[Review] Heiner Flassbeck - Fundamentals of Relevant Economics

Siehe auch:
[Rezension] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - Statische und dynamische Wirtschaftstheorie

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.

Dynamic Development

Flassbeck argues that mainstream economics lacks an adequate theory of dynamic development. Economic development is described only in steady albeit different states. Transitions between these steady states are omitted. According to Flassbeck these transitions are given too little attention since increasing labor productivity in the form of technological progress occurs during these phases. Flassbeck refers here to the analogous development of creative destruction like the displacement of companies by more productive companies and the role of pioneer entrepreneurs like the displacement of companies by more innovative companies according to Schumpeter. New technologies and where appropriate new companies are the core of economic growth and in particular prosperity growth. [1, p.112-118]

The IS/LM-Modell (Investment-Saving/Liquidity-Preference-Money-Supply) is intended to describe the macroeconomic equilibrium toward which an economy tends. It is created by combining the equilibrium models for the goods market (IS function) and the money market (LM function). When the interest rate is plotted against income the IS function is a decreasing function because rising interest rates reduce the demand for credit. As a result fewer goods are produced and private households receive less income. The LM function in the same representation is an increasing function because the demand for money is negatively dependent on the interest rate. Consequently investing yields more profit than saving when interest rates fall and saving yields more profit than investing when interest rates rise.

Flassbeck already criticizes the assumption of an economic system tending toward equilibrium. According to Flassbeck a market economy does not tend toward stability. The derivation of the IS function is criticized because it presents the demand for credit for investment as a function of interest rates. In fact the demand for credit for investment depends on interest rates and demand of good s. And the derivation of the LM function is criticized for assuming that central banks control the money supply. In fact central banks set the interest rate but not the money supply. [1, p.139-153]

Stationary Balance Mechanism

A method often used by Flassbeck is to assess economic development based on primary balances. This includes private households, businesses, the government and foreign trade. Flassbeck uses this to criticize the widespread myth of the benefits of austerity policies. In fact profits are the sum of investment minus savings. And saving reduces demand. It is widely assumed that when the government saves (revenue > expenditures) companies still make the same or greater profits. But in reality demand and consequently growth decrease when the government saves (revenue > expenditures) because government spending directly or indirectly represents corporate income. [1, p.126-132]

Gold Standard and Monetarism

As expected Flassbeck is not a supporter of the gold standard. Inflation always provides an incentive to buy and deflation always provides an incentive to save. A gold standard on the other hand would force minimal inflation or deflation thus either creating no incentive to buy or creating an incentive to save. More important however are wage increases equal to inflation plus productivity growth. This puts inflation into perspective and is the prerequisite for demand for productivity increases. [1, p.158-164]

According to Flassbeck these practical approaches have failed in the face of the countermovement since the 1970s. Making matters worse arguments based on tautology have taken hold. A lack of arguments is thus turned into a virtue. Monetarism is cited as an example of this which argues that inflation is the inevitable result of an excessive expansion of the money supply. In fact the money supply is a necessary but not sufficient condition. Monetarism confuses stock and flow variables since money Not spent does not affect demand and therefore does not cause inflation. [1, p.154-158]

Flassbeck questions the ban on direct financing of states by central banks. Specifically he questions the benefits of central banks purchasing government bonds on the secondary market (indirect acquisition). He questions why the government should support commercial banks. If government bonds end up at the central bank anyway via the secondary market (indirect acquisition) central banks could also purchase them directly. [1, p.158-164]

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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