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Alternatives to Stagnation and Depression

by Joachim Bischoff Monday, Aug. 05, 2013 at 10:39 AM

Politics has fought the symptoms of the great crisis with banking- and economic packages while its systemic causes remain untouched… The hardest phase of the great crisis is ahead of us, not behind us. All sectors try to safeguard their position through spending cuts...


By Joachim Bischoff

[This article published on 7/22/2013 is translated abridged from the German on the Internet, http:////]

The 20 leading industrial- and threshold countries (G20) conjure economic growth in view of growing uncertainties in the world economy. At the G20 summit in September 2013 in St. Petersburg, there should be an action plan with a short-term emphasis on more growth and employment, the G20 financial ministers and central bankers declared.

The German economy is in an upwind, according to the German Bundesbank president Jens Weidmann. . Germany will post “an enormous profit in the spring” after a weak winter. This outlook for a slight strengthening of the German economy should certainly be taken with a grain of salt. In 2013 growth in Germany will move in a corridor from 0 to 1 percent.

The prospects for the Eurozone are even more modest. Germany remains the locomotive for the European economy. In 2013 the Eurozone will continue in recession and shrivel 0.6%. In 2014 it should rise 0.7 – thanks to Germany. Without Germany, the economy of the Eurozone would only grow 0.2%. “This is neither a recovery nor a recession,” reported Kai Carstensen from Ifo in Munich. Considered realistically, one could also say politically-conditioned smooth-talking is at work here.

The recession in the European monetary union is deeper and will last longer than predicted by many economists and most political decision-makers. There are undeniably signs pointing to a gradual improvement of the economic situation. At the earliest the economy of the Eurozone will not shrivel any more in the third quarter. For the whole year most economic experts assume a 0.7% decline of the economy in the Eurozone. This will be the second recession year in a row.

Economic weakness is a problem of southern Europe’s debt states first of all. In Greece, Portugal, Cyprus and Ireland, the downward dynamic is unbroken thanks to the ridiculous austerity policy. However the weakening of domestic demand has expanded to the core of Europe, namely to France and the Netherlands. In countries like Italy, the political contradictions increased in the last months. Hardly anything of a necessary growth policy can be seen in France, Italy or the Netherlands.

The European Central Bank holds fast to its policy unlike the US where brightened economic data moves the Federal Reserve to suggest throttling down the expansive monetary policy.

Commercial banks that deposit their surplus liquidity over night with the European Central Bank do not receive any interests today. With this measure, the financial institutes should be moved to award more credits to corporations. However commercial banks withholding credits from businesses is not only a problem in the periphery-states of the Eurozone. A withholding of investments for reasons of cost reduction occurs on the side of businesses. Infrastructure investments of the public authority declined in the last years.

The Netherlands, model student of austerity ideologues Merkel/Schauble for years, is caught by the downward dynamic. With a 0.8% decline of economic output, the country will come out the weakest this year within core Europe. The restraint of corporations in wages and investments is to blame here – as in the Euro periphery states. This led to a decline of domestic demand.

This trend is intensified by a rise in the unemployment rate, higher income taxes, falling home prices and increased indebtedness of private households. The conclusion is that the austerity policy pushed by Germany in the Eurozone intensifies the crisis constellation and remains focused short of breath on merely gaining time. More crisis measures will be adopted after the September 2013 Bundestag elections.

The Austrian economic researcher Stephan Schulmeister massively criticizes the austerity policy in the Eurozone and the one-sided interpretation of development. “We are skidding into a depression” (“Ten Steps into Depression” in Frankfurter Rundschau 7/18/2013). It is “incomprehensible” that the majority of German economists repeat what was done under the Heinrich Bruening government in the inter-war period. All chances of reviving the economy in Germany were stifled at that time through the severe austerity course.

A “catastrophic development” is manifest in southern European countries. No upswing is possible in these states through the austerity policy. Gradually the shriveling process also seizes the northern countries. The financial crisis of 2008, the following Euro-crisis and its perception as a state debt crisis are part of a long-term process of worsening economic and social outcomes under financial capitalist framing conditions.

