Wolfgang Köhler Redaktionsbüro
Wolfgang Köhler Redaktionsbüro

Values of a New World Economy

Economics is not an exact science. Exact sciences describe phenomena which appear or take place no matter who is involved in performing them. An apple for example will fall to the ground at exactly the same speed in exactly the same time no matter who the person is who drops it.


Economics, however, is about choices. Nobody knows in advance how many people will buy the next version of an iPhone at a given price or how many will rather buy the cheaper new version of a competing smartphone. There will always be people out there who want to have the newest iPhone version at any rate, and there may be consumers who turn away from Apple products, some of them because they have learned about the shocking conditions of how they have been produced. Consumers make choices and whether they go for the cheapest product or for the most prestigious one is a function of the set of values of each individual consumer.


Economists may try to analyze consumers’ behavior. They may calculate the price elasticity of demand for a given product based on empirical data. They may even be right in assuming that price elasticity for a similar product may be similar to that of the analyzed first product. But in fact the two will hardly ever be identical. That is so, because people or consumers make choices. The criteria on which these choices are based are values. And those values are pretty subjective items.


Talking about values, what do I mean by it? Generally speaking, values are the basis on which we set our preferences and our priorities. It’s about what a person deems important to him or her and what is not so important.


It’s about right or wrong, good or bad. Take two persons who graduated in physics. The one may be heading for CERN, the big particle accelerator near Geneva to work in his/her field of knowledge. The other one may prefer to use his mathematical skills to arrange complicated financial products in a bank. Why do the two take such different choices? Because they make their decisions on the basis of their different sets of values.


Why are values so important in an economy? Values are so important because they make people behave differently from the assumption of those economists who still believe in the fictitious homo economicus. This homo economicusalways acts according to his material interests. Real people weigh the economic benefits of a decision against their moral or cultural values. We make such decisions all the time, every day.


The homo economicus, however, does not know anything of those moral or cultural values. So you may call him an unethical person or an immoral person.


Classical economists, however, have a strong case in sticking to the homo economicus. That is one of the results of an experiment, which has been performed by economists of the universities of Bonn and Bamberg. Professors Armin Falk and Nora Szech rented six large rooms at Beethovenhalle, the concert hall of Bonn, and invited some 1000 students to participate in the experiment, by which their behavior was to be tested.


In one setting, individual participants were asked to decide between winning ten Euros and condemning a young healthy little mouse to death – or to go without the ten Euros and let the mouse live its life.


In another setting participants were divided into a group of buyers and a group of sellers. The sellers were each given a mouse, the buyers were given 20 Euros at their disposal. Now the buyers could make offers and/or bargain with the sellers on the price. Each time an offer of a buyer or a seller was accepted and the 20 Euros divided between the two, a mouse would be killed. One other alternative was to decide not to participate in any bargaining over a mouse’s death. But in that case buyer and seller would have to go without any money. This second setting was organized with multiple competing buyers and multiple competing sellers in a way to simulate a market situation.


So the question was: Win some money and condemn a creature to death or go without the money and save a creature’s life – or in other terms: money or ethics.


The experiment’s result was that in the first setting where individuals had to choose between ten Euros or saving a mouse’s life, 45 percent decided to take the money and condemn a mouse to death.


In the simulated market situation, however, 75 percent went for the money.


This experiment tells us two things:


The first one is to realize that the homo economicusis alive and well in many of us.


The second piece of knowledge is that markets tend to undermine our moral values.


I repeat this because it is a central piece of understanding human behavior in a market situation: Markets tend to undermine our moral values.


Is it a surprising piece of knowledge? I would say “No”. We have many words and phrases for it: “Money makes the world go round” is one of them.




For the last 30 years we have all traded off many of our values in exchange for winning some material or financial benefits. In my view, there have been two – or rather three – historical events which increased our readiness to do so. The first one was the free floating of monetary exchange rates after the US gave up the gold backing of its currency in 1971. Before that, under the Bretton Woods regime, the US Federal Reserve guaranteed to exchange, on the demand of anybody, every US-Dollar into gold at a fixed exchange rate of – if I remember rightly - 35 Dollar per ounce of gold. All other currencies of the western world had fixed exchange rates to the US-Dollar. At that time policy makers could act almost autonomously. If their decisions had consequences, say, for the competitiveness of the country’s economy, then the exchange rate of its currency may have to be revalued later. But with floating exchange rates since 1971, policy makers always have to keep one eye on “the markets”: What would alternative actions do to the exchange rate?<


The second event, that made policy makers more conscious of “the markets”, has been the oil price hikes in the 1970s and early 80s. The oil bills of our economies rose dramatically. And since we can spend our income only once, we spent more on energy and less on other consumer goods. Both times, our economies fell into a recession and the number of jobless people rose dramatically. Since then our governments (and I would say the majority of the electorates) would do almost anything that promises to increase employment.


