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Dominant Economy Pretends Its Breakdown Was Unforeseeable

by Albrecht Mueller Friday, Feb. 10, 2012 at 8:39 AM

The consensus of the past two decades on how the macro-economy functions is shattered. The breakdown of the dominant economy is a consequence of the financial crisis, the "great shock."


By Albrecht Mueller

[This article published January 24, 2012 is translated from the German on the Internet,]

Since the 1929 world economic crisis, we know continuing to save in a macro-economic crisis makes no sense. The crisis is intensified with this pro-cyclical policy. A common monetary zone can only thrive when balance of payments surpluses and deficits are equalized in the medium term. Therefore it was clear from the beginning that the common Euro currency could only be bailed out if the piece-work costs and competitiveness in the Euro-zone are balanced and do not drift apart. However the dominant economy and the dominant economic policy in Germany reject these insights. The predominant misery and the great danger for the Euro-zone is a product of ignorance. There must be passion for alternatives.


Over a decade ago, Heiner Flassbeck urged using knowledge about economic connections in economic and financial policy. Peter Bofinger and Gustav Horn think similarly.

On, you could read from the beginning, the end of 2003, what is right and what is wrong. In my books “The Reform Lie” (Die Reformluege) of 2004 and “Power Mania” (Machtwahn) from March 2006, the problem of balance of payments in a common currency zone is discussed in detail. Heiner Flassbeck has emphasized that Angela Merkel’s policy can damage the Euro project and the project of a common Europe.


“Rethinking the Economy” was the title of the conference that began January 23, 2012 in Frankfurt. The consensus of the past two decades on how the macro-economy functions is shattered. A fundamental re-orientation of the macro-economy will be necessary, British economist Diane Coyle said. The time has come to research the imperfection of markets, Harvard Professor and ex-IMF economist Rogoff declared. The breakdown of the dominant economy is a consequence of the financial crisis, the “great shock.”

The conference themes include:

• The dominant economy has not stood the test. For example, the capacities of the German economy are used less to capacity since 1993. Real wages have stagnated for 20 years. The competitiveness of the economies in the Euro-zone developed very differently. Germany has exported its unemployment. The neoliberal recommendations of the Washington Consensus (deregulation, privatization etc.) have led to waste and social dislocations in many countries.

• We have long known what should be done in macro-economics. I quote the Nobel prize winner Robert Solow who said on the question of perspectives for Germany in “Wirtschaftswoche,” September 9, 2004:

“The German economy has tottered for a decade. If I were a manager, I would not expand my production as long as the markets do not expand. No one perfectly commands macro-policy. But it could be better in Germany.”

This has continued for nearly eight years. Solow is still right today. The macro-economy does not need to be re-oriented to do what is necessary. One must apply what one knows and not be guided by prejudices, in particular by the prejudice that Keynes is out.

• We have long known the markets are imperfect. Stupidity, not general ignorance, led the ideologically and politically dominant economists to believe unemployment could be removed and jobs created by lowering wages. Since Pareto in the 1920s, we have known that the markets cannot solve ecological problems. For a long while, we witnessed the danger of destructive speculation when capital- and basic food markets are deregulated. No re-orientation of economics is needed for this. The stall in which opinion-leading economists romp must be cleaned out.

The danger exists that economists could continue business as usual with a little correction. Therefore the breakdown of the dominant powers of the past must be discussed.

This danger is manifest. No essential change is evident in the journalism that accompanied the wrong way of the dominant economy in the past… Warnings of the loss of Germany’s industrial competitiveness were made in 2003. That was a wrong diagnostic move without parallel and without effect.

All these people want to carry on business as usual or the status quo.


In the Financial Times on January 23, 2012, four economists from different European countries described what is necessary and urgent to avoid the “implosion” of the Euro-zone: reduction of the debts of vulnerable states, reduction of the balance of payments imbalances and distribution of the adjustment burdens on all shoulders. [Sharing the burdens is opposed to “you’re on your own economics” in the 2012 US presidential race. Translator’s note] They explained why the Brussels summit of December 9, 2011) violated all necessary criteria.

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