“Politics has fought the symptoms of the great crisis with banking- and economic packages while its systemic causes remain untouched… The hardest phase of the great crisis is ahead of us, not behind us. All sectors try to safeguard their position through spending cuts amid falling stock prices, high unemployment, empty state treasuries, EU-wide austerity policy and unstable exchange rates and raw material prices: businesspersons, households, foreign countries and the state. That is fuel for a crisis over several years.”

Breaking out of the downward dynamic and an age of austerity requires a political change to a “New Deal” as a concrete alternative concept. To promote the transition to real capitalist framing conditions, the “New Deal” gives greater priority to activities in the real economy than the activities of “financial chemistry.” Simultaneously the overall strategy concentrates on those tasks that were systematically ignored in the neoliberal age. Their mastery would enormously increase real value creation and permanently improve conditions for a “good life,” according to Schulmeister.

In the middle of a grave crisis, an efficient macro-economic fiscal policy must redistribute income from the household sector to the state so private savings decline but not consumption. At the same time short-term speculative activities should be limited to the financial markets and long-term real economic activities of businesses promoted. The measures of the “New Deal” can be financed by contributions of high and the highest incomes and assets and by a higher taxation on financial transactions and financial assets.

The core problem of breaking out of a stubborn depression in the EU is inadequate social demand. Businesses do not invest enough in new plants or equipment and therefore create little wage income and jobs. The alternative to consolidation policy can be viewed as a political decision, setting investments over social consumption and getting the economy going again.

This has absolutely nothing to do with a continuation of debt policy. Interventions in distribution conditions are necessary, selective tax increases in times of economic distress. Europe needs structural reforms but not as urged by defenders of a consolidation policy. The alternative to consolidation includes financing public goods and services not adequately funded by the private capitalist sector through increased taxes on higher incomes and on profits on property and amassed mammoth assets: improved social security, education, health care and public infrastructure.

Thus the alternatives for further development are clearly outlined. One cannot assume they will play a great role in Germany with the present hierarchy of power.


By PROKLA editors

[This editorial published in June 2013 is translated from the German on the Internet.]

The financial crisis of 2008/2009 and the following economic crisis have shattered dominant economic theory and the economy. Extensive deregulated financial markets, the peak of economic efficiency according to neoclassical doctrine plunged into a deep crisis in the shortest time. A far-reaching collapse of the international financial system could only be prevented through enormous state bonds and financial injections for big banks – in complete contradiction to the market radical dogmas. The analytical helplessness of neoclassicism was so obvious in view of the crisis that many appearances of its advocates seemed embarrassing. In light of the vast economic programs with which the US, Germany and other states reacted to the financial market- and economic crisis, some observers saw a Renaissance of Keynesianism on the horizon. In some media, people are even reminded of the Marxist theory that crises are necessarily part of capitalism.

But all this has not damaged neoclassicism very much. Its reputation is somewhat tarnished. That the market creates the best of all possible worlds and that privatization of state enterprises automatically leads to more efficiency and greater prosperity cannot be defended in the public as easily as a few years ago. Heterodox, Keynesian and Marx-oriented voices have become louder. However the dominance of neoclassicism is institutionally unbroken in universities, research institutions and think tanks – both on the “supply” and on the “demand side.”

For years business administration has been in first place in the popularity of students at German universities. More young persons than ever prefer it to jurisprudence or medicine. It ranks far ahead of German studies, language and literature for young women. Managers and financial- and business advisors mostly decide for business administration because business administration promises prestigious vocations and relatively high incomes. The discipline is often denied an academic or scholarly character within the scientific community since neither theoretically nor empirically higher claims are pursued… “Customer-orientation,” “Entrepreneurship,” “corporate branding” and “guerilla-marketing” are often put on the market as panaceas or magic formulas without facing the limits and internal contradictions of those concepts. The MBA course (Master of Business Administration), the royal discipline of manager education, is internally criticized by some because complex realities are reduced to numbers enabling quick decisions without understanding the economic and social context. They are accepted uncritically by most students and teachers.

