Capitalism, the Swiss Model

By Alan W. Ertl

An economic survey of the Swiss economy, demonstrating successful functional capitalism.

• Language: English
• Publisher: AuthorHouse UK
• Release date: Jun 11, 2014
• ISBN: 9781491893586

Alan W. Ertl

University professor, having had also a successful career in international business.

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© 2014 Alan W. Ertl. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or

transmitted by any means without the written permission of the author.

Published by AuthorHouse 06/03/2014

ISBN: 978-1-4918-9359-3 (sc)

ISBN: 978-1-4918-9349-4 (hc)

ISBN: 978-1-4918-9358-6 (e)

Because of the dynamic nature of the Internet, any web addresses or links contained in

this book may have changed since publication and may no longer be valid. The views

expressed in this work are solely those of the author and do not necessarily reflect the

views of the publisher, and the publisher hereby disclaims any responsibility for them.

Contents

Foreword

Introduction

I

II

III

IV

V

VI

VII

VIII

IX

X

XI

XII

XIII

XIV

XV

XVI

XVII

XVIII

XIX

XX

XXI

XXII

XXIII

XXIV

XXV

XXVI

XXVII

XXVIII

XXIX

XXX

XXXI

XXXII

XXXIII

XXXIV

XXXV

XXXVI Conclusion

Foreword

During the 1970s I studied toward, and was awarded, the Master of Arts Degree, at The University of Exeter in Devon, England. While there I had the unique privilege of studying under the late, Dr. Frederick Victor Meyer,—Reader in International Economics. It was with this scholar that I developed a lifelong interest in the integration processes going on in Europe, a deep understanding of applied fundamentally macroeconomics, and a knowledge of the social philosophical requirements of successful multinational interdependence. There, and afterwards Dr. Meyer helped me to hone my understanding of European political economic happenings and specifically, of the unique position Switzerland plays amongst the community of European states.

This writing is a continuation of that initial interest.

It is not possible to thank individually all of the many people that have helped me put together the thoughts used to create this study, however definitely sincere thanks is given to each in their own for their much appreciated intellectual input. The many quotes from outside sources are documented, but if there are any omissions of external ideas or thoughts by others not quoted here, there is certainly no intention intended to omit recognition of credit where credit may be due.

It took a considerable length of time to put this together, and it is so that some of the statistical documentation is older than others. This being the case however the material used was selected to make a statement of a condition or fact, and if not exactly au jour, the general intended impressions are valid and the author stands by them.

Most appreciative am I to Mrs. Jean McGregor for her diligent assistance in putting my notes together into readable text. Her spirited professionalism was much appreciated.

Alan W. Ertl

Heidelberg, Germany

Spring Semester, 2014

Introduction

Here and further along in the text, it is mentioned that from time to time one is made aware of new studies showing that within the community of global nations Switzerland is relatively well placed in terms of welfare, cleanliness, length of life, economic activity per capita, etc. Depending on the report and the information being assembled, what is clear is that Switzerland frequently comes at either the top or near to the top of these many lists.¹ There are countries that have a higher GDP per capita but generally speaking these are the new-rich countries that gained their wealth from the extrapolation of raw materials, their national treasures. In principle, one could say that there are richer countries,—oil rich countries, countries using their capital in the ground,—oil,—to support their economic welfare. Switzerland is not of this ilk for it is a country virtually without any appreciable natural resources. The Swiss, simply speaking, derive their wealth from ‘working’ and it is here among the countries that do work, that Switzerland compares very favourably.

This fact posits the interesting question, ‘how is it that this small alpine republic devoid of natural resources continues to be placed high on these many lists?’ This question is, in essence, the subject of this writing. With this survey the economy, and elements of the functioning of this economy, will be put to display, along with some of the theoretical ideas and practical rationale used by these people to achieve their noted success.

Switzerland is capitalistic but it is not capitalistic of the Anglo-American brand , in many respects it relates more to the social market economies of continental Europe. This as a starting point is of major interest and may be the most important reason for the successes that Switzerland has achieved. It is a different sort of capitalism.

Capitalism is an economic system, based on—private, rather that—state, ownership of business, factories, transport services, and etc. with free competition given over to profit-making² It is in many respects a delicate commodity, much like a precious egg. An egg rests in a protective nest, the nest holding capitalism is the government. If it is the case that the government is controlled by, for example, one class of people, then capitalism applied in that economy will be biased toward the benefit of that one class of people. Conversely if the government is more representative of the population in general, composed of people from all classes in society , then the benefits of capitalism will not be in support of just one group, it will be benefiting this greater array of different individuals in the economy.