And I guess there was a third event which involves two Nobel prizes: to Friedrich August von Hayek in 1974 and to Milton Friedman two years later. Both economists have been strong proponents of what we have come to call neo-classical or neo-liberal economics. Their ideas and theories did not just spread out of nothing throughout the world. It was instead the result of a conscious and organized effort of a network of liberal thinkers who first met in 1938 in Paris. After the Second World War and after Friedrich von Hayek had published his book “The road to serfdom”, they met again, this time at Hôtel du Parc on Mont Pèlerin near Vevey at Lake Geneva. There they founded the Mont Pèlerin Society which still exists today.


The mission of this group of intellectuals was to spread the idea of liberalism. In order to explain the enormous significance of this task, Hayek, in his opening address at the 1947 meeting, did not shy away from citing his strongest opponent, John Maynard Keynes, when he said:


"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else… I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.“



The idea of liberalism is, of course, full of value propositions: Markets are best left to themselves; with free markets the invisible hand will care for the increase of the people’s wealth. Private enterprises are more productive than public ones. Free trade brings benefits to everybody. The interference of the state or politics respectively is counterproductive.


When you start to ask questions about those value propositions, you get closer to the very essence of the idea. It’s objectives are: growth of a national economy as measured by GNP and the wealth of its people. Justice (or justice of income distribution) for example is explicitly rejected because it is a non-economic parameter. Justice is not numerically measurable. Neo-liberals, instead, recur to formulas like this one: Whatever creates new jobs is deemed as “social” – no matter how the conditions of those new jobs are.


Now, you may ask: What’s wrong with this? Quite frankly: I am not saying, that these value propositions are totally wrong or bad. Instead I am ready to confess: I do not wish to live in an illiberal country, neither in a political nor in an economic sense of liberalism. But…


…we must bear in mind, that this idea of neo-liberalism, which was promoted so effectively and so successfully by Hayek and his colleagues at the Mont Pèlerin Society, was inspired by historical events from some time ago.


In fact, when they developed their ideas, the proponents of neo-liberalism found themselves in a world that bore some similarities to the world of Adam Smith. When Adam Smith wrote his famous book on “The Wealth of Nations”, economic and even private life in Britain was regularized in almost every detail. So he pleaded for some economic liberty. After the Russian Revolution, the soviet leaders installed a planned economy which was to be totally controlled by the state. At the time, Ludwig von Mises explained in his book “Die Gemeinwirtschaft” that this kind of public planning would fail. Friedrich August von Hayek wrote his book “The Road to Serfdom” under the impression of wartime economies in Europe and the US, which was greatly under the control of governments. So all the three of them had strong arguments to plead for more liberalism. In this recent crisis, however, we made an experience which John Maynard Keynes already knew about when he said: Economists are people that nobody takes notice of as long as they live. But when they are dead, they cause great damage.


In this recent crisis we learned that overly regulated markets is not our problem. Instead, too much liberalism is. Under-regulated financial markets have gotten out of control. Instead of serving the economy and society, finance has taken over as the ruler of economies and societies. Scientists turn away from neo-classical (or neo-liberal) economic theory. And not only them: Freshmen at Harvard University boycotted introductory courses in economics. In Germany, such well-established institutions as the “Stifterverband für die deutsche Wissenschaft” and the business newspaper “Handelsblatt” both asked for a renewal of economic thinking: In a brochure they have been quoting academic teachers saying that introductory courses in economics are resembling something like “brain washing”.


What could this “New Economic Thinking” be all about? Where could it differ from neo-classical economic theories?


Let us go together through a number of historic developments trying to analyze what went wrong.


