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by Conrad Schuhler and Rudolf Hickel
Tuesday, Dec. 16, 2014 at 12:13 PM
The homo oeconomicus cannot be our hope and is not desirable or future-friendly. The economic benefits to the capitalist entrepreneur are in contradiction to nature and to the person..We face completely oversized financial markets that have uncoupled from the real economy creating value.
ECONOMICS IS MAINLY ONESIDED AND REACTIONARY
By Conrad Schuhler
[This article published on November 5, 2014 is translated from the German on the Internet, www.isw-muenchen.de.]
1. THE FAILURE AND CULPABILITY OF ECONOMICS
Doubts about the explanatory power of economics have arisen since the 2007/2008 world financial crisis. That is really the understatement of the year. Economics (the mainstream around neoliberalism/ neoclassicism) cannot explain the crisis. Its advice and prescriptions were and are an important cause for the genesis and persistence of the crisis.
International capitalism changed its course from the beginning of the 1970s. Until then it based its development on so-called Fordism since the end of the Second World War. Mass production increased on the foundation of higher domestic demand. The change of policy consisted in producing for the world market and no longer for the domestic market. Wages and salaries, previously the pillars of domestic demand, were now mainly and often exclusively considered cost-factors minimized for reasons of global competition. The era of neoliberalism began that aggravated the crisis with its reduction of purchasing power demand and led to a shocking financial crisis. Credits on one side and heavy debts on the other side replaced income generated in production more and more. The bubble formation over assets began and its eventual bursting starting with the mortgage credits in the US.
The neoliberal economic theory from Vienna to Chicago could not explain this crisis. This theory was jointly responsible for this crisis. Significantly the international spokespersons of neoliberal theory, Milton Friedman and Friedrich August von Hayek, were awarded Nobel Prizes for economics in the 1970s. They were the driving forces of the Mont-Pelerin Society that successfully urged market fundamentalism for more than 60 years as a model for politics and the economy… Eugene Fama received the 2013 prize for his “efficient market hypothesis” according to which the rational actors on the financial markets always achieve market efficiency and balanced prices. That is why a regulation of the financial sector should be absolutely rejected. For that, the Nobel Gold for economics was awarded despite the continuing financial-, debt- and investment crises.
This failure of economic theory is manifest on the national German plane and no only on the global plane. In November 2008, four weeks after the collapse of the Lehman Brothers investment bank that explosively triggered the financial crisis, the “council of the five wise men” that advises the German government on economic questions predicted a slight economic dent for the coming year. In truth, the 2009 production fell 5%. The dominant economic theory is blind for the crisis and therefore has no solutions.
2. WHY ECONOMICS IS MAINLY ONESIDED AND REACTIONARY
In the study of the history of thought and the classical authors of the economy, critical students demand the whole range of economic thinking and not predominantly statistics and econometrics. As a first reaction, their identification of this deficiency seems surprising. Normally sciences enjoy spreading their intellectual origin and development. Subjects like history of law, philosophy of law and sociology of law officially belong to the canon of “jurisprudence.” The thoughts of Aristotle, Galileo and Newton are present along with Einstein and Weizsaecker in physics where the teamwork of experimental methods and theoretical models are valued far more than in statistical-econometric economic theory. Why is this different in economics? Why is economics so blind and dumb regarding its own history of ideas?
Economics emphasizes the origin and distribution of social wealth. As the textbooks have said for generations, economics is based on the assumption of scarcity of resources to satisfy the needs of “economic subjects.” The legitimation of those who profit most from this economic system basically dictates the hard work and pay of the production factors and political power depends on the results and recommendations of this discipline. Economics has an ideological rule-securing or rule-challenging function. Therefore it acts more resolutely than anti-ideologically and appears as a “neutral” authority of scientific reason by withdrawing to statistics and econometrics.
However the exact opposite is true. The problem is not in the application of mathematical procedures but in not questioning the axiomatic of these procedures, their presuppositions and basic assumptions. Three points illustrate this.
2.1 THE FALSE DOGMA OF ECONOMIC BALANCE
In economics, the principle of economic balance as expressed in the theorem of Jean Baptista Say is in effect. Incomes arising in production cover the supply. In the modern macro-economy, the aggregate supply is said to correspond to the aggregate demand so market clearing is attained. No crises would occur if the market were free from interventions. The system by itself tends to balance.
This is logically impossible. That the arising incomes do not need to refer to either the place or time of the produced supply is ignored. Income can be saved and not spent so a gap opens up immediately between supply and demand. This was a central point of the criticism of Keynes in the neoclassical balance theory.
Spending need not occur where the incomes arose. The purchasing power demand is directed at goods… while the losers are eliminated from the market. IN a ridiculous way, Say’s theorem and the underlying assumptions of balance theories of all kinds – from Walras and Pareto to Marshall – deny the possibility of a crisis originating from the system. Therefore they only repeat the meaningless phrase exogenous factors responsible for the crisis to explain the manifestly constant crisis.