The discussion here is one essentially falling within the domain of classical political economics. Economics encompasses the interaction between people. Today it is a theoretical discipline aiming at developing explanation for the economic happenings of society. The traditional holistic notion of political economics bifurcated late in the 19th century into the areas of (i) politics, which is now found in most universities, generally speaking, in schools of government; and (ii) economics, which has itself also been divided into the distinct fields of micro and macroeconomics, the former falling into the service of applied economics or business, the latter referring more to global or national economic considerations.

The central economic problems have been discussed virtually since classical antiquity, resulting in the fact that today there is a particularly good quantity of economic phenomena, which has been categorised and analysed. Moral and political philosophers on the one side and businessmen and administrators on the other continue to make their donations to this corpus of economic understanding .

Unfortunately the politics of classical political economics has now been essentially removed from economic considerations. This, regrettably, creates an obfuscation regarding the functioning of activities in the marketplace. For example, in the recent period when the Americans and their allies decided to go to war in the Middle East, it gave a complex of political and subjective moral reasons for doing such. In the open press, the economic reasons for such an activity were not discussed by any significant politically prominent individuals. However, when observing the action of the wars, one noticed immediately that these wars were in areas rich in oil, or central to the distribution of oil through modern-constructed pipelines. In other words, one noticed clearly a distinct economic advantage cum causation for these wars, more so then any political or moral consideration. Observations revealed the fact that the publicly given reasons for the wars were totally different then the economic realities.³ When it was eventually determined that the premise used by the Americans to declare war on these peoples was found to be a wrongful act based on anything other than at-hand knowledge, the American military retreated from the region. That war and the ensuing civil disturbances were economically extremely profitable for oil interests. As a direct result of these military activates there was a major and ongoing global shift in economic income, although many suffered, there were by a few great benefits to be had. By separating economics from politics only half of the picture is reviled, only together can one begin to make sense of happenings.

Looking at Switzerland, it is necessary not only to look at the economic enterprise exhibited among the people, but also the political bias evidenced by that government, as with the aforesaid egg and nest analogy. The sort of government that exists in Switzerland is a classical republic in the form of a participative democracy, it is a government composed of people representing a good cross section of the many indigenous populations of the country operating via specifically set public mandates. The people elected to office in Swiss government continuously refer back to those that have elected them to determine the parameters of their competence. This makes the economy very responsive to people and their desires.⁴

The notion of the effects of government on economic aspects of capitalism can be seen in a contemporary example where two different governments treated the same condition in different ways and got different results accordingly. This example shows that governmental action in managing economic situations has a profound effect on the wealth and welfare of their respective populations. In America at the end of the Clinton period because of his applied macroeconomic policies, that country was able to create a budget surplus. Mr Clinton wanted investment money to curb the rapidly depreciating capital infrastructure of that county. When he achieved a budget surplus, the opposition Republican Party in congress immediately demanded that tax on richer people be reduced. The argument was that if there is a surplus, people are obviously being taxed too much. Mr Clinton wanted to invest that residue surplus in increasing the nation’s net capital infrastructure but the opposition party would not entertain this strategy and wanted it returned. For them returning the money to the rich was not only eminently more popular but it had also electoral advantageous.

In Switzerland, essentially the same situation occurred, the government’s management of the economy nets almost chronic yearly tax surpluses. There the people are calling for a redistribution of this wealth to everyone. Their reasoning is that redistributing this wealth would stimulate the entire economy even more, which would benefit virtually all and sundry, from workers through to the owners of the means of production.⁵ In America, the notion was to reduce taxation of the rich, which would only benefit those few people at the top. The Swiss want to redistribute their surpluses to everyone which would benefit everyone. This example shows the same situation,—tax surplus,—with different solutions. One favouring the few, the other favouring the many.

In an attempt at answering the question as to why it is that Switzerland receives high recognition on things that relate to their economic performance, this study will examine in its many chapters deferent aspects and conditions contributing toward their high degree of recognised success. Switzerland is capitalistic, this is not unique, what is unique is their functional application of capitalistic principals. It is their unique approach to applied capitalism that attains for them the recognised systemic economic successes noted by others. Looking at aspects of the Swiss economy, there will be an endeavour made here to display to the reader the uniqueness of these economic considerations. The examination which follows will reveal a very tight working economy with a keen sense of collective purpose. By looking at various applications of the involved elements the reason for Switzerland’s comparatively high standing will be made apparent. Starting with a discussion of basic economic cum political economic concepts and continuing through to functional applications there will be exposed the secrets of this Swiss economic performance.;—if there are indeed any secrets per se.

