Economic science is characterized by a reduction to the market fundamentalist paradigm. Plural economy. Alternatives in Economics
by Rudolf Hickel[This article published on September 24, 2019 is translated from the German on the Internet, BdWi - Forum Wissenschaft 3/2019
Although the economy is a determining part of society and individual conditions are shaped by it, there is no opening for the related questions. The bleak model figure "homo oeconomicus" dominates. In the history of the theoretical debate, important impulses can be found for economic science. But the predominant teaching, research and, above all, consulting are characterized by a deep contradiction: Markets are in a position to achieve the optimal balance of the economy as a whole through endogenous self-regulation. The prerequisite for this is that prices are formed by supply and demand. If, on the other hand, there are real crises, then the causes are ascribed to the so-called "institutions outside the market" - state and trade unions.
Competing paradigms or different perspectives of theory formation are not taken up by mainstream economics. Alternative schools of thought such as Marxism or Keynesianism are given the stamp of scientific ineptitude and are excluded.
Instead, it is suggested that there is a uniform and self-evident way of thinking and that only one relevant economic method has emerged.
Critical approaches oppose this prevailing, neoclassically founded orthodoxy. The colorful world of different alternative views is summarized under the keyword "heterodox economics".
Students also protested against the prevailing one-sidedness. Thus in 2003 the working group "Postal Autistic Economy" was founded, which was renamed "Network Plural Economics" in 2012. The Plural Economy movement demands more theoretical diversity and interdisciplinarity. In addition, it criticises the seemingly religious belief in the market, which suppresses questions of unjust distribution, poverty, monopolistically bequeathed markets, new dependencies on the labour market and the division of the world economy. The theoretically completely underexposed eco-crisis and the presented market fundamentalist sham therapies intensify the necessity of a growth-critical economy.
A critical stocktaking of the deficits of the predominant economic science teaching and research is the focus of this issue, which the BdWi publishes together with the working group Alternative Economics. The book also presents independent theoretical approaches
beyond critique. We hope that the contributions will provide further impetus for discussion and would like to thank all authors* for their cooperation.
On the Meaning of a Plural Economy
19.09.2019: A look at a new degree course at the University of Siegen
[This article published on 9/19/2019 is translated from the German on the Internet, BdWi - Über die Bedeutung einer Pluralen Ökonomik
"So science is a principle of swimming against the current."Klaus Holzkamp
Probably in no other area of social science does the dominant mainstream leave so little room for alternative perspectives as at the economic science institutes. A one-sided capital friendliness and market apologetics dominate the scene. Numerous scientifically founded alternative economic theories are available, but are ridiculed and discredited by the advocates of neoclassical teaching. Gustav Bergmann, Heinz-J. Bontrup and Jürgen Daub find that the manifold social crises require more room for scientific controversies and report on plural approaches at the University of Siegen.
We face major challenges worldwide in social, ecological, political and economic respects and are confronted with many unexpected, contingent developments. One should be able to expect scientifically sound answers and solution concepts from economics (VWL and BWL). However, this is not the case. On the contrary, economics has increasingly developed into a one-sided and capital-friendly science. The teaching of classical economics (Smith, Riccardo, Marx, etc.) with its labour value theory has simply disappeared from the curriculum of the economic faculties and even Keynesianism, which prevailed after the Second World War with its capitalism-stabilizing deficit spending, is still treated only marginally at most, but then discredited as "outdated". The prevailing opinion is that anyone who, as a critical economist, still relies on national debt today, for example, can no longer be taken seriously. And the "long-term keynes" has never had a place in textbooks or in research.1
In contrast, the neoclassical economy is propagated and declared sacrosanct today - by the way also by most media.2 3 With its subjective value theory and its neoliberal ideological political orientation, the neoclassical puts its faith in the "homo oeconomicus" and the "market" with its alleged self-healing powers. According to this, every economic subject can deal rationally with its resources and the market, freed from state influences and stalling, provides the best for an efficient and allocative control of scarcities through
corresponding price signals.
