In a hundred years, people will ask for explanations concerning the political and economic failure in the early 21st century. The answer will probably be that the most important reason was the lack of political will to steer a global economy without regard to blind ideology; our inability to understand complex economic relationships and our unwillingness to implement them in non-ideological politics. Nobody will believe it.

Economic crises and their political consequences

Economists have created a world that they do not understand

by Prof Dr Heiner Flassbeck *

Since we humans have climbed down from the trees, we try to understand the world that surrounds us. As for the interpretation of nature, we have come a long way. We abandoned ancient myths and acquired a scientific perspective on things which gives priority to rationality and logic instead of faith and feelings.

Making consistent use of logic

Especially the consistent use of logic has proved to be superior when it comes to understanding the world and the optimal adaptation to its ever-changing circumstances. Only he who is equipped with the means of logic can filter out those statements about the world which are significant, i.e. consistent and empirically verifiable and distinguish them from any number of meaningless or contradictory ones.
The crucial step to knowledge is actually the recognition of relations that - with a certain stability – can be observed in reality and finally reveal why they exist. That the apple regularly falls to the ground from the tree, instead of flying to the sky, is only the first small step on the road to more sustainable conclusions. Only the following steps – the discovery of the power that moves the apple, our ability to prove the existence of this power, so that other explanations can be eliminated – create real knowledge.

Need there be no logic in economy?

This is different in the so-called science of economics. Here an attempt to attain knowledge is repeatedly overlaid successfully by faith, by ideology and by pure advocacy. The phenomenon that certain interest groups and companies interested in specific outcomes “keep” scientists – who do nothing else but question the results of serious research or even thwart them through their own “research” – also exists in other, more scientifically oriented areas such as chemistry. As in other areas, however, the “anticipatory obedience” is missing, which even independently operating economists show when the topic “market vs. state” is discussed. Unfortunately, most economists are not trained as social scientists but as technicians whose only job is to understand the seemingly perfect market and defend it. It is – and I described that several years ago (Flassbeck 2004) – more of a glass-bead-game than a science. And this game is solely and exclusively about the improvement of the game itself, not about knowledge in the sense of a better interpretation of the world (cf. Kay 2011 and the replica of Davidson). Since, however, only real knowledge can be translated into successful economic acting, the politicians would still remain without serious advice with respect to almost all issues even if they understood how much they needed it.

The phantom: The market would be able to do things better ...

Thus, we have given rise to an economic world that is built on a few misconceptions such as the fact that the market can do almost everything better. Actually this world would desperately require an incredibly complex regulation to function reasonably. However, there are no efforts to achieve such a comprehensive regulation, because the prevailing opinion in economics and politics firmly holds on to the idea that the market or markets were certainly going to fix it. The consequences are dramatic. The world economy staggers from crisis to crisis, and the suggestions that were given to the politicians by the “experts” are messy; they contradict each other in almost every facet. Financial markets have indeed taken over the command, but they do not really know for what to use it; except, of course, to secure their own sinecures. That makes the next crisis inevitable.

Politicians, led by lawyers, dabbling

Since the economists are such a many-voiced chorus, politicians, led by an army of lawyers, have begun to knit their own economic world. In this world, procedures govern the matter, and the microeconomic thinking, i.e. thinking in terms of a private household, triumphs over the inclusion of macroeconomic relations. Thus, the euro crisis has been re-interpreted as a crisis in which some “sinner states” have been guilty of something (gluttony and licentiousness), and this is why they must now be judged by honest, hard-working judge states. In this way, the debtor was declared the one to blame from the outset, whereby mentioning the relevant connections did not seem necessary.
Seen from a microeconomic point of view, there is in fact some evidence that the person who is deeply in debt and is not given any more credit by the market, has acted wrongly and should be sanctioned. In macroeconomic terms, however, there is no evidence at all. There is no simple causality, because what appears to be “too much debt” is in itself the result of a highly complex process, in which many of the individual players and some sectors are cooperating. In this process, it is all about finding a sector (including foreign governments), who is willing to go into debt in order to invest and thus, justify the planned savings by private households. For example, if a country like Germany conducts an aggressive policy to improve its competitiveness, other countries are forced into debt because many individual actors in these countries buy German products on credit. In the first half of 2011, the German trade surplus with the countries of the monetary union was still at 37 billion euro, which also means new loans of this amount. France’s deficit was at 18 billion, the Italian at 6 billion and even Greece’s debt amounted to 1.8 billion.

Even if each of these purchases on credit is completely trustworthy and economically justified, the result for the indebted country itself is catastrophic. It is exposed to a gradual erosion of its economic power whose fatal consequences, as with the geological erosion, too, will only show when the big rain comes in form of a financial crisis. In such a crisis, all existing investments will be re-evaluated by investors, and risky assets will then be largely avoided from the outset.

The debtor is condemned a priori, because he is the weaker one

The a-priori condemnation of debtors has a fatal effect on the coexistence of nations. Firstly, the debtors will in future be skeptical or hostile to all forms of international cooperation, because they rightly have the impression that a diktat from outside is imposed on them which is not justified by anything but which damages their sovereignty and forces them into neoliberal programmes (this occurs mostly via the infamous “conditionality” of the IMF, which consists mainly of “flexibility” and the opening of all markets). Thus, the political systems of the debtor countries are overstrained in an intolerable and unsustainable way in the long run. The reduction of public deficits, required in all cases, takes its toll on those parts of the population that are the least able to cope with these cuts. The wages of government employees are reduced, because one has direct access on them. Sectors that are not exposed to international competition will be liberalized (the electricity and energy sectors in Argentina, for example), industries that still belong to the state, will be privatized. All this is, however, not related to the causes of the crisis and is quite understandably perceived by the affected people as completely arbitrary. In this way, in the eighties and nineties, almost all populations of Latin America became staunch opponents of the International Monetary Fund (IMF). Systematically, people there elected leftist governments in order to escape this diktat.