2.2 THE FALSE AND INHUMANE PICTURE OF HOMO OECONOMICUS
The model of the person in economics is the so-called homo oeconomicus who perfectly surveys the market, clearly foresees the future development and then rationally decides upon an action, optimally adjusted to all relevant data, that creates the greatest economic advantages for him. This homo oeconomicus is also the basic figure of all marginal theories like the marginal benefit- and marginal cost schools. However the marginal figure is a chimera. Neither this know-it-all or this predict-it-all person exists nor a person who makes purely rational economic decisions. Think only of the influence of advertising focused on the affective approval of the recommended product, the opposite of rational-economic enlightenment about the range of items for sale. The motivation strategy is used for insurances, banks, textiles, medicines and building materials; rational considerations are eliminated.
Thus the homo oeconomicus cannot be our hope and is not desirable or future-friendly. For example, there is an increasingly sharp conflict today between protection of the atmosphere and nature conservation on one side and unscrupulous profit-mongering on the other side. The more business can shift ecological costs to the general public – the so-called externalization of ecological costs – the better the balance sheet looks. The economic benefits for the capitalist entrepreneur are in sheer contradiction to nature and to the person. Therefore we do not need a homo oeconomicus but an economic actor for whom the human factor and not economic advantage is most important in his economic actions.
2.3 MONOPOLISTIC COMPETITION DOMINATES MARKET ECONOMY TODAY
In many ways, economics starts from atomistic competition to which market participants have to submit. In truth, monopolistic competition has long dominated. Enforcing monopoly power strategically on the market is central, not adjusting to the free price formation on the market. This conversion of monopoly power also takes place on the political plane. If a US-EU free trade agreement should be accepted today with the TTIP with which corporations gain the right to sue for compensation against profit-reducing laws, this would demonstrate the primacy of the economy over politics and democracy.
3. WHICH THEORETICAL POSITIONS MUST ECONOMICS RE-APPROPRIATE TODAY?
3.1 THE MARXIST POSITION
Marx initiated a revolution of economic theory with a precise analysis of the crises of the economy for the first time. Marx applied the labor value theory starting from Adam Smith and David Ricardo to the commodity labor itself.
Marx stated: “The value of the commodity labor like every other commodity is determined by the production time needed for the reproduction of this specific article.” The so-determined value of labor can be surpassed by the goods produced by labor. Only a part of the produced goods is necessary for the reproduction of labor. The excess part is the surplus… The capitalist on one hand wants to maximize the surplus value and on the other hand minimize wages. This enormous divergence of consumer power on one side and productive power on the other side represents the endogenous crisis in capitalism. According to Marx, the endogenous crisis can only be remedied by socializing control over capital and over the hard work and compensation of production factors.
3.2 THE POSITION OF KEYNES
For Keynes, the level of production and employment is determined by the effective demand for goods. The consumption of private households is its greater factor. According to Keynes’ consumption function, the savings rate increases with the increase of income. The marginal consumption inclination decreases. Therefore more equality in income distribution has a positive effect on consumption, investment and growth. A lower general wage level would not have a positive employment effect but would result in a demand shortfall and job losses. Thus Keynes pleads for greater equality in income distribution and for a “comprehensive social control of investments.”
3.3 THEORIES ON FINANCE-MARKET DRIVEN CAPITALISM, PAUL KRUGMAN AND RUDOLF HICKEL
We face completely oversized financial markets today that have uncoupled from the real economy creating value. In 2010 the volume of financial transactions amounted to 75-times world production. When financial businesses offer profits of 10 to 30% while the economy only grows 1 to 3% per year, an ever larger part of wealth is sucked up in the largely unproductive financial sector. This economy liquidates itself. Therefore Hickel and others urge the rigorous regulation of the financial sector and many support the conversion in to public, democratically-managed property. Only a democratic financial management can ensure more democratic control of the economy.
FINANCE-MARKET CAPITALISM: ON THE GAMING TABLES OF THE INTERNATIONAL CASINO
Who are the actors and how can states tame the potential crises?
By Rudolf Hickel
[This article first appeared in: Frankfurter Rundschau, September 30, 2014 and is translated from the German on the Internet.]
An epochal change of globalized capitalist development has become clear at least since the financial market crisis. The development dynamic and the relative strengths have fundamentally shifted. Previously profit-oriented value-creation dominated with the basic conflict between labor and capital. The old well-known conflicts around distribution of income, organization of working conditions and crises with unemployment erupting through over-accumulation marked this capitalist epoch. Today this development is displaced by the dominance of the financial markets. The new label is finance-market-driven capitalism or finance capitalism.
