unequal when the Performances promised by the parties are unequal or when one party is in an inferior position to the other. Unequal promises are made either by the more powerful party to the treaty or by the less powerful. The first is the case if the greater power promises help to the other party without a stipulation in return, or if it makes promises on a larger scale than the other. The second is the case if the weaker party is obliged to give more than it gets back.

5. Some of the obligations of a weaker party to a treaty involve some loss of sovereignty, for example if it is agreed that the weaker ally may not exercise some part of his sovereign power without the consent of the more powerful.

1. When property has come to Citizens from sovereigns, the right by which they hold it depends on the discretion of the sovereign. By contrast, property of which Citizens have obtained full ownership by their own industry or in any other way is subject to three principal rights which, by the nature of states and as necessary to their purpose, belong to sovereigns.

2. The first right is that sovereigns may make laws obliging the Citizens to accommodate their use of their property to the interest of the State; or defining the extent and nature of possessions, and the method of transferring property to others, and other matters of this kind.

3. The second right is that the sovereign may collect a fraction of the Citizens’ property as tribute or tax. For since their lives and fortunes are to be defended by the State, it is appropriate that they contribute to meeting the expenses necessary to this end. It is totally unscrupulous to attempt to enjoy the protection and convenience the State affords while refusing to contribute either Service or property to its preservation. And yet prudent rulers would be wise to take into consideration the resentment felt by ordinary people, and to make an effort to give as little offence as possible in collecting taxes, observing fairness above all and imposing taxes that are moderate and flexible rather than massive and uniform.

4. The third right is eminent domain, which means that in a national emergency sovereigns may seize and apply to public use the property of any subject which the crisis particularly requires, even if the property seized far exceeds the amount which had been fixed as his normal obligatory contribution to his country's expenses. For this reason, however, as much of the excess as possible should be refunded to him from the public treasury or by a levy on the rest of the Citizens.

5. Besides these three rights, there is in many states a distinct public property, which usually goes under the name of the country's or the kingdom's patrimony. This is again divided in various places into the patrimony of the prince and that of the country, or into the privy purse and the treasury.

1. We come now to the duties which a man must perform towards other men. Some result from the common Obligation by which the Creator has willed that all men be bound as men; others derive from a particular custom which has been introduced or accepted, or from a particular adventitious State. The former are to be shown by every man to every man, the latter only towards certain men on the basis of a particular condition or State. Hence you may call the former absolute, the latter hypothetical.

2. First among the absolute duties is the duty not to harm others. This is at once the most far-reaching of all duties, extending as it does to all men as men, and the easiest, since it consists of mere omission of action, except insofar as passions in conflict with reason must sometimes be restrained. It is also the most essential duty, since without it human social life would be utterly impossible. For I can live at peace with a man who does me no positive Service, and with a man who does not exchange even the commonest duties with me, provided he does me no harm. In fact, this is all we desire from mankind at large; it is only within a fairly small circle that we impart good things to each other. By contrast, there is no way that I can live at peace with one who does me harm. For nature has implanted in each man such a tender love of himself and of what is his, that he cannot but repel by every means one who offers to do harm to either.

3. This duty affords protection not only to what we have from nature, as life, body, limbs, chastity, liberty, but also to what we have acquired on the basis of some institution and human Convention. Hence this precept forbids that anything which is ours by legitimate title be taken, spoiled, damaged or removed from our use in whole or in part. By this precept all crimes are understood to be forbidden by which harm is inflicted on another, as, killing, wounding, beating, robbery, theft, fraud and other forms of violence, whether inflicted directly or indirectly, in person or through an agent.

1. By *duty’ [offcium] here I mean human action in conformity with the commands of law on die ground of Obligation. To explain this, one must first discuss the nature of human action and the nature of laws in general.

2. By ‘human action’ I do not mean any motion which has its origin in man's faculties [facultas] but only such as is begun and directed by the faculties which the great and good Creator has given to mankind above and beyond the animals. I mean motion initiated in the light of understanding and at the command of will.