I

Capitalism is a political system however it constitutes also a very interesting portion of the study of applied economics. This being said, it is not, however, necessarily an easy-to-define field. The object of economics can best be appreciated when put into contradistinction with the physical and natural sciences—the universe, the earth, all that is in the earth, the elements of which it is made as well as the animals and plants, forms of other life and non-life are the subjects of a distinct group of science known as the physical and natural science. However, in a physical world there is something else deserving attention, that being ‘man’ himself actually living in human society. Indeed, man could not possibly live in anything other than a form of society. The relations that unite man socially provide the substance for a separate group of sciences called the social sciences. As among man is found different forms of social relations, there are many different social sciences each with a specific relationship as its central point of investigation. The lines of demarcation among the various social sciences are not clear and there is a substantial overlay as the frontier of these sciences is more or less indefinite. Although these various branches of the social sciences are diverse, they often meet on the same ground in the search to define greater knowledge.

What concerns the economist the most is an aim of human activity, which has to do with providing for human needs. In a broad sense, political economics has to do with the relations of men living in human society, which are such that eventually aim at satisfying needs and a promoting of welfare and this on respect of dependencies upon the possessions of material objects. This general consideration may be subdivided into a classical three-fold division⁶ of production, distribution and consumption and in the more modern period, places emphasis on the area of production specifically as far as it is related to exchange coming under the rubric of circulation and the notion of consumption being relegated to the moral area of the use of wealth.

Although consumption is no longer popularly found in mainstream economics, the use of wealth, whether consumed or saved, is a pure and important economic act and may indeed be considered as the ultimate end of all economic acts. Consumption can very much be appreciated when the wealth of a given society is examined. Understanding that the distribution of wealth has much to do with moral and political considerations, it is appreciated that the more broadly wealth is spread throughout an economy the more wealth in that economy is created. This is so as wealth generally activates more wealth in the marketplace and with more concentrated wealth, the economic activity becomes separated from a holistic activity to a parallel of activities, with on the one side those with much consuming much, and on the other those with little likewise consuming little:

The Distribution of Income/Consumption

Percentage Share of Income or Consumption

Swiss EU Neighbours

EU Candidates

EFTA Countries

* Except for Estonia, Hungary, Latvia, Lithuania, Poland, all EU Candidates and the Russian Federation. The figure refers to expenditure shares by percentile of population ranked by per capita expenditure. For the rest, Income in both cases.

Statistical data drawn on the presentation of statistical data in the European Union: Economics and Politics, 8th Edition, edited by Ali M El-Agraa, Cambridge University Press, Cambridge (2007).

The distribution of income, (or consumption) directly related to the amount of income in the hands of households is a sub-function of the percentage of distribution of a given GDP throughout respective economies:

Percentage Distribution of GDP 2004

Swiss EU Neighbours

EU Candidates

EFTA Countries

Adapted from Table 5.7 p.97 of European Union:

Economics and Politics, 8th Edition op cit.

The crystallisation of what is today know as modern economics commenced at the beginning of the seventeenth century.⁷ The early thinking of economics was stimulated by the discovery of America, an activity that gave great impetus to the accumulation of the economic body of knowledge during the sixteenth and seventeenth centuries, which focussed on the mercantile system. A counter reaction to this system took place in France in the middle of the eighteenth century, particularly under the influences of Rousseau and Montesquieu, the latter’s book, The Spirit of Laws, commencing with the dictum Laws are the necessary relations resulting from the nature of things. It is, perhaps, with this that economic science per se was born. Louis XV’s famous physician, Quesnay, published the renowned Le Tableau Économique, perhaps the first work to attempt to describe the workings of the economy in an analytical way. This writing concentrated on thinking by men known as economists celebrated in history as physiocrats⁸. The school of the physiocrats introduced into the economic science the ideas of

1) the belief of the existence of a natural and basically essential order of human societies, the notion being that evidence for such orders becomes apparent when one observes that individuals cannot help conforming to such. As it was so obvious, it was believed useless to devise laws that would regulate the system. All that was needed was to let things alone (laisser faire).

2) the superiority of agriculture over commerce and industry.

Physiocrats regarded the soil as the chief force of nature and the ultimate source of wealth because it is able to produce a net product. The non-agricultural sectors of society were considered to be the sterile classes. Influenced by the physiocrats was the Scottish professor, Adam Smith, whose 1776 publication of An Enquiry into the Nature and Causes of the Wealth of Nations changed the focus of economic theory asserting the pre-eminence of the English School for nearly one hundred years. His ingenuity was able to examine the economic revolution that was, in his time, already well-advanced. In his writing, he rejected the second physiocratic principle and gave industry a legitimate place in the production of wealth. He did, however, retain the first physiocratic principle, the belief in economic laws and in laisser faire. Pedantically observing facts and profiting from lessons of history, he enlarged the general field of economic science to where it, in many respects, is found today. Directly following Smith were two English contributors whose theories left their mark indelibly upon economics thinking. The first was Malthus whose famous theory of the increase of the population (1803) and Ricardo, who devised a theory of rent (1817), two ideas, coming from the influences of the work of Jean-Baptiste Say, which became a clear model for innumerable writings of the nineteenth century that formalised economic thinking. Economic thinking developed then into a very clear system, which in many respects combines both the deductive and inductive method of academic thinking into one method with three distinct stages:

