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How Economists Change the World
by Stephan Schulmeister
Email: marc1seed (nospam) yahoo.com
05 Jan 2015
Theory development is also a war over dominance at the universities, in the media and in politics. The goals of Hayek's war were expulsion of the Keynesians, liberalization of the financial markets, abandonment of full employment policy, dismantling the social state and weakening unions.
HOW ECONOMISTS CHANGE THE WORLD
The explosive intellectual effect of the Nobel Prize winner: the struggle between neoliberals and Keynesians over decades has consequences
By Stephan Schulmeister
[This article published on August 25, 2014 is translated from the German on the Internet, http://derstandard.at. Stephan Schulmeister is an economic researcher in Vienna and author of “Learning from Roosevelt and His New Deal,” http://la.indymedia.org/news/2014/07/264745.php.]
Unlike the natural sciences, economic theories change their object, economic reality, and as a result the distribution of income, assets and power. Two kinds of things follow:
Firstly, knowledge and interest, insight and justification are mixed up in the thinking of economists. A theory is worthy of a Nobel Prize when its interest-linkage is disguised through original construction and mathematical abstraction (like the theory of “natural unemployment”).
Secondly, theory-development is also a war around dominance – at the universities, in the media and in politics. No one understood this better than the Nobel Prize winner Hayek. After his bitter defeat to Keynes in the argument over the worldwide economic crisis, Hayek knew: the advance of the Keynesians along with the social state and the full employment policy would continue for years – even if he had already warned of this “road to serfdom” in 1944.
The goals of his war were expulsion of the Keynesians, liberalization of the financial markets, abandonment of full employment policy, dismantling the social state and weakening unions. The strategy was to establish a network in the form of the Mont-Pelerin Society (1947) and the think tanks. The weapons consisted of new theories refuting Keynesianism. The most important of them were forged at the University of Chicago under the leadership of Nobel Prize winner Friedman. The “proof” was that de-stabilizing financial speculation gets rid of itself and represents no danger (1953). The “proof” was that the depression of the 1930s was caused by the Federal Reserve (the state) (1963). The “proof” was that full employment policy was senseless because there is a “natural unemployment” (1968).
A navigation chart for politics is derived from these theories: away from the system of fixed exchange rates, away from interests kept low by politics and away from protection against unlawful termination and other regulations of the labor market. In general, markets are deregulated and politics is tied to rules.
The task of think tanks is to pass on neoliberal concepts to the rank and file in schools and particularly in the media (Hayek’s “second-hand dealers”).
At the end of the 1960s, the success of Keynesianism drove more and more entrepreneurs into the neoliberal camp. Full employment had strengthened the unions. Unions urged redistribution and joint-determination and prevailed through increased strikes. The spirit of the times turned to the left (1968) and swept social democracy into office. Neoliberals had always warned of the social state, unions and leftist do-gooders.
The way from Rhine to neoliberal capitalism occurred through the “backdoor” of an unfettering of the financial markets. The abolition of fixed exchange rates and two dollar-devaluations triggered two oil price shocks, two recessions and an inflation push. The central banks reacted to this with a high interest policy. Since the beginning of the 1980s, the interest has been above the growth rate. Businesspersons adjust by reducing investments. Unemployment and state indebtedness increase while the financial markets boom. The greater are the problems in reality, the more unrealistic are the theories of the neoliberals. All actors have the same expectations. Economic fluctuations are consequences of technological innovations. Money and finances play no role.
In the 1990s, the EU accepted the neoliberal rules (Maastricht criteria, European Central Bank statute). Austerity policy and social cuts became guidelines. Unemployment, precarious jobs and state indebtedness climb. “Let our money work” is the watchword and stock prices boom.
The 2009 stock crash led to a recession. From 2003, stocks, real estate and raw materials boomed. Their simultaneous 2008 devaluation (for the first time since 1929) was the most important systemic cause of the great crisis. Even though this is the result of neoliberal theory and practice, “critical” economists could not use them for a counter-offensive.
The crisis became the turbocharger for dismantling the social state in the EU. EU elites welcomed speculation on the bankruptcy of member states as “disciplining by the market.” They responded to the intensified drives with the Troika austerity policy that drives southern Europe into crisis. Unemployment is fought with wage cuts; consumption collapses.
