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The State Should Rescue the Market Economy

A balance recession is more than a temporary slump of the economy. During a balance recession, private economic actors try to reduce their debts. The cheap money seeps out on the financial markets where it leads to new bubbles. The labor market does not function like other markets. Falling wages did not lead to more employment - as claimed for decades.

The economic signs point to storm but it's not too late for a conversion. That is the appeal of five noted economists from three continents

by Markus Mugglin

[This article published in the Swiss WOZ journal on 4/18/2013 is translated from the German on the Internet.]

"Most have not heard anything about balance recessions." "Unfortunately many European politicians are not aware of an economic sickness called balance recession," Taiwanese economist Richard C. Koo complains in his contribution to an economic manifesto presented by five noted economists.

The message is explosive while the criticism of the chief economists of the Nomura Research Institute in Tokyo is technical. It is only one objection among many that show how little the current debates on the economic crisis focus on the real economic courses of events. The consequences are fatal as demonstrated by the crisis deepening for years.

A balance recession is more than a temporary slump of the economy. During a balance recession, Richard C. Koo explains, private economic actors try to reduce their debts. Debts are minimized instead of businesses taking credits to finance production and maximize profits.

That is the great problem that confronted central bankers worldwide for months. Their broadmindedness is unbounded like their powerlessness. The cheap money seeps out somewhere on the financial markets where it leads to new bubbles.


The consequences can be seen everywhere - in the US, Japan, Britain, Ireland and Spain where the crisis deepens on and on. The Great Depression of the last century that plunged North America and Europe into poverty and distress shows the dramatic effects of a balance recession. The warning to politics lies here, Koo says. The countries mired in crisis risk the collapse of their economy or a long-lasting economic trough with high unemployment and additional massive debts.

According to the economists who composed the Manifesto, the balance recession is only one of many problems raised at the most different points of the global economy.

Heiner Flassbeck, former chief economist of the UN organization for trade and development exposes the gulf between theory and reality in the example of the labor market. The labor market does not function like other markets - and different than the mainstream economy claims. Falling prices led to a greater demand on the commodity markets - but not on the labor market. Falling wages did not lead to more employment - as claimed for decades.

On the contrary, wage flexibility slows down the demand for goods and ultimately leads to more unemployment. "Unemployment after the 2008/2009 financial crisis jumped to nine percent, the highest level in the last sixty years despite the lowest share of wages in the gross domestic product" (Flassbeck).


The crisis makes clear how the functioning of the free enterprise system is hardly understood. That is the deeper reason why the crisis worsens, unemployment rises and the gulf between rich and poor becomes greater. That is the main message of the Manifesto.

"Act Now!" does not promote revolution. With different arguments, the authors expose the failure of economic policy and are united in decrying boundless capitalism. The active state is necessary and must intervene so the market economy can function.

The command of the hour is the "immediate ending of austerity policy." As long as the economy does not invest, the state must step into the breach. Otherwise the prosperity built over decades and the democratic order will be endangered, not only income and jobs.

That does not sound revolutionary. Still the call does not have a majority.


by Albrecht Mueller

[This review published April 18, 2013 is translated from the German on the Internet,  http://www.nachdenkseiten.de/?pc/16933.]

Correct fast action is urgently necessary. However the majority opinion in politics, science and the media is so hardened and narrow-minded that the pressing demand of economists Paul Davidson, James K. Galbraith, Richard Koo, Jayati Ghosh and Heiner Flassbeck that could save us from the dangers of a new worldwide economic crisis will probably ricochet off the concrete of dominant opinion. I hope for another fate for this book and call from the heart. Still the constant resurrection of the dominant circles is simply disillusioning. In this review, the most important elements of the book oriented in the manifesto will be outlined.

The common clear message of all five authors is: take measures to stimulate the world economy. Neoliberalism has failed. Prevent a relapse in nationalism and a war of the nations. A serious international cooperation and an immediate ending of austerity policy are the commands of the hour.

Several statements and demands follow:

The world economy is in its most serious situation since the 1930s.

The financial crisis and the new crisis in the real economy are not natural phenomena. They are made by people and are the mediate and immediate consequences of false economic doctrines revived in the last 30 years while the important lessons from the Great Depression were forgotten and repressed. The meaning of objective insecurity and the necessary role of the state are not understood, as Paul Davidson shows in this book.

Politics must drastically limit the power of the financial markets.

The labor markets of the western world must be oriented in stable returns for people, not made flexible again.

Monetary policy must combat the deflation danger in the crisis with all available means.

Fiscal policy in the industrialized world must now steer against a new recession.

