Understanding Social Democracy Like a Prussian!
Social democracy is the norm in most of Europe and used to be even in the United States (you might know it as the New Deal). When the Cold War came to a close, attitudes toward government shifted, and many Americans now doubt whether or not a government, at the state or the federal level, can effectively administer economic policy that facilitates growth. The decline of communist regimes is a key point of evidence, with the claim that the centralization of economies denies individuals and firms the creative flexibility to meet consumer demands, while also denying them the incentives to be as efficient as possible.
There is a problem, however. Many Americans view this conflict with purist notions. Some view successful economies as only possible in the context of a gutted, crippled state, one that cannot interfere with business, while others view private ownership as inherently extractive and short-sighted. Yet, what if there were already a system that addressed both of these sides’ concerns? Furthermore, what if a German military officer developed that system 160 years ago?
The Prussian Hybrid
The conflict between the critics of the state and the opponents of markets is one about where economic decisions should fall: at the macro-level or the micro-level. The macro-level represents collective interests that are determined by the government, while the micro-level consists of individuals who act in self-interest. This is a fundamental conflict that has played out in many environments. We see it in theoretical physics, where the theory of relativity explains the vast universe, while quantum mechanics explains the sub-atomic universe. We also see it in warfare, often phrased in terms such as strategy and tactics. While these terms are often treated as synonyms, the difference is in the same dichotomy: strategy represents thinking at the macro-level, while tactics represents thinking at the micro-level.
Military leaders throughout history have struggled with harmonizing tactical and strategic needs. Sometimes, commanders who win battles are not able to win wars. This was famously seen in Second Punic War for the Carthaginian general Hannibal, who frequently delivered tactical feats that shook the Roman Republic but never quite toppled it. Even Cannae, his greatest victory and considered the role model for all subsequent battles in every era of warfare, fell short of Carthage winning; they ultimately lost. While some commanders have succeeded in meeting both strategic and tactical needs, it was not until the Nineteenth Century that a coherent system emerged that enabled this on a consistent basis. It was developed by a man named Helmuth von Moltke.
Moltke was an officer in the Prussian Army during the middle of the Nineteenth Century. He led Prussian forces in three consecutive wars: against Denmark, Austria, and then France. We know he must have done something right, because his master, the Prussian King, emerged from those conflicts as the German Emperor, the Kaiser. What exactly did Moltke do right, and what use could it possibly offer for economic systems?
Thus, Moltke made his peace with uncertainty, developed a command system around it, and, in so doing, gave birth to operational warfare.
It is worth noting the context in which Moltke developed his ideas. After Napoleon’s final defeat in 1815, Europe entered an unusual period of relative peace, with no major conflicts until the ones mentioned in the previous paragraph. During this lull, Prussians had begun reflecting on their embarrassing defeats by the French. At the same time, the Industrial Revolution was in full steam, and the population growth and new technology that came with it meant that the next major war would be very different and much larger.
Wanting to prepare Prussia against future embarrassments, Moltke took a hard look at the changing world and realized that wars would be fought on scales that had never been seen before. With so many soldiers, so many units, so much land to cover, and so many new tools for combat and logistics, he realized something that many commanders would be too proud to admit: War was too complex to plan individually. Moreover, larger wars were more susceptible to unforeseen changes, so any plan that was too specific would fall apart in days. Thus, Moltke made his peace with uncertainty, developed a command system around it, and in so doing, he gave birth to operational warfare.
His system involved the higher levels of military leadership setting strategic goals that subordinates had to pursue, but deliberate holes were left in the plans to allow lower officers the ability to use their problem-solving in the midst of execution. The strategic goals would just be a guide to their thinking, not mindless orders. When unexpected changes occurred in a battle or a campaign, Prussian officers would still understand what the goal of the combat was and set their plan accordingly. This would enable several commanders of several units, all fighting in a fluid and dynamic situation, to adapt while still working as a team and thus allowing the high command to wage war with economies of scale at their side.
This system is usually described in German as Auftragstaktik. Being a hybrid system, it completed the bridge between strategy and tactics, allowing Prussian forces to benefit from decisions at both the macro-level and the micro-level. The incontrovertible success of this system led to its adoption over the years by most militaries, to include America’s today. While we have often not realized it, this is also the basis for the economic successes of social democratic nations, as we will now discuss.
Social democracies have tended to apply a similar system to their economies, being the centrists of economic theory. While Auftragstaktik is the basis for operational warfare, social democracy could be described as the basis for operational trade. By setting economic policy in a framework that is operational in nature, social democrats have found a way to utilize the benefits of decisions at both the macro-level and the micro-level.
Through operational trade, social democracies can derive decisions at both the macro-level and the micro-level and enjoy the specific benefits of each.
Within a market, just as in a war, there is uncertainty. We never know what new technology will emerge at what time and how effective it will be. We never know what new, cultural fads will emerge that will be in demand. We rely on consumers and suppliers to have the flexibility and freedom to make their own decisions in the ebb and flow of a market, so that economic activity can always be oriented toward growth.
At the same time, it is important that individual decisions in a market do not interfere with the activities of others. Basic tenets, such as enforcing property rights and contracts, are thus necessitated. As the Prussians found of modern wars, however, markets today span immense populations and involve inventions whose impacts can reach across continents. This makes it difficult for individual actors to notice when their self-interest might actually undermine growth at large. Simultaneously, governments have too much going on to be able to dictate all economic activity. Therefore, a government that sets regulations and standards for private actors in a market to follow, while ultimately not directing production itself, allows individuals to make creative business decisions that support one another in pursuit of collective good: a growing economy.
Not poisoning the river allows a factory to have living customers, and banks that do not issue predatory loans will not cause home owners to hit a bubble. By that same token, a universal basic income would collectively assist consumption but would allow consumers as individuals to choose products. With social democracy, costs are decreasingly imposed on the collective in the form of negative externalities, and this assists economic growth. Better yet, this does not occur so stringently that individuals are without options or incentives, which further assists growth. Through operational trade, social democracies can derive decisions at both the macro-level and the micro-level and enjoy the specific benefits of each. (For a discussion on the metrics of these benefits, consider reading Here’s How We’re Going To Pay for It.)
The military context of the Prussian system of Auftragstaktik is not relevant, but it does provide insights. All of life is mathematical systems. By abstracting the proper mechanisms, we can implement a similar system, with similar results, in our economic development. Rivalry between the market and the state is not inevitable. Americans on the left and the right thus have a system right before them that addresses their concerns about private excesses and public constraints. The only thing that needs to change is their willingness to give both sides their due.
Fans of the state, like Moltke, need to make their peace with the uncertainty that occurs in trade. Fans of markets, meanwhile, need to accept the benefits of scale that come from collectivist input. By doing this, Americans can once again begin to enjoy the kind of prosperity that accompanied the policies of the New Deal.