3. It has been given to man to become acquainted with the diverse multiplicity of objects that he meets in this world, to compare them, and to form new notions about them. But he has also the ability to envisage his future actions, to set himself to achieve them, to fashion them to a specific norm and purpose, and to deduce the consequences; and he can tell whether past actions conform to rule. Moreover, human faculties are not all in constant and uniform Operation; some of them are aroused by an internal impulse and after arousal are brought under control and direction. Finally, a man is not attracted to all objects indifferently; some he seeks, others he avoids. Often, too, he checks a motion despite the presence of the object of action; and he often selects one of several objects before him, rejecting the rest.

4. The faculty of comprehension and judgement is called understanding [intellectus]. It must be taken as certain that any adult of sound mind has natural light enough to enable him, with instruction and proper reflection, to achieve adequate comprehension of at least the general precepts and principles which make for a good and peaceful life in this world; and to recognize their conformity with human nature. If this is not granted, at least in the court of man, men could hide all their wrongdoing behind a plea of invincible ignorance, since no one can be condemned in the court of man for violating a rule which is beyond his capacity to understand.

1. Everyone knows how useful, how simply necessary, an instrument of human society language [sermo] is. Indeed, it has often been argued, on the basis of this faculty alone, that man is intended by nature to live a social life. The legitimate and profitable use of language for human society is based upon this duty prescribed by natural law: no man should deceive another by language or by other signs which have been established to express the sense of his mind [sensa animi].

2. A more profound grasp of the nature of language requires a knowledge of the double Obligation incurred by using it whether in Speech or in writing. The first is that users of any given language [lingua] must employ the same words for the same objects following the usage of that language. For since neither sounds nor particular letter-shapes naturally signify anything (for if they did, all languages or forms of writing would necessarily converge), the use of a language would become meaningless if everyone could give an object any name he wanted. To prevent this, it is necessary for a tacit agreement to be made among users of the same language to denote each thing with one particular word and not another. For without an accord on the consistent employment of sounds, it is impossible to understand from what someone says the sense of his mind. By virtue of this agreement everyone is obliged to use words in his common discourse in the sense they bear in the accepted usage of that language. It follows from this too that, although the sense of a man's mind may be at variance with what he says, yet in the afFairs of human life everyone is assumed to have meant what his words indicate, even if it deviates perhaps from the inner intention of his mind. For we can know nothing of his mind except by signs; and therefore all use of language would be rendered futile if an internal mental reservation, which each man can form as he pleases, could undermine the usual force of signs in social life.

1. Reputation in general is the value of persons in common life [vita communis] by which they may be measured against others or compared with them and either preferred or put after them.

2. Reputation is either simple or intensive. Both are viewed with reference on the one hand to men living in natural liberty and on the other hand to men in the civil State.

3. Simple reputation among those who live in natural liberty consists primarily in each man's making himself and being taken to be such a man as may be dealt with as a good man and who is fit to live with others by the prescript of natural law.

4. Reputation of this kind is held to be intact, so long as one does not knowingiy, willingly and with evil intent violate the law of nature with respect to others by a malicious or outrageous act. Hence everyone is taken to be a good man, until the contrary is proved.

5. Reputation of this kind is diminished by malicious commission of outrageous crimes contrary to the law of nature, the effect of which is that one needs to show more caution in dealing with such a man. However, this stain may be purged by making voluntary reparation for the loss caused and by giving evidence of sincere repentance.

6. Similarly, reputation is utterly destroyed by a manner and way of life which aims directly at indiscriminate harm to others and at profiting by open wrongdoing. Men of this nature (so long as they show no signs of repentance) may be treated as public enemies by all who are in any way affected by their wickedness. They may however repair their reputation by abjuring their vicious manner of life and entering on an honourable course, after making restitution for loss or obtaining forgiveness.

7. Simple reputation among those who live in states is not to have been declared by the law and custom of the State a vicious member of the same, and to be regarded as a person of some Standing.

1. Self-love is implanted deep in man; it compels him to have a careful concern for himself and to get all the good he can in every way. In view of this it seems superfluous to invent an Obligation of self-love. Yet from another point of view a man surely does have certain obligations to himself. For man is not born for himself alone; the end for which he has been endowed by his Creator with such excellent gifts is that he may celebrate His glory and be a fit member of human society. He is therefore bound so to conduct himself as not to permit the Creator's gifts to perish for lack of use, and to contribute what he can to human society. So, by analogy, though a person's ignorance is his own shame and loss, yet the master is right to flog the pupil who neglects to learn such skills as his capacity allows.

