[Review] Flassbeck, Heiner - Fundamentals of Relevant Economics

Siehe auch:
[Rezension] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - Irgendjemand muss sich immer verschulden

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.

As in his other works and statements Flassbeck emphasises that someone always has to get into debt. The question is never whether someone needs to go into debt to achieve economic growth. It's always only a question of who should go into debt if one wants economic growth. Someone always has to go into debt to cover the amount of savings and future nominal economic growth. Those who refuse to do so will force stagnation.

In the past governments would only have had to borrow during a weak economy. But that era is over as companies no longer fulfill their traditional role of borrowing but have become savers. Persistent budget deficits are therefore inevitable unless a country renounces economic growth or runs permanent trade surpluses.

Classical and Ideal Economic Order according to Schumpeter

Flassbeck describes Schumpeter's ideal economic system with growth as follows. Pioneer entrepreneurs do not simply respond passively to demand with a corresponding supply. Pioneer entrepreneurs create new products or new production processes.

Pioneer entrepreneurs take out loans for the the aforementioned dynamics to procure materials and means of production and the bank creates new money in the process. Pioneer entrepreneurs do this to be competitive in a timely manner. As a result, additional demand for goods and services arises. [1, p.183-186]

The golden wage rule must strictly apply. According to this rule wages must increase by the amount of productivity improvements and the inflation rate. A workforce that can consume what it produces can keep the same economy running. A workforce that cannot consume what it produces cannot keep the same economy running either. Consistent wage increases across all incomes, and beyond the golden wage rule only lead to a higher inflation rate. But an inflation rate that is too high leads to higher interest rates from the central bank and excessively high interest rates lead to rising unemployment. [1, p.236-250, p.415-417]

When will Inflation come and when will it not come

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. [1, p.293-308]

Therefore it is not simply increased spending/demand from one sector or increased spending/demand from the government alone that causes a higher inflation rate. Especially when capacity utilization is not full or underemployment exists an increase in the inflation rate due to increased spending/demand is correspondingly less likely. A countercyclical fiscal policy when capacity utilization is not full or underemployment exists is therefore not problematic from an inflation perspective.

Development of Sectoral Balances

Internationally it can be observed that corporate financial balances have been rising since the 1970s. As a result companies have become savers rather than debtors. One reason for this is seen in the long period of stagnation as companies are reluctant to take on debt during recessions. When demand is lacking companies also do not invest. This development demonstrates the need for governments to take on debt. [1, p.208-222]

[5, UVGD] [5, UBCABOP] [5, UBLC] [5, UBLH] [5, UBLGE]

It is also evident that since the 1970s the foreign sector has no longer been balanced in many countries. Several countries have become either permanent debtors or permanent savers in terms of foreign trade. One example of this is Germany's foreign trade surpluses. Germany has therefore become a saver in terms of foreign trade. This was achieved through wage dumping at a given level of labor productivity. Consequently unit labor costs in Germany were kept low especially lower than in the rest of the Eurozone. Germany's export surplus however is the import surplus of other countries in this case other Eurozone member states. [1, p.200-207]

Example

Flassbeck doesn't go far in proving this thesis. The development in the USA is a prime example of the benefits of demand-side policies. In addition the USA as the supposed home of supply-side policy consistently refuses to pursue austerity policies. With this quasi-continuation of demand-side policy the USA achieves consistently higher economic growth than for example, the EMU (European Economic and Monetary Union) or the EU (European Union). And on the other hand the USA, with this quasi continuation of demand-side policy achieves consistently higher economic growth than for example the EMU (Economic and Monetary Union of the European Union) or the EU (European Union). Flassbeck notes that the USA did not have higher inflation rates as a result of this expansive fiscal policy. Government spending and national debt have therefore not led to the inflation rate being higher in the USA. [1, p.77-83, p.90-100]

[5, ZCPIN]

[5, OVGD]

[5, UBLGE]

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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