That this is not the case has actually been sufficiently empirically verified. In its model thinking, neoclassics do not even take into account the microeconomic rationality trap that occurs in reality. Here the individual can behave rationally. If, for example, the entrepreneur dismisses his employees during the crisis, this is rational from a business point of view. But if all entrepreneurs* do it, then the crisis will intensify for all. Although the Neoclassical describes external environmental effects that do not lead to market price internalisation, it nevertheless negates state market interventions for environmental protection. And the neoclassic has no answer at all to the marketimmanent destruction of competition, the allegedly "most ingenious instrument of disempowerment" (Franz Böhm), except that the monopoly is a "degeneration" of the system. Yet the monopoly gain is in reality the goal of all capitalist acquisition itself. Every entrepreneur dreams of one day being a monopolist and skimming off monopoly rents.
Lack of reference to reality
In today's economics an intolerable and unrealistic "model platonism" prevails.4 So it is not surprising that even practitioners from business increasingly complain that students think too formally and are hardly capable of creative problem solving. The pure market model of an idealized "perfect competition" based on Leon Walras' general equilibrium theory, which is implicit in macro-, meso- and microeconomic theories, is nothing but a chimera and has nothing to do with the reality of today's highly concentrated and bequeathed markets as well as internationally operating large corporations, which exert influence on the decisions of democratically elected politics.5
In the usual economics courses, education serves the goals of the capital side. Female founders* are regarded as beings worth protecting, female investors* must not be frightened away. Nature means soil and is regarded as a pure source of resources to be exploited. Questions of social responsibility and ecological sustainability are considered only marginally and serve as semantic decoration. Everything is discussed with the idea of usefulness in the sense of economically powerful actors as if there were no other participants. So it is not surprising that co-determination theory and research does not (any longer) occur at the economic science faculties.
In addition, many economic degree programmes and research areas are devoted primarily and with the greatest degree of self-evidence to a "study of wealth". The BWL appears to be even more one-sided, the gutenbergsche narrow-mindedness has led to the fact that only Chrematistik is practiced - according to Aristotle, pure wealth studies, which he saw as a reflection of oikonomia. The Faculty III of the University of Siegen is more socioscientifically oriented. The economic sciences BWL and VWL are reunited and besides a plural discourse about all forms and theories also the practical application is made possible.
In any case, the answers of today's dominant neoclassical economy no longer offer
sufficient bases for action for necessary social changes. They remain attached to the problem logic of the "more of the same". Critics even say it is "mathematically rationalized ideology production...". (Frank Beckenbach) or the neoclassical economy is accused of "the frozen gaze" (Silja Graupe).6 Indeed, the neoclassical-neoliberal economic perspective essentially focuses on striving for change via the pure so-called "self-regulation of market forces" already mentioned. This, of course, remains trapped in a pure "market logic" of buying and selling.
The ruling neoclassicism does not want to know anything about the dependent employee, about the only person who creates value and added value and is exploited by capital. In an incredible mystification and suppression of economic reality, it assumes that the ("dead") capital, which only originates (derivatively) from human labour, also generates its own value and has its own (marginal) productivity. On the contrary, it is significant that business administration, the doctrine of the company, places people on the same level, if at all, with the production factors "materials" and "resources". In a "communitizing personnel policy" (Gertraude Krell7), people are only the productivity potential for increasing shareholder value.8 Ultimately, the profitability of the capital employed is decisive for business administration. In Günter Wöhe's standard work for business studies students, people only appear in this style.9
With such a one-sided and nonholistic economy, however, political and ecological necessities are not nearly justifiable and certainly not really feasible. And yet it is true that the current way of speaking of the economy is that of the neoclassical-neoliberal economy; it is the only possible way of expressing economic problems and has meanwhile become politically accepted worldwide. So to speak, a one-dimensional development has taken place that only permits certain problem definitions and very specific answers to economic problems. We therefore regard it as imperative that the repertoire of economic perspectives be broadened and that a critical reflection of different approaches take place in economics and research appropriate to higher education.
Alternative Perspectives in Siegen
All this was the motivation for the development of a new course of study "Plural Economics" at the University of Siegen, in which students of the Faculty of Economics, Business Informatics and Business Law learn different perspectives and necessary action alternatives for current economic problems. In many degree programmes in management, organisation and economics (BWL/VWL) the opposite is still frequently the case. In the minds of students, the idea of manageability, feasibility and simplicity is growing with the conventional courses of study in economics, which threatens to end in a highly developed simplicity. The really important questions are undecidable questions, i.e. questions to which there are no clear answers. Decidable questions have long been decided. The students should use an approach that they have previously practiced for these trivial, albeit often tricky, problems. Investment decisions can by no means only be made by means of the correct application of complete financial plans, business plans or capital value calculations. All parameters and data inserted in these calculations are social inventions, their correctness only becomes apparent in the real experience. Often it comes
completely differently than expected, because one was deceived beforehand or only considered a small part of reality, which one feels to be coherent.
