The "New Economy" and its Illusions
Pseudo-Liberalism or True Liberalism
By Fredmund Malik
[This article is translated from the German on the World Wide Web, http://www.schweizerzeit.ch/1502/liberalismus.htm. Fredmund Malik is a professor of economics at the University of St. Gallen, Switzerland.]
The only new element in the "New Economy" is something ancient and as old as the hills. Deregulation, globalization and digitalization lead the world to the model of perfect competition more strongly than any other technical or social development in the past.
The main elements of the competition model - known to every economics student in the third semester - are: friction-free adjustment of all economic processes, minimization of time and maximization of transparency. The consequences of this model are also clear. Prices level out on the lowest possible standard and no one makes any profits any more.
This insight is neither new nor especially pleasant for the entrepreneur side. In this light, the "new economy" appears rather old and far from the heavenly conditions. Not a single thesis of the "new economy" supporters and their loyal media vassals has proven correct. In other words, the collapse of illusions actually occurred much earlier, in the middle of the nineties.
Delaying and shifting this collapse so long can be ascribed to the unparalleled creation of liquidity by the US Federal Reserve together with the direct interventions supporting the stock exchanges. This led to an unprecedented credit expansion and a gigantic "asset bubble" (stock market bubble) not justified by any real economic output. Simultaneously that mass psychology mood spread in which every risk appeared trifling and the belief could arise that the American Federal Reserve was always ready to be a deliverer.
FED Chairman Alan Greenspan, heroized by the financial world and the media like Abraham Lincoln and John F. Kennedy, has a good chance of entering into history as the destroyer of the American economy. All conditions were fulfilled that made possible a collapse of the financial markets with all the usual consequences: a long-lasting recession, possibly a depression and destruction of a large part of asset values in a period of deflation. As history teaches, such events are not limited to the economic sphere but have far-reaching effects on the social fabric of society, endangering old-age pensions and social security. For the same reason, these events also lead to the risk of political radicalization.
The lessons could have been drawn long ago if one studied Japan and its economy. Japan is ten years ahead of the US and therefore offers the best example. All the excesses happened there in the second half of the eighties. The result was a ten year debt-filled agony for which no end is in sight. Lessons could also have been drawn from the collapse of the Southeast Asian economies. However this warning came too late to halt the mass psychology moment.
Economic Laws Remain
"Old" and "new" cannot be applied so simply to the economy and its laws as attempted. The "great transformation" that presumably is still in its first third will bring many innovations. Radical innovations will occur in all value-added stages of the economy from research and development to marketing. New forms of organization and new types of enterprise will arise, new kinds of administration, learning and teaching, transportation and consumption. People will act in many new ways.
Nevertheless the laws of the economy will not change. Price formation will occur despite all the innovations through supply and demand. Contracts should be observed and expenses paid. Debtors should be served. Creditors have to be executed or written off. Businesses first need customers, then they can think of shareholders. They must be competitive at all times. Being valuable is not their goal. Business will first maximize customer value. Shareholder value comes afterwards. Solid financing and the ability to survive bad times will be basic elements of every business strategy. One must learn to rightly distinguish false misguided growth and market-necessary size from personal monuments. Good managers must be clearly contrasted from adverturers and egomaniacs. Businesses cannot be conducted one-dimensionally in a purely financial economic way in the long run.
True and False Liberalism
A free economy is not possible by renouncing on rules. This must be learned again. Liberalism has never meant disorderliness but rather the establishment of carefully well-thought out and skillfully arranged rules that set limits to self-destructive forces and clearly and strictly limit individuals' exercise of power and enforce responsibility and liability for faulty conduct.
The complexity of a modern society, its transparency, the speed of disseminating information and the educational state make it more important than ever that the core systems of the economy and society are robust. These systems may neither be at the mercy of intellectual adventurers and their economic illusions, the playthings of the greed of the financial world nor abandoned to the megalomania of managers.
If the greatest chance of humanity for peace, freedom and prosperity that ever existed should not be carelessly lost, pseudo-liberalism must be replaced by true liberalism. A small but internationally interwoven country like Switzerland must have a precedent interest in true liberalism.