The consequence is the recent recession in the EU. The predicted upswing turns out to be a mirage; another recession is possible. At the same time politics has deepened the tension in the EU. The degraded turn more and more to rightwing populists. The Le Pens, Straches and Co. only need to thresh out national, social, anti-finance capitalist and anti-European phrases and their percentage of votes rises and rises.
The elites should think this over. Neoliberal theories were once useful in straightening things out. However they have done their duty. Europe’s disintegration and further damage to the real economy are not great steps forward.
THEORY DEVELOPMENT AS WAR
Rethinking the Economy. A Debate on the Future of Economics
Goal, strategy, weapons and money: How Keynesians and market radicals wrangle over the right prescriptions for national economies and what can be learned from the struggle for the future
By Stephan Schulmeister
[This article published on November 8, 2014 is translated from the German in the Sueddeutsche Zeitung newspaper, http://stephan.schulmeister.wifo.ac.at/fileadmin/homepage_schulmeister/f.]
A fundamental connection is often overlooked in the debate on the state of economics. Whoever wants to judge whether the dominant theories are still viable or whether we need new approaches must consider the interaction of theory and praxis.
On one hand, if a theory becomes a paradigm or worldview, it changes its object – from the role of the state to the distribution of income, wealth and power (in contrast, the course of the stars is independent of the worldview of the physicist). Thus theoreticizing control through interests is obviously rewarding for whoever wants to influence reality.
On the other hand, development of a theory becomes a prestigious challenge if the “navigation chart” leads deeper and deeper into crisis. The theory becomes a new paradigm if it can explain the “crisis enigma” concretely.
Can examples help? Think back to the 1920s. The market radical theory dominated at that time. As a result, the stock market boom and the mentality “let our money work” were not reasons for concern. The 1929 stock market crash led to a recession. The budget deficit and unemployment soared. The Austrian economist Friedrich August von Hayek and the followers of the mainstream recommended austerity policy and wage cuts. His British rival John Maynard Keynes vehemently attacked this position.
The symptom therapies lead into depression. Keynes was the winner in the war of economists. His “General Theory” (1936) explains why symptom cures deepen crises, why financial speculation generates manic-depressive price fluctuation s while damaging and eliminating entrepreneurs, why free commodity markets and an active economic policy complement each other and why trust and confidence are basic condition s for prosperity. Keynes understood actors as individual and social, rational and emotional beings, in short as persons.
Keynes’ theory reflected the rules of the game of the 1950s and 1960s. The pursuit of gain can only develop in the real economy with fixed exchange rates, stable raw material prices and interest rates below the growth rates. A strong social partnership and the social state strengthen trust. Full employment was achieved in 1960. Unions took the offensive and demanded more joint determination and redistribution. Strike activity tripled. In 1968 intellectuals drifted to the left. The spirit of the times swept social democracy into power. Lastly, the ecology movement declared capitalism a discontinued model.
The conditions changed by the Keynesian navigation chart provoked the neoliberal counter-attack. Hayek prepared that counter-attack after his bitter defeat by Keynesianism. Warfare needs a goal, strategy, weapons and money. The goal was expulsion of Keynesianism, liberalization of the financial markets, abandonment of full employment, dismantling the social state and weakening unions. The strategy was to found a network in the form of the Mont-Pelerin Society (1947) and the think tanks. The weapons were new theories that refuted Keynesianism. The wealthy donated the money.
The most important weapons were forged at the University of Chicago: the “proof” that de-stabilizing financial speculation runs up heavy losses and gets rid of itself (1953), the “proof” that consumers hardly react to increased income so that a Keynesian fiscal policy accomplishes little (1957), the “proof” that the depression of the 1930s was caused by the Federal Reserve, that is by the state (1963), the “proof” that full employment policy is senseless because there is a “natural unemployment” (1968). Therefore unemployment would not rise with higher inflation. Keynesians actually argued this nonsense. “If low unemployment would not decline but increases the pressure on wages and prices (Philips’ curve), this must also function in the opposite direction.” If low unemployment increases the pressure on wages and prices (Phillips-curve), the offensive of neoliberals concentrated on this weak spot. In 1971, US president Richard Nixon yielded to their demand for abandoning fixed exchange rates. In two rounds, the dollar lost 50 percent of its value. OPEC reacted to this with two oil price shocks followed by two recessions together with higher inflation. Keynesianism was finished; unemployment and inflation rose simultaneously.