2. Furthermore, man consists of two parts, soul [anima] and body. The soul has the function of ruler, the body of servant and instrument; consequently we employ the mind [animus] for government and the body for service. We must care for both, but particularly for the former. Above all the mind [animus] must be formed to accept social life with ease; it must be steeped in a sense and a love of duty and goodness. Every man must also receive some education in accordance with his capacity and fortune, so that no one shall be a useless burden on the earth, a problem to himself and a nuisance to others. He must also choose in due time an honest way of life in accordance with his natural bent, his mental and physical abilities, the condition of his birth, his fortune, his parents’ wishes, the commands of the civil rulers, opportunity or necessity.

3. Since the mind depends upon support from the body, we must strengthen and preserve the powers of the body with appropriate food and exercise. We should not weaken them by intemperance in food or drink or by unseasonable and unnecessary toil or by any other means. For the same reason we must avoid gluttony, drunkenness, excessive sex, and so on.

Introduction

Most twentieth century societies have been concerned with the objectives of efficiency and growth. Generally, people hope that their economic system will provide full employment, and an increase over time in both aggregate and per capita production. Arguments for changing the economic system have often been based on a belief that the current economic system is resulting in inefficiencies, or that it is not adequately stimulating increases in productive inputs or improvements in technology or the skills of the labour force.

Macroeconomic textbooks discuss a production possibilities frontier, representing the maximum amounts of alternative outputs that the society can produce, given the current levels of its inputs and given the technology which is available. Efficiency can be seen as a concept related to a society's production possibilities frontier, in that a society functioning inside of its production possibilities frontier is inefficient. Some of its inputs may be unemployed. Price inflation may impede the decision- making process. The technology being used may not be the best available. Certain markets may not be operating efficiently due to a market failure such as monopoly, externalities, or the public nature of certain goods and services. Along the production possibilities frontier, a free enterprise society will produce at a point where relative prices reflect consumer preferences, and this point can be seen as representing efficiency in consumption. For centrally planned economies, where relative prices may not reflect consumer preferences, production may be criticized as inefficient, in that the particular combination and qualities of goods and services produced may not be the combination and qualities that could maximize consumer satisfaction.

Growth can be seen as a shift outward of the society's production possibilities frontier. Growth can be the result of an increase in the quantity or quality of inputs, or an advance in the technology underlying their use. The distinction between the supply of inputs and any improvements in their quality and use is particularly important if the growth objective is seen as growth in production per capita rather than growth in total production.

Introduction

A production or consumption decision, even if it is optimal from the perspective of the direct participants, may result in externalities that make the decision inappropriate from the perspective of society as a whole. A decision that is optimal for the direct participants may create inefficiencies, retard the society's rate of growth, or create inequities that the society refuses to tolerate. Economic decisions may be directed at a myriad of features and attributes of a product and its production process. Societies can choose any of these elements as the focus for non-price regulation, including, for example, the working conditions of employees; the impact of production facilities and waste materials on the purity of air and water, or on the aesthetic appearance of the community; the appropriateness and accuracy of advertising and marketing programs; the health and safety of customers who use the product; and the financial obligations of the producer to its suppliers, employees, customers, and government. For any aspect of any economic activity, a society may conclude that private decision making could be contrary to the best interests of the society as a whole. Through non-price regulations, a society is able to withdraw any particular economic decision from the direct participants and make that decision collectively. Furthermore, for many of those decisions that it leaves to individuals and firms, society is able to restrict the freedom of choice. In this process, non-price regulation involves balancing the liberty of individuals against the rights of society as a whole.

In designing such regulations, a society can institute many kinds and degrees of legal standards, and can enforce its regulations in a variety of ways. Because of the wide diversity of non-price regulations, this chapter examines five examples individually, seeking to explain the rationale for their imposition, and the advantages and shortcomings of each. These examples illustrate general themes. Non-price regulations frequently take the form of laws, and so the relationships between law and economics are particularly significant in this model.