All models conceal ideological premises, implicit value judgements, because they are simplifications of reality. However, it is important to address the implicit premises and values. Many students (e.g. from the Plural Economics Network) criticize that normative settings are hardly questioned and that alternatives are fundamentally excluded. We need well-founded views on reality, which are exchanged in dialogues and discourses. Scientificism is not only evident in the summation of data or the application of complicated mathematical calculations, but also in the description of different perspectives and interests as well as in the critical discourse on social power, on effectiveness and meaning.
The opening up to plurality has another advantage, that of the estimation of unintended consequences of economic action - beyond the pure calculation of profit maximization. Every non-trivial, i.e. essential and important decision has consequences, especially for other people and the rest of the world. The incomprehensibility of possible consequences of economic action creates more and more problems. In a pure market society, access to the world is only possible through money. Everything becomes a commodity. The pure market logic of a neoclassical economy consistently ignores all non-market prerequisites of a market society (legal system, public order system, educational system, etc.) without accounting for the consequences of this partial economic blindness. A society as a whole (holistically) does not only function according to a neoclassical primitive market logic.10 A society of consumers*inside and entrepreneurs*inside dissolves, since all are only competing against each other and inequality is radically increasing.11 The economy is to be made compatible, i.e. it is to serve as a tool and means instead of dominating as an end.
Economics has largely forgotten that it is a social science. In particular, neoclassical economics imitates the science model of the "exact" natural sciences without considering its theoretical background. Models and mathematical proofs can only be verified beyond any doubt in laboratory experiments; a social science refers to social reality - and this cannot be mapped solely in mathematical models and cannot be verified by such models either. Reality is more complex, more uncertain and more non-rational than any mathematical model, however complicated, could be - the complete scientific failure of economics in a possibly early recognition of the developments in the global financial and economic crisis from 2007 onwards may be an example of this. However, this is not only about the early recognition of crises, but also about the influence of economists on politics and their crisis-making and/or aggravating theories. Katrin Hirte from the University of Linz confirms this in her research when she states: Economists "have actively helped to shape financial products, for example, through their models, or directly promoted their implementation in the economic policy process," and she continues: "In addition to her role as an analyst and initiator, it was above all her attempt to actively shape economic policy via discourses, networks and initiatives that dominated - quite contrary to her own self-image. "12
Goals of plural economics
The goal of plural economics is a non-discriminatory access to economic, social and symbolic capital, because this is what decides who is accepted or rejected in the academic world.13 Furthermore, it calls for a reflection of methodology, since it plays no or only a very minor role in most common textbooks and students receive a completely uncritical introduction to positivism.14 The striving for an "explanatory" economy, for a naturalscientific model, while at the same time rejecting understanding elements, as in the political and social sciences, makes economics forget its normative foundations and it becomes a sham science. It seems necessary and sensible to use and teach very different and diverse methods of research. The dominance of quantitative research is incomprehensible because it is often based on problematic premises or uses a very questionable database. In marketing research, for example, problems with the creation of data sets are hardly discussed. Then, however, there is talk of objective data based on subjective answers in frequently standardized (easier to evaluate) questionnaires. For pragmatic reasons, a methodological individualism is assumed, according to which every human being is regarded as a benefit-optimizing individual who makes decisions without influencing his social environment.
It seems bizarre that "plurality" is controversial in economics. Science is characterized by openness and critical ability - "those resources that determine the progressivity of a science "15. The classical mainstream economy, on the other hand, concentrates power, excludes competitors from the market and strengthens its monopoly. Important heterodox foundations are discriminated against or perverted into neoclassical models because of their non-formal approaches. One separates oneself from reality because it is not possible to integrate complex reality into mathematical models.16 Increasing hermeticisation leads to a loss of legitimacy in economics. Ironically, the reason for this is market failure, which does not mean, however, that in social reality there is also state or political failure. In management theory, this leads to unsuitable methods and insights that do not prove themselves in practice.