Global economic policy must take necessary steps on all planes and quickly draw lessons from the failure of neoliberalism. If that doesn't succeed, more than only income growth and some jobs will be endangered. The prosperity built over decades will be in danger along with the democratic order of our states.

That Heiner Flassbeck brings up this subject to his colleagues and that Westend published this book is very commendable.


by Heiner Flassbeck

[This paragraph published May 1, 2013 is translated from the German on the Internet,  http://www.flassbeck-economics.de/faz-uber-vollbeschaftigung/.]

The FAZ writes about full employment. This is like Ptolemy writing about the Copernican worldview. It could be great fun if they at least had good writers... The labor market does not function like a normal market because supply and demand are not independent of one another unlike the potato market. If the supply curve and the demand curve that economists like to describe as a cross are not independent of one another, there is no normal market outcome and the beautiful free enterprise notion, failing wages bringing more employment, remains a mirage. The FAZ gloats about exports and competitiveness which is not a solution of the problem. Neither they nor mainstream economists recognize the crucial domestic economy connection.

A book in which the Copernican worldviewwwww is explained in detail is "The End of MUnemploymentntntntnt" (Das Ende der Massenarbeitslosigkeit") published by Westend in 2007.



Myth #1 - "The state wastes tax funds"

Myth #2 - "Our tax money seeps away in the social bureaucracy"

Myth #3 - "Taxes, the state and bureaucracy grow rampantly at the expense of citizens"

Myth #4 - "Taxes slow down growth and are poison for prosperity"

Myth #5 - "Germany is a high tax country"

Myth #6 - "Top earners are fiscally burdened most strongly"

Myth #7 - "The top income classes bear the large part of the tax burden"

Myth #8 - "Property taxes strike the middle class"

Myth #9 - "Record business taxes endanger the location Germany"

Myth #10 - "A financial transactions tax would hit small investors and pension savers"

Myth #11 - "One tax record chases another with the German treasury"

homepage: homepage: http://www.freembtranslations.net
address: address: http://www.buzzflash.com

The lessons of the North Atlantic crisis for ecfonomic theory and policy 10.May.2013 10:34

Joseph Stiglitz

The world has seen a hundred financial crises in the past three decades. In this column, Nobelist Joe Stiglitz argues that we could have done much more to prevent this crisis and to mitigate its effects. Looking ahead, we can do much more to prevent the next one. This is a chance to revolutionise flawed economic models, and perhaps exit from an interminable cycle of crises.

 link to www.voxeu.org

The American economy 10.May.2013 14:28


It should be noted that this German commentary is not entirely applicable to the US - their economic system is similar, but the US is the leader and instigator of this world crisis.

"The crisis makes clear how the functioning of the free enterprise system is hardly understood."

This sentence isn't exactly true - the world is not witnessing the collapse of the "free enterprise system" - our "free enterprise", what is also (correctly or incorrectly) labeled "capitalism", operates only under the deep coercion of the State. First and foremost, we have the public/private entity called The Federal Reserve, which as an institution is supposedly privately run, but in actuality it sets political policies (like the interest rate) and is deeply intertwined in political affairs. Beyond the Federal Reserve, you also have the IMF and World Bank, more or less these are controlled by the Federal Reserve as the world's leader of capital and debt. Second, our contemporary market economy is backed up by a huge number of government imposed monopolies, most especially the patents system and the requirement of using the American dollar. International business is hardly "free trade", and the government also routinely regulates large business mergers through the Federal Trade Commission.

Regardless of the a person's thoughts on how "free" and "laissez faire" our economic system actually is, and regardless of how corporatism or consumerism might be a stronger critique of economic system, let's examine the solution:

"The active state is necessary and must intervene so the market economy can function."

It strikes me that the purpose of the State is not to protect the interests of consumers, but to maintain the existing power structure. So, what sort of intervention can we possibly expect from the State if this is the case? Likely an intervention that favors only the rich.

This is really where the advice of Germans is less applicable than the United States, though with the European Union, the Germans will learn the same lesson: our American federal government is NEVER going to be accountable to individual citizens, and never be concerned about the "consumer" or citizen. Empowering the State to make economic decisions is empowering the State to impose tyrannical economic oligopolies. The more the State becomes involved in economic decision making, the worse off most people will be. As an example of this; look at Obamacare (or more appropriately named Romneycare, since he pioneered it), this was created by the Insurance companies, hence their stock jumped after its implementation. While the policy is praised by the media as a healthcare reform for "the little guy", we can tell by economic indicators exactly what this policy is going to do: increase insurance company profit. Government is never going to work as an institution to help regular people, it's purpose is always to help the "1%" - perhaps there are times when all the economic classes share a common goal, and there are other times (and other governments) that have lived under the threat of the guillotine - but we are so far away from those possibilities that it is irresponsible to propose solutions based on these fantasies.