The popularity of the discipline is a symptom of a social condition that is not limited to the organization of the economy but should be applied to culture, education and the social state… Moving the actors into the center and propagating markets as the most efficient form for allocating resources are characteristics of the economics discipline. The continued dominance of neoclassicism in the last decades was also connected with a re-prioritization of economic themes.

Micro-economy has strongly gained terrain over against the macro-economy that in its Keynesian variants always stood in suspicion of abandoning the way of pure faith in the market. The micro-economy has proven to be very capable of learning by largely bidding farewell to the ideal type of homo oeconomicus, this calculating machine on two legs incessantly estimating benefits or profits. That people have limited information, depend on others in their behavior and have cultural characteristics was a common inheritance in sociology since time immemorial. However new discoveries on the conduct of actors on the financial markets are offered in behavioral economics and in specializations like behavioral finance. The insight that these actions in no way act in an instrumental rational way but are “risk adverse” under circumstances, apply a “cognitive framing” for information and often display a “herd conduct” undoubtedly represents a reality-gain.

However those explanations that reduce connections of society to “irrational” psychic dispositions of its members prove half-hearted since they fade out the structural moments of capitalist economics – the pressure exerted on many of these actors to maximize short-term profits on deregulated markets under the whip of competition. These actors undoubtedly act under uncertainty but can assume – as far as they have a certain power position like banks – that they will successfully shift the risks of incorrect calculations to weaker market actors or the state. Different possibilities of actors and social power relations should be analyzed, not only systemic pressures of orientation in profit. These dimensions are diligently faded out when a textbook world is assumed…

Reproaching dominant economics as unrealistic or out of touch is hardly new. In the 1960s Hans Albert criticized a discipline that delighted in constructing elegant models where all actors acted rationally and the economy represented a system of adjustments and recurring states of balance that can be disturbed from the outside. He described this denial of reality as “model Platonism.” Such arguments were countered with the idea – we are at the beginning of a long promising research way – an idea repeated rightfully four decades and several crises later.

A criticism referring substantively to neoclassicism is stronger than the merely formal criticism of model Platonism. These are on principle two very different starting points. On one side a criticism of basic neoclassical categories can be oriented in the Marxist criticism of political economy that shows neoclassicism cannot fulfill its own claims. The usual abstractions out of touch with reality are not enough. One must go further and presuppose a “one-commodity-economy” (an economy in which only a single kind of capital goods is produced). With a “two-commodity-economy,” popular doctrines prove wrong like the wage rate and the extent of employment which are in an inverse relation. The employment level can only be raised when wages (or non-wage costs) fall…

The opposition of orthodox and heterodox recalls historical struggles of the Catholic Church against deviationists and heretics. Even if the stake is not common nowadays for excluding dissenters, the methods of the orthodox mainstream prove extremely effective in preventing pluralism and open debates by simply ignoring the heterodox, particularly by not citing them in scholarly journals or appointing them to professorships. An intensified effect of “methodical monism” appears in the popular journal Rankings in the framework of the dominant paradigm. Katharina Mader and Jana Schuldheiss emphasize that feminist economy has enormous variations and is not a closed system…

The dominance of neoclassicism is important for the real economic praxis of the state and businesses and not only for academic life… The triumphant procession of “quantitative risk measuring models” was promoted by the discipline, given Nobel Prizes and anchored institutionally by authorities.


Flassbeck, Heiner, “The Incredible Lightness of Financial Markets,” July 2013

Konicz, Thomasz. “Addicted to Liquidity Injections.” July 2013

Konicz, Thomasz, “The Crisis Explained,” December 23, 2011

Schulmeister, Stephan, “From Real Capitalism to Finance Capitalism, 11pp, May 22, 2013

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