Development economist Patrick Kaczmarczyk criticizes economic models and calls for a rethink of the costs of labor and capital in Europe.
Calculations of the economic model are seldom of interest to the general public. This changed with the Ukraine war: a group of experts recently calculated what it would cost the German economy to give up energy supplies from Russia and came up with relatively small losses. This was contrasted not only by other economists, but also by Chancellor Olaf Schultz, who criticized such calculations as “irresponsible”. In contrast, model calculators described Schulze’s position as “anti-science”. However, this is a mistake, says economic development scientist Patrick Kaczmarczyk. Even beyond the Russian question, it calls for an overhaul of current economic models.
Mr. Kaczmarczyk, Economic models are never perfect, so they can never fully reflect reality and predict the future with certainty. On the other hand, policy always depends on experts who anticipate the effects of measures. How to solve this dilemma?
The problem with these models is that they are fraught with a lot of uncertainty, especially in a situation like today. We’ve already seen in the context of the post-Corona boom: even if there are delivery issues with small input factors like semiconductors, this can cripple the entire industry. The potential consequences would be much greater if an energy embargo was suddenly imposed.
But still trying to model…
This is important for the economy. However, the problem is that such models are of limited value because they are based on many simplifying assumptions. We need to reduce complexity. But on the basis of a model which excludes, by assumption, cascading effects, loss of demand or financial crises, no political feeling should be created.
Economic Policy: The Model Accounts Question
So how should politics generally deal with such typical accounts?
Such models can be part of the political decision-making process, but they are only part. Qualitative information about the causal relationships of value chains is also part of this, as is the analysis of possible long-term harm and financial market risks. The chancellor made a decision amid great uncertainty. Defaming this as “anti-science” is over the mark. With all the debates about energy bans, however, where the skepticism is palpable, we must not forget that we generally need more variety in economic advice. In recent decades, the economic school of thought has established itself as a dominant force unrelated to the real world. It gives the impression that it is scientific because it is very arithmetic and therefore appears value-neutral. But mathematical models are nothing more than a formal theory, i.e. ideas about how the world works.
Which theory do you mean?
I am referring to the neoclassical equilibrium theory, according to which the economy is always in equilibrium or inclined towards it. Development economist Joseph Schumpeter described this theory as “empty and meaningless” because it is unable to explain dynamic developments. For Schumpeter, capitalist development is a series of imbalances.
Always the same recommendations: liberalization, flexibility and privatization
This sounds like an academic dispute.
he is too. But with very real repercussions. If you understand the world as a market system that is best left to its own devices, then the best results are obtained when all prices are as flexible as possible. This is why the recommendations are always the same: liberalization, flexibility and privatization. Regardless of the problem. However, the world does not work that way. Quite apart from the fact that markets are an integral part of a social and environmental environment, the most important markets of the economy – the labor market and the capital market – do not behave like “real” markets at all. In the labor market, wages determine what families can spend and thus businesses can earn. The company’s income in turn determines the number of employees that are hired. Thus wages are an important cost and demand factor at the same time and hence there is no independent supply and demand curve. The capital market is also a private market, since the entire price formation is strongly dependent on the yields of government bonds. In addition, speculation frequently distorts prices.
What should change in economic policy?
We need to understand how dynamic development works. We also need a competition policy for this, but it is an entirely different policy. Until now, it was only a matter of establishing prices as flexible as possible for all factors of production. This has mainly resulted in shifting production and putting pressure on wages. This is evidenced by the contraction in the past ten years and the decline in investment rates. On the other hand, we learn from Schumpeter that some prices must be fixed for a market economy to function. Especially at a time of massive technological disruption – keyword digitization, climate protection, industrial transformation – we must learn to say goodbye to the old paradigm.
Europe: The economy needs a new wage policy
How will this rethink affect policy?
In order to provoke competition between firms for investments and innovations, we need a different wage policy: productivity-oriented wage increases and wage harmonization in Europe. Just as we use the price of carbon dioxide against climate change so that companies emit less carbon dioxide, higher wages create an incentive to gain competitiveness through investments and increase productivity — because no company will give up market share and additional income if demand is high. With the high level of collective bargaining and international wage coordination, firms have no other option in the long run than high productivity if they are to survive. But in Europe we will have to rethink not only the costs of wages, but also the costs of capital.
What does it mean?
Capital costs are crucial to the competitiveness of companies and this is where Germany, for example, has an advantage. Because the yield on government bonds basically determines the interest that companies have to pay on their loans or on their bonds. And since the federal government does not currently pay zero percent interest, German companies benefit. On the other hand, their Italian competitors have higher capital costs because the financial markets demand higher returns from the Italian state. These differences in the cost of capital must be settled by the European Central Bank so that it explicitly guarantees all government bonds in euros, thus eliminating country risk.
Investments: it is the state that must provide the impetus
Wouldn’t this be at the expense of efficiency?
Efficiency is not everything – what do I gain if I have highly efficient companies whose productivity is stagnant and technically lagging because they are not investing? Second, people and companies need space to allow for some “shortcomings” from which innovations can emerge. This is part of Schumpeter’s multiplication table. And thirdly, the situation is currently very uncertain, and at the same time there is a need to make huge investments, the risks of which are very high. In such a situation, the state must give impetus – and it should not slow down its course because of debt brakes or bureaucracy. Because government spending, which has been criticized many times, improves income opportunities for businesses and gives them much-needed planning security. (Interview: Stefan Kaufmann)