There is one component of this article that I do completely agree with:

"Politics must drastically limit the power of the financial markets."

The only practical way to do this is ban usury entirely. Usury is the act of loaning on interest; more specifically the act of loaning money to make a profit. The entire financial markets all around the world are dependent upon their ability to do this, and really since about 2,000 BC there's been serious critiques of this practice. Usury is actually forbidden in Islam, Jews are forbidden from loaning on interest to each other, Jesus warned against it, and it was nearly banned in Hinduism unless you're of the highest social caste. Just about every philosopher who has contributed to the concepts of Classical Liberalism has criticized this practice entirely... .anyways... It's bad. It's bad for a number of reasons; mostly that it propels a class of wealthy people into staying wealthy without being productive contributors to society. In a similar way that slavery has become prohibited and detested, so must usury as well. Most of the educated public already hates the banks already, it's just a matter of educating people about this insidious practice and the historical criticisms.

@Stiglitz - When you write, "The world has seen a hundred financial crises in the past three decades" it makes me wonder if you're trying to imply that these are a new problem? Have you ever heard of the South Sea Company, or Cato's Letters? Speculation and the resulting bubbles and bursts are not new problems in humanity, nor are these problems exclusive to western markets. I don't think anything can be done to stop economic crises from happening, nothing can help society "exit from an interminable cycle of crises", it's a natural occurrence. If you study the economy closely, you can see them coming and survive them just fine (even profit from them); but the public is often times too distracted, and the media doesn't care to educate them.

fidelity or Fidelity? 13.May.2013 16:49


Some messed up and started using a capital F.

Boom and bust just a natural cycle? Sure just like the seasons, nothing you can do. But arent these markets just a figment of our imagination, no more real than money?

Belinskism, anyone? 14.May.2013 14:45


You know moron, if you just skimmed through my past comments, even just over the past couple weeks, I typically capitalize proper nouns, especially names. Your accusations are so bizarre that it makes me legitimately curious about your mental health. You claimed to be a veteran, you should know that Cascadia offers perhaps the widest community of pro-bono services to veterans, more than any other community possibly in the world. The central hub of these services is Returning Veterans Project. You should skim over their resources because you can find a mental health provider that fits your needs, they're local and free. I highly recommend you find a person to talk to about the things you're dealing with in life, because these desperate jabs to get my attention are silly.

I thought I'd answer this question, since markets and money are often misunderstood in the radical community. More or less this is because terminology has become inflated to become something misunderstood. Clarifying misunderstood language seems so apropos that I shouldn't skip the opportunity.

"[Aarent] these markets just a figment of our imagination, no more real than money?"

It depends upon which market you're referring to, but in general, there is a tangible result in markets called commodities. A market is defined as a place where things are traded, and this can become abstract. Financial markets are expressions of trade, and so is the "marketplace of ideas" - those are imaginative expressions. Markets are as old as humanity, they've existed in every civilization including the Indus Valley and Mayans, we know this because they traded. Even hunter-gather humans traded, so it's possible to say that "markets" predate civilization. A market has many tools of measurement, therefore a size, markets can even have a "place", so I think of this markets within this context as real.

Money is quite real as well, at least in the form of a tangible commodity, interestingly, if you look up "money,commodity" on Google's Ngram, you'll find their uses parallel throughout English writing. "Money" being defined a "medium of exchange" and "measure of value." Of course, fiat money is an illusion of constant-value, and in a broader sense "money" is baseless because money can be anything that has value - so anything that has value can be considered "money" and certainly things that have value are real. Cattle, seashells, beads and other commodities have all been used for money because of their more portable nature, they make a perfect "medium of exchange". For several thousand years civilizations all over the world have used certain commodities as a base understanding of value, and this base unit could be considered "money". Most civilizations for at least 1,700 years of European, African and Asian history valued a laborer or soldier at 1/10th of an ounce of silver per day. Hence, silver is probably the oldest universal and real form of money.

Perhaps "Market" and "Money" were euphemism for another idea? Perhaps "economy" is the abstract idea that is not real? There is some truth to an economy existing only in imagination, as economy is about the measure of wealth or resources. So, if I had 1,000 seashells and used them for my currency, and another person used silver and had 1,000 ounces - who has more wealth? It's relative. The word "economy" is so academically prone because "economy" is actually the study of markets in both a micro and macro scale and understanding how behavior impacts markets. Economies are not tangible, but they are a lens of understanding that are valuable in providing analysis. Though, on the flip side, one could not say "we have a market but we do not have an economy" so, if markets are real, is the study of them really just within our imagination, or is it only intangible?