9 Nov 2010

A Four-Pillar Strategy for a Sustainable Economic System

By Cordula Drautz

Conservative politicians and economists want to make us believe that in order to prevent future crises it is sufficient to condemn the greed of Wall Street managers and deplore the decay of our value system. The German literary critic and author Burkhard Müller correctly suggests: ‘If there is a dominant tone in the current melody of this economic crisis it is the moral one. As if this misery was only a result of excess and could have been avoided if only controls were more effective and human will was stronger. Indeed it is a logical product of our economic system’.

This debate opens a window of opportunity to discuss alternative forms of economics and strategies for a sustainable future. The challenge will be to combine short-term measures to cushion the worst social and economic distortions with simultaneous attempts at formulating an economic programme that, in the long run, develops a diversified, regional and sustainable economy and financial markets which are underpinned by and serve social and ecological values.

In order to create a more sustainable system, we need an integrated approach of economic and social concepts. A four-pillar strategy should include 1) restoring the idea of political economy, 2) reconnecting financial markets and the real economy, 3) revitalising domestic demand, and 4) reforming social security.

1) The ‘two-world-conception’ consisting of value-free economic theory and a completely separated ethics system is today considered both a problem in theory and in practice. When neoclassical economic theory and its ‘pure’ econometrics began to take over the main discourses in both science and politics, moral considerations were deliberately ignored. The concept of ‘political economy’, however, is based on the notion that the economy has to be embedded in the normative order of society. Contrary to widespread believes, it wasn’t the political left, but the founders of classical national economics like Adam Smith and John Stuart Mill who developed this idea. It is noteworthy that Adam Smith was not even an economist, but a moral philosopher by profession.

2) The need for a global regime, which regulates financial markets and reconnects them to the real economy, is paramount. Financial markets have lost their function as financial intermediaries and have created dynamic markets in which risk assessment became a speculative business in itself. Additionally, the share-holder-value-principle entails massive problems, as institutional insecurities, the instability of financial markets and the impediment of innovation block a sustainable development of the macro economy.

3) Its export orientation quickly turned out to be a liability for Germany when its domestic consumer demand further declined (production solely for the purpose of exporting to international markets is not a viable basis for stable economic growth). Wage restraints, attempts to reduce non-wage labour costs, and the reduction of unemployment insurance payments on employees made German exports relatively cheap in European comparison. But Germany should not only rely on its exports, it should more generally support the groups that depend on it such as the car industry and the chemistry and engineering professions. Still, a reform of wage policy through the introduction of a minimum wage and the strengthening of industry-wide collective bargaining agreements are starting points for stabilising domestic demand.

4) With regard to financing our social security system, mass unemployment is a fundamental problem. Although short-term mechanisms, such as shortening the working hours of employees to avoid mass lay-offs, impressively showed the effective protective function of the solidarity pillar in Germany’s economic and social system, the necessity for more long-term stabilisers is obvious. In a collective system, broadening the financial basis is imperative as revenue streams are distributed to fewer shoulders than in tax-based systems. Introducing jobs with diminished contribution requirements has weakened the social security system without fulfilling the underlying aim of creating new jobs. Instead, insurable employment was curtailed. The costs of guaranteeing security for the few came at the cost of insecurity for those outside the system. Those who are ‘within the system’ continue to receive pay, bonuses and benefits. Those who are outside get nothing. Thus, the need for a more balanced distribution of labour, and, especially, for integrating new forms of employment into the social security system by restructuring the source of income, is obvious, should we wish to guarantee the survival of the welfare state.

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