Furthermore, it seems reasonable to us to discuss the goals and contents of research in principle. Economic research should (especially if it is publicly financed by taxpayers' money) balance out power and information asymmetries instead of increasing them. In business administration, research is conducted on and for companies. In marketing, for example, all too often one-sided research is carried out for the supplier side. There is hardly any consumer research and the stimulation of needs is researched. This leads to a consumerist "prosperity model" with tragic consequences for the social and ecological environment. This happens with public money, solely for the benefit of capital owners. Public research creates the basis for numerous innovations, which are later skimmed off by the private sector.17 In her book, Mazzucato shows that the state is often the largest provider of venture capital through its funding. In 2008, for example, the US government provided 57 percent of the funding for basic research. The basic innovations for computers, jet aircraft, the Internet, biotechnology and more were financed by the state.
Sense and goal of economic action
The crises of the world pose great challenges: Financial crisis, resource depletion and climate change, terror and war, social misery. In Plural Economics, we at the University of Siegen want to discuss the meaning and goal of economic action. How we come to good decisions together, what opportunities we have to accept challenges. How we can effectively change and how our lives and economies affect others, how we can organize responsibility. Do we do everything that is technically possible and apply it? Do we strive for profit even when we exert massive influence on the food supply of other people, whole countries? In the midst of capitalism, is it at all possible to decide differently? Can we develop humanly at all in this model or does the competitive society evokes the subject behaving competitively on all sides? These questions play a central role in the course of study "Plural Economics".
Notes
1) See Norbert Reuter 2000: Ökonomik der "Langen Frist", Zur Evolution der Wachstumsgrundlagen in Industriegesellschaften, (Habil.), Marburg; Karl Georg Zinn 2013: "Keynes' growth skepticism in the long run", in: Jürgen Kromphardt: Weiterentwicklung der Keynessche Theorie und empirische Analysen, Marburg: 75ff.
Monetary policy under the regime of over saving Political Economy of Minus Interest Capitalism
by Rudolph Hickel[This article published on 9/25/2019 is translated from the German on the Internet, Geldpolitik unter dem Regime des Übersparens | Linksnet
Today's predominant economic science teaching, research and above all consulting is characterized by a deep contradiction. Market fundamentalism is at the centre of this "mainstream economics". Markets are able to achieve the optimal balance of the overall economy through endogenous self-control. The prerequisite for this is that prices are formed by supply and demand and that the market-clearing equilibrium is achieved. The bleak figure of "Homo oeconomicus" stands microeconomically behind the macroeconomic belief in equilibrium. The macroeconomic consequences, however, are devastating.
Empirically and theoretically, it has repeatedly been shown that this neoclassical fundamentalism tends towards ideology rather than diagnosis of the major economic challenges. The highly complex models of equilibrium economics cannot conceal this. Here are a few examples: In the labour market, the systemic dependence of employees on
the workplace is suppressed in wage formation. In the public sector, as a prerequisite for functioning markets, attempts are repeatedly made to deprive the public sector of its power via market models. Macroeconomic irrationality in the form of crises as a result of microeconomic rationality is not recorded. Social injustices caused by bequeathed markets elude the neoclassical view. Adventurous efficiency models obscure the instability of the financial markets caused by the herd instinct. While the environmental problems generated by microeconomic profitability do not occur, under the pressure of the real environmental crisis reluctantly reduced models of pricing environmental damage are discussed.
Critical approaches are being taken against this prevailing, neoclassically founded orthodoxy. The colorful world of different alternative views is summarized under the keyword "heterodox economics". We are also talking about the "plural economy" that seeks recognition. The superiority of many of these alternatives over market-fixed orthodoxy is demonstrable. Heterodoxy also includes Marxist political economy with the goal of the "anatomy of capitalist valuation laws". But even the analysis of the driving forces and destructive consequences of speculative capitalism that J.M. Keynes developed are not taken into account by the neoclassically dominated majority economics, especially in teaching.
This paper attempts to assess the current monetary policy of the European Central Bank on the basis of the dominance of the highly speculative financial markets that dominate the producing enterprise economy, the so-called real economy. Heterodox, i.e. alternative theory formation, is unavoidable simply because today's monetary policy cannot explain the lack of inflation in the face of massive excess liquidity. Contrary to its own theorem of optimal market price formation, the impression is suggested that the central bank has the task and power to shape interest rates on the financial markets.
