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Driven to Consumption and Money out of Nothng

by M. Binswanger, A. Sahr, and B. Milanovic Monday, Dec. 10, 2018 at 12:52 PM

Growth originally created a material prosperity about which earlier generations could only dream. However, more economic growth does not lead to people becoming happier. We are prisoners of a system that forces us to permanent growth. Banks create credits.


Economy. In the past, growth meant prosperity or even happiness. Today, the system forces us to more and more consumption

By Mathias Binswanger

[This article published on Freitag 13/ 2018 is translated from the German on the Internet, www.freitag.de. Mathias Binswanger teaches economics at the University of St. Gallen, Switzerland. Following his 2015 book “Money out of Nothng,” he is working on a book on economic growth.]

Economic growth changes increasingly from a desirable goal to a pressure to which we are subject. The promise that a better future life would accompany growth has dissolved. Nevertheless, capitalist economics forces us to continue growing whether we want this or not.

Growth originally created a material prosperity in many countries about which earlier generations could only dream. The per capita gross domestic product corrected for inflation rose tenfold in countries like Germany, Switzerland and the US between 1870 and 1995.

The beginning of industrialization was a very unpleasant time for a large part of the population. A huge mixture of poorly paid workers had to work and live under miserable conditions. However, workers shared in the economic growth over time. Their wages began to rise and they became consumers with more and more purchasing power, an essential support of economic growth.

For a long time, economic growth made a positive contribution to the well-being of many people. Compared to the past, we can afford a luxurious way of life. On average, we live longer and healthier. However, whether growth contributes to the well-being of people is increasingly doubtful in Western Europe, North America and Japan. As many studies show, more economic growth does not lead anymore to people being happier.

Flourishing only on credit

This could be reason enough for questioning economic growth. Growth only makes sense economically as long as it makes a positive contribution to subjective well-being. Growth has effects on the environment that led to a criticism from an ecological perspective since the start of the 1970s.

Can economies function today in the long-term without growth? In the long run, the whole business sector can only realize profits when more and more capital flows in from the outside generating additional demand and additional revenue. Commercial banks awarding credits create additional money. This inflow occurs in modern economies. For real profits to come out of the additional created money, the newly generated money must be used partly for financing investments in real capital (machines, equipment etc.) Because of that, the production capacity of the economy increases and additional production of goods and services occurs.

However, the increase of demand and production comes to an end if no more money flows into the economy. Profits quickly become losses and the economy falls into a downward spiral. The pressure to growth was long unrecognized as long as the salvation-promise of a better future was joined with growth. But, a compulsive act increasingly came out of this salvation-promise in recent times. Material prosperity is no longer a credible promise of a better future for more and more people in rich countries.

Therefore, growth can hardly be justified today with this argument. Instead, we hear that a country like Germany with trifling or non-existing growth will be unattractive as an economic location and will lose innovative power or jobs. We must grow to remain economically successful even if we do not want more material prosperity. That is the growth pressure!

Thus, we are prisoners of a system that forces us to permanent growth. Efforts of businesses to always create new growth potentials drive this growth, not unsatisfied needs. This is not a problem in a purely technological sense. Technical progress makes possible a greater production of increasingly diverse goods and services. Digitalization will probably catapult work productivity. Consumers driven to growth will be the new drivers of growth.



Finances. Banks create credits at the touch of a button, wages stagnate, schools decay and Goldman Sachs is in the government. Who benefits from this?

By Aaron Sahr

[This article published in Freitag 13/ 2018 is translated from the German on the Internet, www.freitag.de.]

Financial systems should finance economically sensible and politically-approved projects. In the 1980s, many thought the best way was self-direction. The taxing state withdrew with policies of deregulation and globalization. Market mechanisms should replace official or government control. The accompanying hope for better general capital holdings was based on the misleading assumption that the financial system only transfers capital – from being unused to being used. But that is not true.

An important fact seldom discussed in expert circles is increasingly considered in the political public. Banks credit credits out of nothing. In awarding credits, banks do not borrow from other savers. The money approved through a credit application is not taken from anyone but is created by the bank pressing a button. Money-creation is an accounting process, nothing more. The central banks can hardly influence this. On principle, the money supply can be determined by banks; they decide how much money exists and what is financed.

