Friday, August 22, 2014

Merkel vs the economists

One of the most interesting figures from the post USSR / Warsaw Pact era was Vaclav Havel of Czechoslovakia.  This was no ordinary politician / activist.  Witty, urbane, and a genuine intellectual, he had carved out a pretty serious career as a playwright before getting involved in politics.  When he became the first democratically elected President of Czechoslovakia in 1989, I am sure I was not the only person to have very high hopes and expectations for his presidency.  Unfortunately, he would soon prove to be an enthusiastic neoliberal hack.

I have written several times about how promising politicians became neoliberal swine upon their elections.  Many of these folks ran specifically anti-neoliberal campaigns so their sell-out of principle was especially egregious.  But in a case like Havel, there didn't seem to be any sellout of principle involved.  If you grew up in the Eastern Bloc like he did, "capitalism" was taught as this monolithic ideology.  While capitalism was considered this unspeakable evil, it had produced an economic miracle in postwar Europe that was really hard to ignore.  But nowhere in his Marxist indoctrination was he taught that there were wide variations in the way "capitalism" had been practiced so he could not have known that the version that produced wirtschaftswunder in post-war Europe was dramatically different than the neoliberalism he was being asked / forced to adopt.  Hell, I live in a country that got wealthy practicing Industrial Capitalism and then came to an abrupt stagnation and decline when it switched to the neoliberalism of Finance Capitalism in the 1970s—and even with all those real world examples, I find it extremely difficult to explain it to people who actually lived through the changeover.

Angela Merkel's problems with economics are a lot like Havel's—only worse.  Not only did she come of age politically during neoliberalism's ascent, she lives a country that had become so rich and powerful during the age of Industrial Capitalism, it has been able withstand many of the storms caused by neoliberalism's excesses.  She governs a nation where virtually all of the academic economists are good little neoliberal toadies, while the mainstream journalists and the zeitgeist is overwhelmingly conversant in neoliberal talking points.  Germany is prosperous in spite of their idiot economists, not because of them.  So now Europe has suffered six years of economic disaster and only Germany has held its head above the fray.  Merkel may be an economic neophyte but she just has to know such a situation cannot last.  Even the financial press is now writing about the end of wirtschaftswunder.  And if Germany gets into a serious trade war with the folks who supply their energy, the remaining power of her industrial capitalism will surely end.

Meanwhile, Ms. Merkel is asking the economics profession why they keep getting everything so wrong.  If and when she discovers the reasons have mostly to do with academic debates from the 1970s, I will imagine she will be truly miffed because there is no way she could have learned about THAT as a chemistry student in DDR.

Chancellor Merkel challenges Nobel economists

Manuela Kasper-Claridge / nz  20.08.2014

German Chancellor Angela Merkel has asked Nobel laureate economists why their discipline got so much so wrong in recent years. And she challenged them to come up with new measures of wellbeing.

For the fifth time, winners of the Nobel Prize in Economics have come together to discuss current issues in their field. The conference is held every three years in Lindau, a small, scenic town on the shores of Lake Constance near the Austrian and Swiss borders. This year, the meeting included more than 400 young economists and a special guest - German Chancellor Angela Merkel.

Critics of European economic policy were also in evidence.


"Austerity blasts Europe", "Economic growth versus sustainability", "Is ethical thinking foreign to economics?" - provocative placards in garish colors were hung along the streets leading to the convention center. Representatives of NGOs like Attac, which is critical of economic globalization, have been holding demonstrations in Lindau. Many are dissatisfied with the policy prescriptions of leading mainstream economists. They see them as responsible for out-of-control financial markets and high unemployment.

Whom does economics serve?

The Nobelists come to Lindau to talk about the state of academic economics and about the state of the global economy itself. There is no fixed theme - topics can be freely chosen. But a question that is always in the background is: How useful is economics?

This year, 18 Nobelists came to the conference - all of them past winners of what is formally called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, established in 1968 by the Swedish central bank.

Here, they're meeting young economists from 80 countries who are looking to learn from them - including Kareem Immail, a young Egyptian economist who works at the International Monetary Fund. He said he has been following the discussions at the conference with interest, but there are "more questions than answers" on offer.

The German Chancellor is looking for a dialogue

There were more journalists accredited for this year's meeting than for any of the previous ones, and the tone of dispute and controversy has rarely been so marked.

This year's meeting was also the first which Chancellor Angela Merkel attended. She had questions as well:
"Why were the economic sciences in the past several years of crisis so badly off the mark in terms of predicting or describing economic reality? Were the underlying economic theories wrong, or were we listening to the wrong people?" she asked the meeting's Nobelists and young researchers.

Politics has to be able to do more

Angela Merkel noted that she was herself trained as an academic scientist - she has a doctorate in physical chemistry. She knows, she said, that there are no perfect answers. Especially not in politics, which has to focus on the interests of the citizenry, rather than on economic theories. She said that "Homo economicus" could not consist simply of economic expertise, and made a pitch for her political approach.

"For us, it's about understanding the expectations and ideas of the citizens about what a good life is," she said. That's what her priority is, and she wants economists to address this as well. She wants new economic welfare indicators developed that aredifferent from traditional measures like gross domestic product (GDP) or unemployment rates.

A rebel from Indiana

Among those listening to the discussion with satisfaction was Joseph Stiglitz, a Nobelist who was chief economist of the World Bank from 1997-2000. He's one of the few prominent economists who is not considered to be conservative. He has been called "the rebel from Indiana," in part because he questions whether markets are always efficient. In an interview with Deutsche Welle, Stiglitz said that his analyses have nearly become mainstream.

A topic that has consistently preoccupied him is the widening divide between the rich and the poor.
Widening inequality

"For almost fifty years, nobody talked about inequality. Now there's a broad consensus, even among economists, and certainly among our society, that inequality is an important issue," he said, and cited figures from the US.

"95 percent of the income gains earned nationally during the past several years in America went to the top 1 percent. Median incomes, adjusted for inflation, are lower than they were 25 years ago."
The American Dream

Stiglitz noted that in the US, it really is the case that the rich are getting ever richer, and the poor poorer. In his view, that will have enormous economic consequences. One key factor is that not enough was being invested in the education and training of the broad population. The American Dream - an iconic story of starting as a dishwasher and rising to the status of a millionaire through hard work - has long since become an almost unattainable myth.

A Europe for the rich

Asked about his views on Europe's economy, Stiglitz admitted that income distributions are less unequal there than in the US. In Germany or Scandinavia, there is a strong middle-income class. But in Europe, too, the incomes of the wealthy have risen disproportionately to those of the rest of the population.

Economists without answers

Alvin Roth, another professor of economics and Nobelist, told DW that he can understand the intensity of the discussion about social inequality. He said rising unemployment among the young was especially troubling.

At the same time, he asked non-economists to understand that economists don't always have solutions to economic or social problems.

"Economics is a very young science, we're still learning, the environments change, the challenges change," he said. more

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