All this is not new and has frequently been accounted for even by the IMF itself. It has, however, not prevented European politicians from pouncing on precisely these programmes with which the IMF has previously so often failed. How is it possible that the political leaders of an entire continent, actors, that have taken over responsibility year by year in the Fund, now make the same mistakes in their own region that – before the current crisis – led this organization to the brink of irrelevance? Well, something like that can only happen if either you consciously want to push even your own region into chaos in order to emerge as the final winner of the competition of nations – or else, if you do not really understand what has actually happened, and if you lack the ideological openness to understand it at all. I am inclined to accept the second explanation.

People despair of globalization, and democracy is highly at risk

With this intergovernmental failure we can immediately recognize that it is not merely the lobbyists’ direct pressure, which lets politics systematically and repeatedly take the wrong track. In these inter-state relations, there are hardly any direct financial benefits that would be promoted by the neo-liberal agenda of the creditors. Privatization is certainly one of the fields in which multinational companies have massive interests. The reduction of state services for the poor, however, up to the point at which the economy of the debtor country is forced to its knees, does indeed not benefit the companies. If finally – as in Latin America – leftist governments are elected in the wake of the excessive neoliberal agenda, lobbyists have achieved exactly the opposite of what they sought.

No, it is the lack of understanding for the global economy’s complex system which explains the permanent failure of politics even until far into the political left. We do not have the politicians who were able to pursue policies within the global economy, and we do not have the economists who would be able to create a design for global economy. That way the world economy is muddling itself through into the future, repeatedly and surprisingly struck by global and regional crises just like by heavy meteorites from outer space. Ordinary people fall by the wayside – and in the end democracy will fall by the wayside, as well.

Incredible wealth for the ones, a miserable livelihood for the others: that threatens democracy

If the global economy is only understood as a system that offers incredible wealth to a few and at best stagnation or a meager livelihood to the greater rest, democracy is in danger. In most people’s eyes democracy does not only mean they can vote every four years and in between they have to bear what the neoliberal agenda requests them to. At least since the 2008 financial crisis, many understood that the hope of an end to the euphoria in financial markets and the fact that the wealth of a few would also eventually be of their benefit was a great illusion. The second crisis, which is just beginning, will now take away their hope that the democratic state, at least, would be able to steer things in the right direction. But then what?

Making globalization more manageable via the nation state

Then the door is wide open for all kinds of pied pipers. Most importantly, however, those will be successful again who try to exploit the failure of globalization. What will come after the era of globalization? The natural response would be as it were to return to the nation state. That would not be bad if there were simple, tolerant ways to renationalize the globalized world a bit and this way to make it again politically more manageable. But such simple, permissive paths do not exist in a world in which many people left their homes and wagered their fate on the global economy. In the hope they would in the end not be denied recognition as equal citizens because of the economic success of all populations, they have emigrated from their home countries and thus threaten to become the real victims of the failure of international coordination.

If the writings on the wall in Europe and the USA are not mistaken, the new right-wing movements which mushroom everywhere will not stop to make the current form of globalization responsible for all the worries of the people. They will go one or several steps further and blame the “others”. Just as political Europe saves its day by finding the “guilty” and pillory them, they will make the “foreigners” and the foreign influences responsible, and many people will follow them, because they rightly deny why they should personally take the blame for the big failure. While the populist strategy of the right will not make the world economically more successful, because a nation state that applies an inappropriate theory, does not gain any more economic foothold than global economy. Whether democracy will survive, all this is an open question.

Democracy must have the power to control the process in the sense of the common weal

In a hundred years, people will ask for explanations concerning the political and economic failure in the early 21st century. The answer will probably be that the most important reason was the lacking political will to steer a global economy by joint forces. That it might have been our inability to understand complex economic relationships, and our unwillingness to implement them in non-ideological politics – nobody will believe it, especially in regard to the situation at the beginning of the last century. Historians will look for facts, not for lack of ideas. Yet the hope remains that there will be a new critical generation, who cannot be fobbed off with words, but will try to get to the bottom of things without compromise and endowed with reasoning skills that are part of human nature. Perhaps we have seen their beginnings in Tahrir Square in Cairo, in Zuccotti Park in New York and at the Plaza Italia in Santiago de Chile.

At this point I will not try to explain what concrete proposals follow from my own reflections. I have done so elsewhere in detail, without these suggestions having been comprehensively adopted. Today, it is more a question of stopping, removing the pressure of time and the hysteria and first of all explaining what is actually happening. It concerns first and foremost the correct diagnosis of the problems of the economic system in which we live. In a second step, we will have to realize that “economy” or “capitalism” or “the laissez-faire economics” may only be instruments used by society to meet its needs. It follows that even “capitalism” belongs to us, i.e. the society. And if we realize we cannot manage it and that in a particular way it does more harm than good, we can change it, of course, in the public interest – at least as long as democracy exists and the majority of people want it.

Not the solutions are scarce, but the readiness is scarce with too many and especially with the too powerful, to let go of their interests and their ancient knowledge and give a real chance to the discourse of an open debate in an open society.  

   

• Prof Dr Heiner Flassbeck is an economist. Since January 2003 he has been Chief of Macroeconomics and Development at the UNCTAD (United Nations Conference on Trade and Development) in Geneva.

Source: Final word from Heiner Flassbeck. Zehn Mythen aus der Krise (Ten myths out of the crisis). Suhrkamp Verlag, Berlin 2012