This privilege was used intensively in the decades before the 2008 financial crisis. In 1970, only one percent of the money available today existed in OECD countries. This money was created especially for purchasing assets so their prices constantly rose. Through this kind of “asset inflation,” the financial market profits were constantly greater than the profits of the real economy. Therefore, real economic firms tried to gain more revenues through financial speculation. Less and less money existed for wages. At the same time, the politics of many countries increased the dependence of workers on this system by changing solidarity pension systems to capital funds and promoting private indebtedness. This arrangement benefits a few at the expense of the many. The nice-sounding reforms after the crisis hardly changed anything. They remain superficial. In addition, many central banks printed vast amounts of money to sell securities to the wealthy and stabilize the system =- for more than 60 billion euros monthly.

Private households of many European countries are now heavily indebted. When businesses invest, this is above all in their supplies. Unemployment is correspondingly high; the wages of the majority stagnate or fall. Demand lag behind all expectations. At the same time, the infrastructure decays. Public investments in digital communication, living space, transportation, energy, education and health care are lacking. In 2017, only the richest one percent celebrated a record wealth of 0 trillion.

Zero deficit: A zero idea

For a more socially consistent financial system, politics must either direct the creation of private capital – guiding privately created money where it is needed in higher wages – or politics must use its own government capacities for money creation. Other countries constantly do this while this is formally prohibited in the euro zone. In other countries, the central bank finances state spending through its own money creation. Proposals from France for the euro zone now point in this direction.

This is not a panacea or cure-all. The pressure increases when bricks of dilapidated classrooms fall on the heads of students, caregivers must care for dozens of patients simultaneously, families cannot find apartments any more and tables are overcrowded. Therefore, Olaf Scholz’ confession to the zero deficit is as dubious as the appointment of Goldman Sachs banker Jorg Kukies to be the permanent German financial secretary. Both confirm the autonomy of the financial system and do not signal any change of course. This state reserve has a high political and economic risk in view of crumbling social foundations.

- Aaron Sahr works at the Hamburg Institute for Social Research. In 2017, he published the book “Keystroke Capitalism. Inequality at the Push of a Button.”



Interview. As an economist, Branko Milanovic researches and teaches on inequality, migration and trade.

[This interview published in Freitag 13/ 2018 is translated from the German on the Internet, www.freitag.de.]

“Accepting globalization is wise”

In March 2018, the Friedrich Ebert foundation brought Branko Milanovic to Berlin to be honored with the Hans-Matthofer prize for economic journalism. The list of prize winners reads like a Who’s Who of progressive thinkers: Oliver Nachtwey for his book “The Descent Society,” Mariana Mazzucato for “The Capital of the State” (Freitag 17/ 2016) and Mark Blyth for “How Europe Saves to its Ruin.” Milanovic’s work is titled “The Unequal World: Migration and the One Percent and the Future of the Middle Class” Suhrkamp 2016).

Der Freitag: Mr. Milanovic, what do you think of the political goal of open borders for everyone?

Branko Milanovic: Conceptually and philosophically, that makes sense and is a good goal. But, politically, it cannot be a goal simply because it collides with the political preferences of the host societies. Political philosophy and the economy should grapple with this because we know completely open borders would raise the gross domestic product enormously. However, open borders for everyone is not politically possible. We must organize migration differently in a politically sustainable way.

What is your proposal?

First, we must realize that readiness to accept migrants in a country is connected with the quantity of rights given to these migrants. When someone comes to Germany and immediately claims social benefits and unlimited residence, the German public sometimes accepts fewer and sometimes more migrants. Acceptability becomes greater when the residence time is strictly regulated, the claim to social benefits excluded and other rights withheld that accompany the citizenship of a country.

But migrants coming to Germany are often legally worse-off than German citizens.

I do not know the situation in Germany exactly. People always come for a very specific job or for a calculated time. When the basis for one of the two does not exist anymore, they must leave the country. That may sound harsh. Still, this concept can only function with stringent enforcement.

Do the – poor – countries of origin lose trained workers through migration?