ECB monetary policy: zero interest rates, minus interest rates, low interest rates
Before the summer break, the European Central Bank Council ended all speculation on a turnaround in interest rates. For the time being, the monetary policy decisions previously in force will remain unchanged. Even a postponement of the interest rate turnaround beyond the end of 2020 is quite realistic. These repeatedly revised announcements tend to have a calming effect on the anti-ECB sentiment. The ECB's causality is clear: the flooding with cheap money will continue for as long as the economy needs "favourable liquidity conditions" to strengthen corporate demand, as the original ECB statement says. At the same time, pessimism about economic developments is currently so great that the monetary policy augurs are calculating with a "new wave of monetary easing" after the ECB Governing Council's summer break. The ECB's aim is "to ensure a continued sustained rapprochement of inflation to a level below, but close to, 2 percent in the medium term". With an expected inflation rate of 1.4 percent as a result of a weak economy and insufficient investment in property, plant and equipment, no growth spurt is to be expected beyond this year.
Here is a brief overview of the monetary policy instruments currently in use:
The banks continue to benefit from the zero percent key interest rate that has been in force since March 2016, at which they borrow money from the ECB. If the banks continue not to use the previous zero interest rate money lending rate to grant corporate loans, a nominal minus interest rate is certainly not an option from the banks' point of view.
. Then they receive a premium of about 1 percent if they borrow money from the ECB.
On the other hand the ECB imposes a penalty on the banks that park their liquidity there instead of investing. Last year alone the banks had to pay €2.3 billion in fines, according to the Federal Ministry of Finance. This mainly affects small and mediumsized credit institutions. There are serious indications that this penalty interest is to be increased from 0.4 to 0.5 percent with an additional burden of € 600 million on the German banks. In order to protect the small banks, savings banks and Volksbanks, which have been particularly hard hit by the low interest rate policy, the banking associations are calling for a staggering of interest-free allowances depending on the size of the institution. If the allowance were ten times the minimum reserve requirement, according to a calculation by the German Savings Banks and Giro Association, the banks would be relieved of € 4.6 billion annually in the Euro zone. A graduation of the deposit interest rates of the banks with the central bank is to be recommended for the protection of these banks within the range of the interest business.
The program to buy up further assets, which provides liquidity to the banks, was stopped at the end of 2019 with a volume of over € 2.6 trillion (as of June 2019). This portfolio mainly consists of previous purchases of government bonds from the euro countries as well as corporate bonds such as Daimler AG, Nestlé, Deutsche Bahn, Vovonia or Anheuer-Busch InBev. However, the bonds from the portfolio that will mature in the coming period will be "fully reinvested". The proceeds from the redemption will thus again be used to purchase assets from the banks. Since the beginning of July 2019, the Federal Constitutional Court has been hearing the case following the dismissal of the complaint before the European Court of Justice. This concerns the Public Sector Asset Purchase Programme (PSPP). In the end, the Federal Constitutional Court will probably not go on a confrontation course with the ECJ and avoid a European constitutional crisis.
Expansive cheap money policy: motives, missed targets and side effects
Since the signs are pointing to an intensification of cheap money multiplication for the banks, questions arise: What are the motives, where are the causes of insufficient success and can collateral damage be avoided? Germany's savers have no sympathy for the marginal interest rates. The more than 57 million people affected are furious about the interest and asset losses. The "conspiracy theory" of targeted expropriation is also making the rounds. Whatever power groups are to conspire on whatever, the accusation remains: while savings deposits lead to real asset losses, the state benefits from interest savings on its debts. In fact, interest rates on savings deposits are now just over zero percent. An interest rate of 0.3 percent in nominal terms and an inflation rate of 1.7 percent last year will shrink the real purchasing power of savings by 1.4 percent. The combination of a minimum nominal interest rate and a negative real interest rate is flagellated as "financial
repression". 1
Government bonds: Minus business for investors
The flight to a safe haven with government bonds is also no longer worthwhile. Since the beginning of August, yields on all types of German government bonds have been in the minus zone. 10-year German government bonds generate a "penalty interest rate" of between 0.4 and 0.5 per cent, which is mainly profitable for public debtors. 30-year German government bonds are also slightly down. There is a double cause for this: On the one hand, demand for German government bonds is rising due to the economic slowdown and even fears of recession, driving prices higher. On the other hand, the government is reducing the supply of German government bonds on the way to zero indebtedness.