1) Observation of facts and conditions

2) Imagination, which is required to connect facts into relationships and causes into a distinct hypothesis

3) To vary the hypothesis through finding out the validity of the consideration in question

The intellectual advance of mankind both in the natural and the social sciences rely upon this methodology. The idea of verifying hypothesis, applying the deductive method, the mathematical method considers the relations, which arise among men in any given circumstances as relations of equilibrium, which are similar to those found in the studies of mechanics. To do this, the hypothesis in question must be reduced to a certain number of given conditions excluding all others.⁹ Thereto, another methodology is the psychological method frequently called the Austrian Method, a school devoting its attention exclusively to the notion of value, which it places at the centre of economic sciences.¹⁰ The value of value, according to the Austrian School, is to give expression of human desires as economic science is naturally reduced to human desires and the causes, which intensify or diminish those desires respectively, involving a very subtle psychological analysis. Here, attention is given to the old classical hedonistic principle, the principle of attaining the maximum of satisfaction with the minimum of effort. These two schools, the mathematical and the psychological, are in the service of deductive methodology. These two schools, or directions of thinking, opened up from the point of view of solutions, this themselves relating to schools of thought, which come down to the modern period and play a distinct role in economics relating specifically to economic outcomes or results.

II

For this paper, the general proposition is made that Switzerland is a rich country. It is visibly rich and examination in that country reveals the results of richness. The purpose of this writing is to see whether or not it is possible to characterise exactly those elements that are brought together to produce this wealth. The wealth of Switzerland is not significantly different from that of its neighbours in Europe, however, it is significantly different in as much as it emphasises itself throughout the population and is observable as one sees the wants of man through the mechanism of value and price being cared for as they are in Switzerland. The visible results of the economic activities of Switzerland in concert with the continental application of economic principles diverge themselves perceptibly from the Anglo-American model. Where the Anglo-America model acquiesces to largeness, on the Continent and especially in Switzerland there is a balancing sought,—to balance large enterprises there is a continuous push toward reseeding small single proprietorships.

The historical developments through to effectively the beginning of the twentieth century produced, basically in Britain, a momentum that took economic thinking out of the academic analytical setting and thrust it into the hands of applied practitioners. Applied economics is what has become known today as business. Business has its roots in theoretical economics, especially those economics from the Anglo-American thinking that became known as microeconomics and erroneously, by developing a practical application presence, lost connection with economics’ theoretical roots. This process has persisted for one hundred years led by the Anglo-American world based on notions of the marketplace that only in theory are found. The divorce of the intellectual from the practical has caused distortions in the marketplace, which as the twentieth century advanced and found in the twenty-first century to be extremely evident. Macroeconomics theoretically suggests that a practitioner in the marketplace is a price-taker. It would suggest that with an abundance of participants in the marketplace, a fundamentally homogeneous product with to restraints to enter or exit,—in perfect competition,—could eventually create a position where supply equals demand at the market-determined price yielding a market-determined quantity.¹¹ With perfect competition, the marketplace is such that each competitive firm has an interestingly shaped demand curve. Under the theoretical conditions of perfect competition, the producer or firm is most definitely a price-taker, meaning that the individual provider of a good in the marketplace has no choice but to accept the price that has been demanded.

Image43872.PNG

NB: The equilibrium (the point where P meets Q) in the marketplace determining both the price of the goods sold and the quantity of goods sold in perfect competition is a product of supply and demand.

The normal supply and demand in the economy determines price that people are willing to offer for particular goods in the marketplace and it determines the price at which people in the marketplace are willing to buy those goods. At the point where S=D, (supply meets demand) the market is said to be in equilibrium and the price and quantity of the goods available and demanded in the marketplace can be determined. It is this equilibrium price that in perfect competition the individual wishing to participate as a producer must orient his activities. A perfect competitive firm, as a result of this, has a horizontal demand curve, this meaning it can double or triple its sales in the marketplace without experiencing any reduction in price.¹²

Image44049.JPG

NB: The demand for the products of a participant in a perfect competitive marketplace produces a perfectly horizontal demand curve for definitional reasons, eg, if a quantity of ten of a product is being sold, each of those ten products would sell for a given price, the price taken from the marketplace. If one hundred products were sold, they would still be at the equilibrium price given by the marketplace that the producer in perfect competition has to accept as given. In other words, each additional quantity put onto the marketplace by the individual producer is done so at exactly the same price, ergo, the demand curve for the producer’s product is horizontal for each good demanded on the market is demanded at exactly the same price as the last and the next. Because the demand curve is horizontal, the competitive firm’s marginal revenue is also a horizontal line that completely coincides with its demand curve, meaning that marginal revenue equals price:

(MR=P)

This means that the revenue that the competitive firm is