First, I regard that as an argument of those who simply do not want foreigners. But the problem is real. Who will monitor for clear water if a small poor country only trains a few skilled workers for sewage technology and a large part emigrate? On the other hand, we cannot go back to the Berlin Wall and forbid people from leaving their country. When states see that emigration is a problem, they steer against this and ensure that residents have higher wages or other incentives.

Walls are not a matter of the past. In her address, Andrea Nahles told a taxi driver who said Trump was right with his protectionism that at least does something for his people.

Obviously, the taxi driver is not completely wrong. There are people in the states under pressure because of cheap imports from China. But, I doubt Trump’s measures will function more than one, two or three years. I do not believe Trump as US president is powerful enough to change the rules of the World Trade Organization developed over 60 years. I can understand the taxi driver but nothing of this protectionism will be left in a few years.

In your book, you show the diverse consequences of globalization for inequality. Globally, inequality has declined. Many have an income in countries like China, India or Vietnam. In contrast, incomes have stagnated or fallen in the old industrial countries.

Yes, there are good studies that describe the connection how the penetration of the US market with Chinese imports has a long-term negative effect on wages in some sectors in the US. There are similar studies that focus on Europe.

Isn’t this development a striking manifestation of what we experience today – the abdication of the West and Asia’s ascent?

In a certain way, Asia’s ascent is detrimental for the relative economic power of the middle class in the West. Saying this is not popular. But this is not a zero-sum game in which the world economic output remains the same and a large share for one inevitably accompanies a smaller share for the others. The world economy has grown on account of China and India. There are reasons why everyone does not have more today.

What are the reasons?

Nation-state policy was unable to help social groups that were losers.

How this could change today in Germany is much contested among leftists. Some say this is only possible in global ways. Others want to concentrate on nation-state policy that succeeded between 1945 and 1980.

Pretending this is 1965 and repeating the policy at that time is impossible. The world is now globalized and therefore a return to capital controls, natural currencies and tariffs is not really an option. A German firm cannot be prohibited from investing in Slovakia. Things have changed very dramatically. 80 percent of employees are working in the service sector. This makes organizing people in unions much harder than in the past. The degree of organization has fallen in Germany where there are still comparatively powerful actors like the IG Metal Union.

Is submitting to fate the only possibility?

No, but accepting globalization is wise. The nation-state can still play an active role in social policy even under these circumstances. The state must act because there is no one else there.

You urge an effective taxation on inheritances.

Yes. The top one percent must be taxed more. The financial sector must be better regulated. Smaller investors need fiscal relief.

Then, you propose the participation of workers in businesses. Does that come from your work in Yugoslovakia?

No, this was different in Yugoslovakia. There workers could join in decision-making through councils and were represented in management but had no shares in the firms. Strengthening small investors is important. Today, they are at a disadvantage compared to large investors who thanks to costly advice can lucratively invest their capital. Workers should receive shares. This already happens today and is not entirely new. The CEO of Siemens in Germany, Josef Kaser, recently said rising inequality is because “many employees are not involved in wealth formation through shares.”

Yes, he should give his workers more shares as bonuses or part of their salaries. This is important to me because we have see4n one thing in the last 20 years. In all rich countries, the share of income from capital has skyrocketed. When capital is strongly concentrated, the inequality between individuals increases almost automatically. If I am the one who has all the capital and the share of capital in the total economy rises, I become richer and the inequality becomes greater. De-concentration of capital is extremely important for rich countries to reduce inequality. That is the underlying logic.

The global mobility of capital is so great today those worldwide solutions to the high concentration seem entirely illusionary.

That is true. If Europe would resolve to take a hard line or crack down against capital flight, that could be very effective just as pressure on Liechtenstein or Switzerland already has effects. Obviously, there can be no world completely without tax havens. Still, many islands like the Cayman Islands are vulnerable if there is a headwind blowing.

In your book, political regulation is seen as a way to reduce inequality. War is often proposed as the only way to lower inequality. Is that a realistic prognosis today?

How dreadful that such questions are often raised! That would be a disaster, not a solution. That would be like killing myself because my knee hurts.

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