Shares too risky, real estate market barely usable
Anyone who finally switches to speculatively driven equities or other high-risk alternative investments must be aware that the price explosion can quickly be followed by a deep fall. The share index of the 30 DAX companies has risen much faster than real economic power over the years.2 This relative decoupling is attributable to massive speculation. With its flooding of money, the ECB itself has contributed to the fact that share prices in this zero interest rate landscape have been driven by the real economy. Those who have to plan for the future with their savings cannot economically be expected to take the risk of speculative trading in equities.
Decoupling the statutory pension system from the financial markets
The undeniable negative effects of the low interest rate policy, especially for those who are currently dependent on wealth accumulation for their old age, allow only this conclusion to be drawn:
The old-age provision that secures one's existence must not be made dependent on the financial markets. If the statutory basic provision is restored without the need for private capital provision, the current collateral damage of monetary policy will be minimised to those dependent on saving. Monetary policy thus regains its macroeconomic leeway.
Individual economic frustration and overall economic rationality
What savers perceive as irrational in microeconomic and individual terms is highly rational in macroeconomic terms. The central bank is pursuing the right goal of making its monetary contribution to stabilising the Eurosystem and its macroeconomic development. If this policy is successful, the savers who are ostensibly burdened will also benefit. If the economy were brought to its knees by a restrictive monetary policy, which would again lead to higher interest rates, jobs would be lost, wage incomes would fall and rising inflation would reduce purchasing power.
The following statement is part of the rational education of savers: Interest does not come
"from the office" (ECB in Euroland), but is originally determined by the bequeathed financial markets. The central bank is more the driving force of the fundamental crisis forces than the cause. Politicians and bankers lack the courage to explain that the low interest rates are also a consequence of the macroeconomic overspending compared to investments in property, plant and equipment - not only by private households, however, but also by the corporate sector and the state with its surpluses.
Why target inflation rate "close to, but below 2 percent"?
Today, the focus is on the target rate specified by the ECB of "almost on, but below 2 percent". In principle, a maximum permissible inflation rate was already valid at the time of the Deutsche Bundesbank as part of its concept of money supply management for economic growth while avoiding inflation. How can this maximum mark be justified macroeconomically? If monetary policy were aimed at zero inflation, this cyclicallyindependent inflation would not be exhausted. The slide of the economy into deflation would be a realistic danger. Price cuts and subsequent, collapsing profits on a broad front would be the result. The economy needs this low rate of price increases as a "lubricant" for the economy. Without this shock absorber, the adjustment of relative prices would be made more difficult and stability policy would be less capable of action due to rapidly increasing short-term shocks. Nevertheless, the question arises as to whether the target rate is set too low in view of the emerging economic stagnation trend. ECB staff are currently informally analysing whether the current target of consumer price inflation of "below but close to two per cent" for the post-crisis era is still appropriate. After many years in which the inflation rate was well below the current upper limit, the inflation target may also be above 2 per cent for a while, avoiding increasing inflation expectations. This break with the taboo is intended to achieve the monetary policy target on average over a longer period.
The inflation rate as a target criterion is currently still being controlled according to how it works: If inflation rises above the target rate of just under two percent, this is the result of a surplus of demand over production capacities. In this case, the monetary policy response will be to tighten and make central bank money more expensive for the banks. By contrast, an inflation rate below the target level as a result of inadequate demand expectations signals a paralyzing economy. At present, the ECB is still very concerned that deflation rather than inflation could occur. This broad-based fall in prices would be poisonous for corporate profits, resulting in an economic crisis. Interestingly, the criticism of ECB policy hardly points to the provocative contradiction to monetarist theory: According to the monetarists, the surplus of cheap money should lead to galloping inflation. But inflationary dangers are not even to be seen on the horizon of a better economic cycle. On the contrary, the economy is developing more in the area of economic stagnation, almost in the environment of zero inflation. One reason lies in the relative decoupling of the overpowering financial markets from the real economy. Monetary policy provision with liquidity finds it difficult to find the hoped-for way into a monetary surge in demand. Money also ends up on the financial markets and drives them speculatively due to insufficient yield expectations for investments in property, plant and equipment.
