[Review] Heiner Flassbeck - Fundamentals of Relevant Economics

Siehe auch:
[Rezension] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - Entwicklung der Wirtschaftsordnung

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.

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. The creation of an absolute advantage occurs through a completely new, specifically superior product or through the creation of more productive or cheaper production processes. Pioneer entrepreneurs can therefore displace the competition because they have lower unit costs. Pioneer entrepreneurs can then choose a compromise between higher profit and lower price.

Pioneer entrepreneurs take out loans for the the aforementioned dynamics and 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. This could cause inflation. However productivity improvements are not inflationary since productivity improvements increase supply, meet additional demand and thus counteract inflation. With constant demand the goods market is less utilized or cleared after productivity improvements, resulting in greater competition and thus higher price pressure. These partial productivity improvements create pressure to adjust specifically the competition for improvement.

The assumption here is that wage increases include productivity increases and inflation the Golden Wage Rule. This is important because the added value created must be in demand. This added value includes either superior products or equivalent but cheaper products. The result of this development is greater prosperity for all. And rising wages in turn force productivity improvements to ensure competitive costs. [1, p.183-186]

National Balance Mechanism

When individual actors in an economy save demand is withdrawn from that economy. This happens when revenues exceed expenditures. And a shrinking of aggregate demand directly results in a shrinking economy. The government can offset these savings with a budget deficit. What individual actors save and don't demand the government can demand instead. The government can therefore maintain economic growth or avert a recession with a budget deficit. However with budget surpluses the government would be guaranteed to worsen a recession because demand is withdrawn from by the government. This is particularly influential because individuals tend to save or restrain themselves when the economy is poor. [1, p.195-200]

This dynamic can also be described using fiscal balances. The fiscal balances describe the difference between revenue and expenditure of a sector over a period of time usually one year. The sectors are the general government, the sum of domestic private households, the sum of domestic companies and the foreign trade of that economy as a whole. Consequently it is a flow variable and not a state variable. Surpluses mean savings by the sector and thus the sector in question is withdrawing demand from the economy. Deficits mean the sector is incurring debt and thus the sector in question is supplying demand to the economy.

International Balance Mechanism

What determines the price of products is not only the wage level but also the capital costs of production i.e. the capital stock. And what determines the competitiveness of countries is not only the wage level, but also the wage level divided by labor productivity, i.e., unit labor costs. Economies can catch up by importing capital and technology. However the lower wage level and high productivity creates absolute advantages and thus higher producer profits. Catching-up economies therefore do not have to first introduce outdated technologies but can immediately introduce the latest technologies capital-intensive since modern production is always superior. Imported productivity and demand for labor can enable the economy to catch up and the domestic economy can follow suit through imitation and imported technology. [1, p.189-194]

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]

Conclusion

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. Those who refuse to do so will force stagnation.

Today companies are taking on less and less debt or are even savers. Private households cannot indebt themselves permanently because unlike companies they do not generate returns and their lifespan is limited. And not every country can run trade surpluses to turn the consumer into a debtor. Growing government debt is therefore a natural development.

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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