Fairness does not exist in war. Keynesians only claimed the Phillips connection for a closed economy but higher inflation was a consequence of global shock. Friedman & Co. with their struggle against fixed exchange rates contributed to the simultaneous rise of inflation and unemployment.
The neoliberal offensive picked up steam. In 1980 the goal of low interest rates was abandoned. Since then, interest rates have been above the growth rate. Entrepreneurs adjusted by reducing investments. Unemployment and state indebtedness increased. The financial markets were deregulated. The creation of derivatives fueled speculation. Austerity policy and social cuts became the guidelines of policy. Unemployment, precarious employment and state indebtedness climbed more and more like the stock prices. The stocks should provide for old age. From 2003 stocks, real estate and raw materials boomed. Their simultaneous devaluation in 2008 (for the first time since 1929) led to the great crisis.
What is now happening is exciting to see. The US renounced on austerity policy and massively increased unemployment benefits. On the other hand, the EU follows the neoliberal navigation chart and slips into a depression. The situation of businesses and employees worsens; the stock markets boom and prepare the next fall or crash.
In conclusion, the dominant theory legitimates finance capital, not the interests of real capital. The priority of the stability of money value and state finances, lower state shares and privatization of social security serves finance capital. However entrepreneurs invoked the neoliberal spirits almost 50 years ago and are not free of them today.
In the meantime, science veiled the ideological substance of its theory by raising the abstraction level again. The assumption of “rational expectations,” the thesis of the inefficiency of all economic policy and lastly the theory of the “real economic cycle” are veiling tactics. Fluctuations are only consequences of the “technology shock.” All this was awarded with Nobel Prizes.
KEYNES REGARDED “LOVE OF MONEY” AS HALF-CRIMINAL AND HALF-PATHOLOGICAL
Even though the great crisis was the result of neoliberal theory and policy, the Keynesian did not use it for a counter-offensive. In the time of their marginalization, they did not prepare any alternative concepts for “Day X” when the dominant rules of the game fall in a crisis. They should have further developed several main theses of Keynes that declare: market economies produce crises automatically. The most important trouble spots are the financial markets because their actors act in a very short-term, emotional and herd instinct way. The “love of money” is a despicable, half-criminal and half-pathological quality that should be left to the psychiatrist for treatment as Keynes said in 1930. “Keynesians” have ignored these theses from the start. They would rather persist in the bright world of balance. Disturbances occur on the macro-plane. Anti-cyclical policies must be practiced. That is not made concrete in the policy of the European Central Bank. The zero-interest policy encourages stock speculation without stimulating the real economy.
Whoever really wants to improve things must begin in a much more fundamental way. The following agenda leads to a new better economy:
• Economists must reflect on the relation of knowledge and interest in their work (and their financing).
• Market actors must be understood as persons, as emotional and social beings. Inter-disciplinary research demands this and makes possible a realistic micro-funding of the macro-economy. Hans-Werner Sinn should have been opposed when he defended the dominant theory a week ago. His world is unsuitable as a reference model. Deviations are understood as “anomalies.” Still emotions and cooperation are also important components of human existence like rationality and competition.
• Parts of Keynes’ theory should be cleaned up like his concept of money and the product ion function. Others should be developed like the question what conduct produces “bull- and bear markets” and what are the macro-economic consequences. This is also true for the original and not (primarily) ideological components in the thought of Hayek (markets as secured processes).
At the end little will remain of the pipe dreams constructed in Chicago. They are too interest-connected and too “market-religious” enamored of the world to come.
Much “creative destruction “awaits economists.
Schulmeister, Stephan: In the Whirlpool of Deregulation, 2014
Schulmeister, Stephan: Learning from Roosevelt and His New Deal, December 2014
Schulmeister, Stephan: Ten Theses on the Crisis and its Solution, August 2013
This work is in the public domain