The ECB is using monetary policy instruments to try to increase the liquidity of the real investment economy.
the provision for old age that secures their livelihood must not be affected by the financial difficulties of the individual.
It's obvious: the cheap liquidity is there. However, the horses drink too little at the monetary bulging trough. Instead of investing in property, plant and equipment, large portions of the excess liquidity are being channelled into speculatively driven real estate and stock markets.
Central bank policy close to helicopter money
The idea of "helicopter money" is sometimes recalled out of sheer desperation over the currently ineffective flooding of money. (Milton Friedman 1969, John Maynard Keynes)
If the banks' granting of credit does not bring the desired increase in money to the economy, then the central bank should distribute printed money directly to consumers. According to Milton Friedman, helicopters that drop cash over the communities take over this task. In December 1999, the then US Federal Reserve Chairman Ben Bernanke submitted a similar idea to the deflation country Japan. Bernanke, commenting on the ECB's intention to achieve the target inflation rate of just under 2 percent: "I think most economists would agree that a helicopter drop of money large enough would definitely raise the price level.
Unfair distribution effects of monetary policy
While the predominant economic sciences do not systematically address the question of distributional effects, this question is at the center of heterodox economics. The distributional effects of dominant monetary policy are: Savers without large capital holdings become poorer, while debtors profit from low interest rates, especially the state with its debt portfolios. So there is a redistribution through interest losses by creditors on the one hand and interest savings by debtors on the other.
According to the Deutsche Bundesbank, since last year, before the outbreak of the financial market crisis, the interest savings of the federal government, the federal states and municipalities can be extrapolated to almost € 370 billion (€ 55 billion in 2018 alone). This estimate is based on the fact that the average interest rate for government loans fell from 4.2 per cent in 2007 to 1.5 per cent last year.3
Small and medium-sized banks, savings banks and cooperatives in particular are among the biggest losers in the EBZ's zero and minus interest rate policy. The most affected are interest rate transactions and the highly relevant surplus from interest payments on deposits over interest income from lending transactions (interest margin) for the operating result of the banks.
On the other hand, a calculation by the DZ-Bank shows that in the years 2008 to 2018, the real interest losses from savings deposits, bonds and insurance policies for private
households add up to EUR 358 billion net compared to the "normal interest rate level" (interest savings from low-interest loans deducted).
Overcoming monetary policy failure politically and economically
An expansionary monetary policy is indispensable in view of inflation, which is far too low, and the danger of turning into deflation due to continuing weak demand. On the one hand, it is important to make them effective and, on the other hand, to minimise the harmful side effects. This is not understood by the neoclassical "mainstream economics" with its fixation on self-stabilizing markets. The reason for this failure does not lie in the concept of monetary policy, because that is appropriate. On the contrary, monetary expansion on its own is completely overburdened by the need to boost investment in property, plant and equipment through increased borrowing in the real economy. This is precisely the aim of Mario Draghi's repeated call for a supplementary active financial policy, also at the last Governing Council meeting of the ECB on 25 July 2019: "With the support of the financial policies of the euro countries and the EU as a whole, monetary policy can achieve its goal faster and with fewer side effects". The head of "Allianz Global Investors" at ALLIANZ SE supports the ECB's policy aptly: "So far, central bankers and politicians have worked side by side, not together. A loose monetary policy was opposed to restrictive budgets, especially in Germany. In retrospect too little money was invested... US economists like Paul Krugman have been calling on Germans for a long time: Make more debts! We were against it because we uphold the principles of the honourable businessman. Honourable businessman can remain ..." - especially with a responsible, debt-financed infrastructure programme.
