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Deregulated Markets and Alternative Economics
by Jorg Huffschmid
Email: mbatko (nospam) lycos.com
17 Jun 2008
In the last ten years there was more speculation than ever, more than before the 1930 worldwide economic crisis. A policy of deregulated financial markets made this possible. That real investment profits turn out relatively small encourages the speculation tendency.
Speculating on currencies is increasing worldwide. Jorg Huffschmid urges controls on capital transactions as an antidote – as in the past
[This interview published in: Frankfurter Rundschau August 26, 2005 is translated from the German on the World Wide Web, http://www.meinepolitik.de/huffschm.htm. Jorg Huffschmid is a professor of economics at the University of Bremen and a leader in alternative economics.]
Frankfurter Rundschau: Is there more speculation today than in the past?
Jorg Huffschmid: Yes. In the last ten years, there was more speculation than ever before, more than before the 1930 worldwide economic crisis. A policy of deregulated financial markets makes this possible. With liberalization, the borders fell for currencies and stocks. With deregulation, the fixed exchange rates were destroyed. Suddenly everything was possible and allowed.
What drives the speculation spiral faster today than in the past?
Technology allows simultaneous trading over the whole globe. The transaction costs tend toward zero. That real investment profits turn out relatively small encourages the speculation tendency. The continuously weak domestic demand in industrial states with simultaneous redistribution from bottom to the top leads to accumulation of money for corporations and the rich which is not productively invested. Instead the well-to-do and businesses invest this money in the financial markets.
Speculation does not have a good reputation. What is so terrible about future-oriented financial transactions?
Betting speculations can be suddenly destabilizing. Modern financial market research (Behavioral Finance) demonstrates the irrational behavior of the markets. More and more people trudge behind a divergent trend. The herd instinct governs. The fury of the herd intensifies in the euphoria over the generous credits of banks; $10,000 comes out of $1000 of one’s own capital. So the grasshoppers graze. Bets are made on prices in three months. Such futures trading with hedge funds inflates things. The $1000 herd ultimately speculates with $100,000. When this financial bubble in the billions bursts, investors have a problem – and the lending banks, especially when they speculated on their own account.
Thus speculation is a danger for the world economy. What should we do?
First of all, central banks must credibly ensure there will never be a cash shortage. The American Fed succeeded in this during the tremendous 1996/97 Asian crisis without fueling speculation. Whether the European Central Bank could and would intervene as lender of last resort or as the last anchor is unclear.
That sounds a little brave for an advisor of Attac.
Be patient. A functioning European Central Bank and a financial oversight from the German government are not enough. An internal turnover tax that would make economically worthless short-term stock speculations almost pointless would be sensible. A Tobin tax on currency transactions would also brake fast currency speculations.
Aren’t taxes a sufficient restraint?
Capital transaction controls should be introduced. They cannot be avoided in the long run. State controls of capital transactions with foreign countries were common up to the 1980s. The financial world was more stable because betting speculations were difficult. The rather neoliberal European Union constitution in Article 59 allows such capital transactions controls. Europe should make use of that.
Whoever wants a social economy must raise the system question and change the power relations
By Jorg Huffschmid
[This article published in: DIE ZEIT, 10/16/2007 is translated from the German on the World Wide Web, http://images.zeit.de/text/online/2007/42/besser-wirtschaften-joerg-huff Jorg Huffschmid is an emeritus professor of economic policy and political economy at the University of Bremen.]
Most of our serious social, ecological and economic problems can only be solved bottom up, with the insight and will of affected citizens. Most of our great social and ecological problems did not arise because of deficient understanding of the affected. They are the result of mechanisms and power relations that appear to individuals as objective practical necessities – globalization and the financial markets – that can hardly be changed. Behind these so-called “practical necessities” are persons, businesses and institutions that profit from the abuses and therefore try to maintain the basic structures.
This is obviously not a “far-sighted economy” but the reality of the capitalist market economy. In it, the wealth of a minority grows while simultaneously poverty and difficult social situations increase worldwide, in Europe and in particular countries. Most people cannot choose whether and how they will work. They are dependent on accepting whatever work is offered. Many remain unemployed despite their readiness for work. Most work in a foreign-determined way in a rhythm, with methods and on products which they can hardly influence.
Financial investors have often taken command. These investors’ only goal is multiplying the money accumulated at the top of society. By threatening migration, they put governments and parliaments under pressure to reduce taxes on profits, privatize public goods and cut social benefits. They regularly cause economic crises striking people without any responsibility for the crises.
Referring to the ultimately self-destructive character of this kind of economy is right but hardly helps as long as the framing conditions continue: the dominance and competition of private businesses on largely deregulated markets.
The search for “decentralized civil society and direct democratic institutions” is agreeable. However restricting ourselves to this search runs the risk of losing sight of the general economic and political situation. In the long run, “far-sighted economics” requires changing this general situation and the underlying power relations. The challenge is a radical democratization of the economy: in factories and businesses, in regions, states and international institutions.
Such democratization will not be realized by appealing to the understanding of those who profit from undemocratic structures. Democratization must be enforced against them. Initiatives for local and regional networks, exchange rings and the like could be helpful by showing alternatives to economics in frenzied competition.
The resistance and a broad mobilization against the policy of neoliberalism – against social cuts, privatization of public goods, delegation of old-age security to the financial markets. This resistance gains power when accompanied by positive concepts of alternative economic policy for a “social economy.”
From my perspective, the central points are:
• An overall economic control that brings about full employment through public investment- and jobs-programs and reduced working hours in which all persons who can and want to work find a job corresponding to their abilities and can lead an independent life from its returns.
• A structural policy of ecological reorganization above all in energy- and transportation policy, agriculture and private households.
• A social policy that sees safeguarding people against the risks of poverty, sickness and unemployment as tasks of social solidarity.
• The vigorous defense and democratic reform of the public sector and its financing through a tax policy that obligates individuals according to their output – in other words, through a clearly progressive income tax, property- and inheritance-taxes – and prevents tax evasion.
• Orientation in balance, international cooperation and development promotion in international economic policy.
• Control of financial markets and their integration in the economic framework for sustainable development.
• The acceptance of these ideas requires readiness for conflict as well as reason and insight.