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On the Solutions of Liberal Economists

by Alfons Frese and Heiner Flassbeck Friday, Aug. 31, 2012 at 11:19 AM

The crisis has shaken economics to its foundations. The neoliberal mainstream has lost its support; economists alternate between self-doubt and arrogance. Once they believed in the rationality of economic actors and markets and the notion that financial management exists to serve the real economy.



By Alfons Frese

[This article published 7/29/2012 in: Tagesspiegel is translated from the German on the Internet.]

The crisis has shaken economics to its foundations. The neoliberal mainstream has lost its support; economists alternate between self-doubt and arrogance. The left hopes in the German Institute for Economic Research (Deutsche Institute fur Wirtschaftsforschung – DIW). For ambitious economists, theory is often a burden. One gains reputation through publications in international journals.

The sharpest critics were once proponents. Thomas Straubhaar is director of the Hamburg World Economic Institute and one of the few self-critical economists in Germany. He no longer trusts the pieces of wisdom that once guided him, Straubhaar says under the pressure of the crisis. These wise sayings include belief in the rationality of economic subjects and markets and the notion that financial management exists to serve the real economy. “The respect of economics has drastically plummeted through the crisis,” Straubhaar admits. The widespread self-assurance of many colleagues perplexes him.

“It gets on my nerves when well-known economics professors simply recommend allowing banks and countries to go bankrupt because that’s what our textbooks teach. Such people don’t feel any responsibility,” he said in an interview with the Financial Times of Germany (FTD).

“We don’t have any Stiglitz or any Krugman,” Dierk Hirschel laments referring to the US. The former chief economist of the DGB (German Union Alliance) who now reflects about economics for Verdi misses unconventional thinkers and economists in the Keynesian tradition. “The economic guild is oriented in a more monolithic way than anywhere else. Neoliberal economic professors hold at least 98 percent of the professorships.” For the leftist Hirschel, it is “absurd” when the six German economic research institutes “only differ in nuances.” As a result, there is no competition of ideas. The German discipline is a “dilapidated and autistic guild,” the Verdi economist grumbles.

Perhaps the bitterness of an economist resonates here, an economist who felt like a “dissident” because of the neoliberal mainstream. Others share Hirschel’s criticism. Like Straubhaar, Dennis Snower, head of the Kiel Institute for World Economics, doubts the foundations on which economic decision-makers moved in the past decades. The financial crisis proved that people by no means always act rationally. “Many professors see their lifework threatened.” These professors now have the choice: sit back and watch as their own reputation fades or resist the changes as many do.

It will be a long time until the professors clear the way for new modern explanatory models, Snower says and quotes the economic theoretician Thomas Kuhn: “The discipline makes progress because scholars die out.”


The economic wise man Peter Bofinger admits before the crisis he “completely underrated” what a dangerous role the banks could play for the real economy. In the models of economic textbooks, the banks were described as mediators that collect money and pass it on to businesses and consumers. Today Bofinger calls these “Mickey Mouse models.” Like Snower, Bofinger sees the professorate as part of the problem. The professorate often had little interest in adjusting their system to the changed reality. They maintained their living standards, so to speak.

The market is good; the state is bad. Privatization and liberalization are good; wages for the most part are too high. Many cling to these neoliberal dogmas of the past 20 years. For the Hamburg Straubhaar, it is “undisputed that deregulation initiated in the Reagan era has gone too far.” Even the most trusting market disciple must recognize “what inefficiencies were produced through market failure” and what costs arose by dismantling regulations.

Straubhaar, Bofinger and Snower see economists shrivel in their future significance to the level where sociologists, anthropologists and psychologists find themselves. “The crisis also means the end of economic imperialism, this faith that we are above the other sciences,” Straubhaar says. Many economists have not noticed this… “We have the hope that DIW will join the old times,” says Verdi-economist Hirschel. The old times had more Keynes, more tax- and distribution justice, more links to the left and fewer to the right. That should be central in economics.


[The following brief descriptions of three recent books by Heiner Flassbeck “Ten Myths of the Crisis,” “The Market Economy of the 21st Century” and “Failed” are translated from the German on the Internet. Heiner Flassbeck is an author and economist with the United Nations in Geneva.]

“Ten Myths of the Crisis” – January 2012

The turbulences around banks, state debts and the Euro confuse politicians, journalists and citizens. Hysteria seems to be a raw material of the casino economy. Many myths are circulating. Will Germany be Europe’s paymaster? Are we really living beyond our means? Or does the crisis have very different and more complex causes? In my new book, I make a different and provocative analysis of the economic disaster that now keeps Europe on its toes.

“The Market Economy of the 21st Century” – September 2010

Without ideas and without political-economic competence, the governments of industrial countries drive the stream of the world economy through the financial markets. They want growth and protection of the atmosphere. They want to stimulate the economy and consolidate public budgets. They want free trade but don’t understand it. They want to regulate the financial markets but don’t know how.

Politics fails. The industrial countries do not know any more how to promote the free development of people and ensure progress ecologically and socially so sustainable economics is possible. Heiner Flassbeck shows that the sharing of all citizens in communally gained progress is necessary for a successful economy. He explains why economists, politicians and the media fall and shows how a new economic miracle is possible if the four great areas of finance, trade and social and ecological integration are rightly connected. He fosters hope while urging a fundamental political change that radically reforms the party- and lobby-democracy.

“Failed” – 2009

Why politics capitulates to the economy

In the middle of 2009, the book “Failed” (“Gescheitert”) was published where I demonstrated with the help of the most important political-economic events of the last 30 years why and how economic policy failed so miserably in Germany. German unification was not the only failure. The European integration process and the globalization of the financial markets also broke down. Reform of the labor market and pension schemes failed. In the greatest economic crisis since the Great Depression at the start of the last century, it is time to ask why German economic policy failed to deal properly with the economic challenges.


This was never as clear as in the international financial crisis. Politics fails before the economy. This has a method in Germany. Instead of offering convincing concepts, all the parties only serve the logic of businesses. Politicians muddle in details instead of developing competing solutions for the great problems. Heiner Flassbeck shows how and why politics long capitulated before the economy and urges a radical change.

The answers of all the parties in Germany to the pressing political-economic questions are pitiful. Politicians offer no alternative solutions in the central questions of the economy and its control. Instead the political actors declare business logic as the state doctrine. As a result, politics and society are dominated by individual interests. This failure of all politics before the economy could endanger our democracy.

Heiner Flassbeck, renowned economist at the United Nations in Geneva (UNCTAD) and ex-state secretary in the German finance ministry shows how politics must emancipate itself from pure business thinking. The parties must compete with economic concepts to make our society future-friendly.


Heiner Flassbeck, Institute for New Economic Thinking, with video content

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