Expansionary monetary policy can only escape the interest rate trap if it is supported by an active financial policy with infrastructure programmes and further measures to strengthen macroeconomic demand, including an expansionary wage policy. The new EU Commissioner von der Leyen would be well advised to support the monetary policy of the future President of the ECB, Lagarde, by flexibilising the much too flexible wage policy.
and to support an EU infrastructure programme: with ecologically and socially sustainable projects for strong economic development, also for the benefit of savers through higher interest rates. Finally, the "Grand Coalition" with its Federal Minister of Finance has the power to initiate an expansive financial policy in favour of the economy and sustainable development. The debt brake is the cause of a twofold misguided development: on the one hand, by foregoing borrowing for public investments, futurerelevant infrastructure investments in repair and renovation are neglected. On the other hand, the government is driving yields on government bonds into the minus zone. The debt brake reduces the supply of this financing instrument in the face of enormously growing demand for government bonds that are considered safe. It is therefore urgently necessary to step up the willingness to subscribe to bonds to finance meaningful public projects. After all, the state does not pay interest, but generates interest income. There is no rational argument, but only well-founded criticism of this policy of refusing public financing to lenders who are willing in themselves.
However, a credit-financed investment offensive alone will not reduce the [i]oversavings[/i], i.e. the gigantic gap between far too high savings and too low investments in property, plant and equipment. The old textbook wisdom of companies skimming off the savings of private households to finance productive investments is no longer true. The share of income generated that is not directly spent on the national economy, but instead used to save money, has also increased significantly since the mid1980s, driven by the expansion of deregulated financial markets. While the savings capacity of private households rose to € 196 billion in 2017, the underlying investment in property, plant and equipment is also lower due to the expected stagnation of the underlying trend. Not only private households but also manufacturing companies outside the institutions of the financial sector have contributed to this. These companies as a whole have themselves become savers. In addition, since 2014 the state has been making its surpluses available to the financial markets as asset investors instead of spending on credit. Conclusion: The financial investments of the state and companies threateningly exceed borrowing. The inevitable consequence is negative interest rates, i.e. prices that somehow attempt to balance over-saving with insufficient demand for credit and have thus become the "new norm". The determinants of oversavings can be specified from the fiscal balances of the three main sectors of the domestic economy: Households increase their savings capacity every year. According to the Deutsche Bundesbank, the financing surplus - the difference between the accumulation of tangible assets and the savings made by private households - totalled € 165.4 billion in 2017. In Germany, on the other hand, savings surpluses have not been absorbed by the other domestic sectors for years. In 2017, the state produced a financing surplus of €38.2 billion. Finally, manufacturing companies (non-financial corporations) also generate a positive net financing balance (2017: € 74.4 billion) Overall, there is a lack of effective demand for the real economy as a result of overspending compared with investments in property, plant and equipment. This is another reason why the inflation rate remains below the target norm of "almost on, but below 2 percent". From this balance-mechanical analysis, there are three approaches to reducing the over saving compared to capital spending on property, plant and equipment: On the one hand, the state and companies are expanding their creditfinanced investments in property, plant and equipment. On the other hand, the main source of over saving is private households with massive concentrations of wealth. Against today's stagnant basic trend, the unequal distribution of wealth, which lacks income to finance mass consumption and government spending, must be reduced. Economic development will only become strong and the low interest rate policy superfluous if the over saving in relation to real economic expenditure is reduced. On the one hand, increasing private and public investment serves this purpose. On the other hand, a fairer distribution of income and wealth will dampen savings on the financial markets.
This heterodox approach, which brings together insights from the Marxist political economy and the Keynesian macroeconomic analysis of unstable financial market capitalism, reveals the systematic weaknesses of a market fundamentalist mainstream that is more suited to ideology.
annotations
1) The number of years it takes at a given interest rate to double your savings account balance shows misery from another side of the saver. In the summer of 2008, the savings balance at an interest rate of 2% doubled after 35 years. By contrast, in the summer of 2019, at an interest rate of 0.01%, the total is 6,932 years. In winter 2012/13 it was only 139 years at 0.5%. There is no end in sight to the meltdown in interest rates over the next few years.
2) From 1995 to 2015, the DAX index rose from 100 to 310 and the real gross domestic product to only 200.
3) At the beginning of August this year, investors are paying for a ten-year federal bond with currently 0.4 percent on it. This means that after ten years the Federal Government only has to pay back 96 cents for a €1 bond. This is the price that bond buyers are willing to pay for the "safe haven" that the Bund offers in uncertain times.
Rudolf Hickel, Prof. Dr., was a professor of finance at the University of Bremen and director of the Institute for Work and Economics (IAW) from 2001 to 2009. He is a founding member of the Alternative Economic Policy working group. His main topics are: an explanation-relevant monetary theory, analysis of market failure and criticism of neoclassical monetarist reduction economics.