[Review] Heiner Flassbeck - Fundamentals of Relevant Economics - Money as Capital and Unit Labor Costs as Inflation

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[Rezension] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - Geld als Kapital und Lohnstückkosten als Inflation

Heiner Flassbeck is an economist from Germany. The economist born on December 12, 1950 was among other things State Secretary in the Federal Ministry of Finance under Oskar Lafontaine (SPD) from 1998 to 1999. And from January 2003 to the end of 2012 he was Chief Economist (Chief of Macroeconomics and Development) at the United Nations Conference on Trade and Development (UNCTAD). Flassbeck publishes among other things on Makroskop and Relevante Ökonomik in German and on Flassbeck Economic in English.

The book "Fundamentals of Relevant Economics (Grundlagen einer relevanten Ökonomik)" was written together with co-authors Friederike Spiecker, Patrick Kaczmarczyk and Alexander Mosca Spatz. The book is clearly specialist literature in nature but not a pure textbook. Although connections are discussed in detail at the level of specialist articles no absolute fundamentals are conveyed. The quality of the derivations is very high as the arguments are based on empiricism and logic rather than made in a vacuum. This sets the author apart from any ideology despite the topic. The book gains additional importance due to the current recession.

Chartalism

According to Flassbeck the state cannot not influence the economy. This is particularly clear in monetary policy. The creation of money out of nothing creates the flexibility to create money and make it available when and where it is needed. Money is created or legitimized by the state by declaring it legal tender. And a currency derives its value from the state's power to levy taxes that are to be raised in that currency. Money thus becomes a unit of account to facilitate transactions. Chartalism described but not named by Flassbeck thus states that money has no intrinsic value but is given value by governments. [1, p.264-270]

Capital

Flassbeck uses the term capital in a purely economic sense. Capital describes the liability side or the origin of assets in equity and debt. Capital arises after someone has incurred debt and generates savings and not the other way around. And savings are not lent out. Flassbeck places particular emphasis on this. The same thing happens in developing countries. Developing countries do not have to import capital through foreign trade surpluses in order to invest or consume in their own country. Foreign currency must be acquired through exports only for imports from abroad. Within a monetary union this foreign currency is no longer necessary as all member states can incur debt in their own currency.

The capital stock is the physical capital i.e. the sum of all assets meaning machinery and the like in an economy. Workforce and capital stock together generate the goods and services and consequently the revenue of an economy. However a higher value of goods, services and revenue arises simply as a result of price increases meaning inflation. Real values for goods, services and revenue meaning purchasing power are only available when the figures are adjusted for inflation. Higher nominal meaning not corrected figures must therefore first be corrected. [1, p.280-293]

Inflation

Competition on the supply side and sufficient demand in goods markets can slow or prevent unjustified price increases. Similarly sufficient competition for jobs among job seekers can slow or prevent inflation resulting from wage increases. However in times of full employment or labor shortages wage increases and thus the inflation rate can rise sharply and suddenly. Investments are more likely during an economic upturn. Since new capital goods are not always immediately available the inflation rate can rise. When capacity is fully utilized prices and consequently the inflation rate can rise sharply. Without precautions against such dynamics the inflation rate can also sustain itself and even accelerate leading to a wage-price spiral.

When it comes to anticyclical fiscal policy Flassbeck warns that the delivery of goods varies in speed. For example infrastructure projects involve longer planning and approval times. This time lag between decision and impact must be taken into account at a minimum. Flassbeck therefore advises against investments in infrastructure when using anticyclical fiscal policy.

Inflation hurts creditors and helps debtors by reducing the purchasing power of debt. The wealth of the wealthy is reduced leading to a flight to tangible assets such as precious metals and real estate. Demand for tangible assets such as precious metals and real estate and their value increases.

High inflation rates also tie up labor and workers who manage assets for the wealthy with as little loss as possible. When inflation is high investments are avoided due to frequent changes in the calculation bases and this reduces the demand for labor and workers and lowers the demand for goods and services. This can also cause a self-accelerating recession. The development described above can turn into deflation meaning falling prices, if companies compete for a correspondingly low demand for goods and services. However deflation leads to restraint in consumption. This further accelerates the recession. Flassbeck explains that an economy neither tends toward a new stable state nor regulates itself. Such a downward spiral inevitably means a loss of prosperity and social cohesion due to unemployment and corporate bankruptcies. [1, p.293-308]

Inflation is a long-term Wage Phenomenon

Wages are the largest cost for companies and at the same time the largest source of income for other companies. Companies' costs inevitably depend on wages. However in the long run companies' costs depend not only on wages but also on productivity. With constant wages and increasing productivity these costs decrease. And with sufficient competition and constant conditions (meaning without price shocks or similar events) costs correspond to the price level and consequently to the inflation rate.

Decade	Country	CPI	ULC
1980-1990	Germany	2,897	2,412
	Spain	10,247	8,603
	France	7,385	5,964
	Italy	11,205	11,087
	Japan	2,53	0,121
	United States	5,554	4,641
1990-1999	Germany	2,556	1,886
	Spain	4,222	4,643
	France	1,87	1,061
	Italy	4,156	3,277
	Japan	1,211	0,453
	United States	3,004	2,207
2000-09	Germany	1,591	0,948
	Spain	2,963	3,192
	France	1,728	1,953
	Italy	2,27	2,901
	Japan	-0,255	-1,54
	United States	2,569	1,718
2010-19	Germany	1,329	1,833
	Spain	1,233	-0,093
	France	1,118	0,878
	Italy	1,173	0,819
	Japan	0,466	-0,264
	United States	1,772	1,541

[5, ZCPIN] [5, PLCD]

With this explanation Flassbeck explains that the price level and consequently the inflation rate depend on wage developments and productivity trends. The quotient of wages divided by productivity is also called unit labor costs. Flassbeck further proves that his derivation is correct by plotting unit labor costs as a function of the inflation rate. [1, p.308-316]

Src:
[1] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - ISBN 978-3-86489-414-5
[2] Makroskop
https://makroskop.eu/
[3] Relevante Ökonomik
https://www.relevante-oekonomik.com/
[4] Flassbeck Economics
https://www.flassbeck-economics.com/
[5] AMECO - annual macroeconomic database / jährliche makroökonomische Datenbank
https://economy-finance.ec.europa.eu/economic-research-and-databases/economic-databases/ameco-database_en

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