The advantage of writing a blog is that one can discuss some issues that would never find their way into academic articles. Here, I want to discuss the academic drift from economics to business&administration. In the German university system, economics used to be big and business&administration little. That has completely turned around in the last decades, with economics now being the sidekick of the business people. Somebody said – I forgot who it was – that the on-going crisis is the result of this shift. PowerPoint killed the economist, if you like. Fancy presentations (like the one above for which I cannot find a source) have held more intellectual power than arguments, and it did not take long until people understood that this holds regardless of the content.
What you have today is what one could cynically call surrogate economics. By this I mean economists who live in an “as if” world, completely shielded from reality by their belief in assumptions like rational behavior and mathematical models. If reality does not fulfill all assumptions, well then, too bad for reality! One case in point is the IS/LM model, which is still taught to undergrads. The money supply is exogenously controlled by the central bank, never mind that today most modern central banks clearly don’t run this kind of system. Instead, they set the interest rate.
Economics today mostly describes some kind of virtual reality where there are no real problems except that some things are not very flexible. If everything and everybody would be flexible, then all would be fine. Clearly, the reforms in the euro zone were following this idea. Cut down government, increase flexibility, and by this regain confidence: a falling price level would lead to firms starting to invest again. However, the debt situation was not taken into account. There have been many economists and practitioners who have brought forward the right ideas, but still neither academia nor policy-makers have changed their perspective. Without new thinking, the euro cannot be saved.
The ECB must be a lender of last resort or some kind of euro bonds solution must be brought forward in order for the euro to survive. That, however, would only stabilize the patient. More economic integration is needed to put a floor on aggregate demand. A financial crisis should not have such a huge effect on demand as it has had in the last years. Hence, some spending must come from Europe. I propose that Brussels pays for education, pensions, transport infrastructure and health care. That, however, would mean that the sovereign nation states surrender some of their (taxing) power.
A future of the euro in Europe depends on this kind of political integration. Nevertheless, the euro must be stabilized first before long-run reforms can be tackled by those who have proven that they understand the situation, economist or not. Mr Schäuble has said that some economists say this and others that. This is new only because the mainstream was wrong again and again, so that those who were right were allowed to speak to a broader public.
Some people who are currently in key positions in Europe lack the intellectual capacity to see through this crisis and redefine it as a moral play: The Merchant of Athens, etc. Simple economics tells you that if foreign debt as a result of net imports in the past is a problem, you either default on a part of your debt or – much better for everybody – you turn yourself into a net exporter. If the creditor country blocks this adjustment, default will be the only economic policy available to the debtor country. If unemployment becomes unbearable, this is where we are heading.
The responsibility for this would lie on the people of Europe, who accepted PowerPoint and rejected economics as a science.