What are the characteristics of this finance capitalism? As a first attempt, activities on the financial markets uncoupled from the business of value-creation in real production since the beginning of the 1980s. The shift of the hierarchy of markets toward a powerful dominance of the actors on the financial markets is hidden. Politics also comes under pressure through the economic power of the financial market system. Before the epoch change, the serving function of the big banks for the whole economy shriveled through the madness of realizing fast profits by risky speculative transactions. No affluence-multiplying idyllic competitive economy prevails on these financial markets. Rather a financial oligarchy powerfully dominates in the climate of monopolistic competition.
Who are the mega-actors? Big banks dominate with their speculative investment banking. No longer serving customers, they rely on their own business machinations to sell off their self-created financial market products at maximum profits. Many forms of worldwide investment funds are counted in the new financial oligarchy. The hedge funds collect the financial assets of the rich as with a vacuum cleaner with the promise of high yields. Moreover real productive businesses that are sold, plundered and resold with the goal of fast profits also come into the view of these “grasshoppers.”
A glance at the products traded on the financial markets reveals the fraud that increases the crisis-susceptibility of the entire economy. These involve speculative transactions that have nothing to do with the financing demands of the real economy. For example, speculation with exchange rates does not help in protecting exporting businesses. Rather massive speculative transactions are carried out with the expectation of marginally changed exchange rates. Derivatives are at the center of the new business model. They are high risk artificial products like speculations on a stock index or change of the structure between short-term and long-term interest rates. The risks of mortgage credits in structured securities disguised through re-packaging are among the inventions of the financial chemists. These packaged products were purchased by German banks without regard to the risks through worthless mortgages. Rating agencies that had to make the risks transparent gave the best ratings for the risky securities in the course of the best payment by their patrons. Thus the markets were deliberately wrongly informed. The huge trade with insurances on credits was part of that. These greatly praised financial market innovations that had to be written off at the end for lack of economic value proved to be junk or rubbish.
In his “General Theory of Employment, Interest and Money” (1936), John Maynard Keynes uttered the warning suppressed by the financial oligarchs and official politics: “Speculators may not inflict any damage like soap bubbles on a constant steam of entrepreneurship. However the situation becomes serious when enterprises become soap bubbles on a whirlpool of speculation. The work will probably be done badly when the capital development of a country becomes the by-product of the activities of a gambling casino.” Finance-market-driven capitalism is marked by instability, volatility and strong susceptibility to crisis. The first far-reaching financial market crisis that broke out in 2007 was the bitter proof. As a result of the burst speculative bubbles, the banks were either driven to fall on account of the enormous losses through write-offs or had to be bailed out through a “bad bank” with gigantic costs for the state. Savers forced to private capital provisions by the reduction of legal minimum pension security had to accept high losses. Finally, the whole world economy crashed at the end of 2008 and jobs were destroyed. Up to today the economy has not recovered from the finance-market-driven crash.
The shock after the finance-market-driven fall seemed great. The vows to fight the causes of this financial market crisis at the subsequent G20 summits and in German politics sounded revolutionary. Nevertheless the many corrections were not enough to tame the system crisis. The German example shows the measures to split up the banks, insure risks, strengthen liability and counter the turbo stock exchange trade remain far below an exodus from the crisis dynamic. The bank lobby is doing successful lobby work worldwide and is regaining uncontrolled power again. Those who are against even the smallest regulations have moved into the sector of “shadow banks.” These are above all investment funds that operate businesses similar to banks without any controlled regulation. A new potential crisis has arisen through bundling with the licensed bank sector. Instead of rigorously closing the “shadow banks,” the EU Commission praises their advantages for worldwide financing transactions. This bank lobbyism is supported by the dominant economics. Today the emphasis is again on efficiency, stability and the unfettered financial markets creating prosperity.
A radical, democratically-founded politics is needed to paralyze the centers of the destructive financial sector. One of the most important tasks is the creation of a strict framework for the financial markets whose assurance of stability is a public asset. The keywords of this financial market system serving the economy and society are: shattering speculative investment banking, prohibiting dangerous financial market products, abolishing trade outside the stock exchanges, renouncing crisis-intensifying turbo-trade on the money markets and prohibiting shadow banks.
Nevertheless the regulation of the financial markets alone is not enough. The question is raised who risks his capital on the gaming tables of international casino capitalism. The wealth concentrated in a few hands and the businesses that do not invest their profits in growth and jobs are the customers for risky speculative products. At the end, it is the wealth concentration that enables hedge funds to act with businesses or parts of businesses without regard to the production sites and employees. Whoever wants to remedy excesses on the financial markets and attacks on the productive economy must be engaged for reducing wealth concentration toward just distribution. The financial markets can only be stabilized with a just distribution of income and assets. To that end, the clear raising of the top income tax rate, a permanent property tax and a temporally limited wealth tax will help reduce the huge state debt mountain.
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