I assume that you have all heard or read about the so-called “Reagan-revolution” and “Thatcher-revolution”. US-President Ronald Reagan and Britain’s Prime Minister Margaret Thatcher were the two politicians who first introduced neo-liberal politics in their respective countries. One of Ronald Reagan’s first big economic actions was the largest tax reduction in US-history. The theory behind it was that companies paying less tax and, thus, keeping a larger share of their profits would invest more and create more jobs. Economic growth initiated by tax reductions would end up in larger tax returns than before.


Now, I do not want to discuss with you whether this theoretic background was right or not. In fact it all ended up in rising public deficits and was followed by the largest tax rise in US-history. I would like to point to another effect of this kind of policy. After Reagans tax policy had been implemented, tax reductions became pretty popular in other parts of the world. Ireland for example lowered its taxes for export-oriented industries and, in doing so, successfully attracted large amounts of foreign investment. In fact Ireland became the first so-called Tiger economy in Europe.


In other parts of Europe the same kind of policy was framed as “supply side economics”. It involved tax reductions, lowering of social contributions and of other public charges. In fact, a competition started between countries to have the most favorable national conditions for industry and commerce.


Today, some 30 years later, you can hear politicians argue that competition between countries is part of a market economy or capitalism. The last time I heard this kind of argument, was when Austrian Minister of Finance Maria Fekter defended the tax policy of this country: “I profess myself to be in favour of tax competition.” It is, she said, in Austria’s national interest to foster the country’s attractiveness with tax advantages. You can hear the same kind of arguments from politicians in other countries – including Germany.


Now, if you think of it till the very end, this kind of competition between nations would lead to a consecutive lowering of tax rates – and not only that. It would lead to an erosion of the tax income of each country competing with others on this kind of a level. If this kind of politics should or does lead to higher foreign investment in one country, it is a “Beggar-Thy-Neighbor-Policy”.


This should be severe enough to abstain from this kind of politics. But it goes even deeper, if you think of it.


The argument of Maria Fekter (and others) contains a value proposition. And this value proposition is: “Competition between countries (or between nations, as I prefer to label it) is good, because it is an integral part of a market economy.”


I’m sorry, but this is not true!


Yes, competition is an integral part of a market economy. But it refers to competition between companies, between enterprises. In an unregulated Laissez-faire market economy enterprises strive after building cartels and monopolies in order to enable them to ask higher prices for their products. That is why most countries try to control the competition of enterprises with antitrust laws. These countries wish to keep competition alive and well, because this kind of competition serves the well-being of a society.


But states and their political institutions are not integral parts of a market economy. The state should stand over and above the market, the state should regulate the market and give it the right juridical framework for its well-functioning. Where would we have ended up in Europe with competing nations?


The European Union is based not on competition between nations, but on competition between enterprises in a single market and on cooperation between nations.


Money or ethics? The ethics part in this context is, that the concept of “competition between nations” is based on a wrong presumption, on a fallacy.


What competition between nations might lead to, you can look this up in textbooks about the First and the Second World War. The idea of competition between nations is something that is deeply rooted in the 19th century and before. Let us arrive in the 21stcentury, for God’s sake!




Closely connected to this kind of argumentation is the idea of international competitiveness of a country’s economy. Economists usually measure and calculate a country’s competitiveness by comparing unit labour costs. There is nothing wrong with that. In a broader public, however, and in the political arena, too, a country’s economic competitiveness is measured at a different scale: its export surplus. We, in Germany, pride ourselves to be the export champion of the world (or at least second best). Exports, indeed, have helped Germany to get relatively unharmed through the present crisis. To some, German competitiveness is a model for others.


Behind this concept of competitiveness stands aother fallacy: that exports would increase a country’s wealth. The idea is simple: A German automaker is selling a car, let’s assume to China. The automaker gets the money. The money is then turned into income of workers, suppliers and the company itself. This micro-economic view, however, should not be transferred to the macro-economic sphere.


From a macro-economic point of view, all national export surpluses and trade deficits worldwide add up to what? Right: to Zero. So, if one country achieves an export surplus, there are others which run up trade deficits. How does a deficit country pay for the imported goods? It either has to print money or take a credit, because it does not earn enough money on the world market to pay for imports which are not covered by exports. The result is that the export country is running up wealth in the form of promises by other countries to pay their bills. And every once in a while a country with notorious trade deficits will break this promise. It does not pay back its debts. In that case it turns out that the export country has sent part of its products as a gift to the import country. In that case, it turns out that the promise of growing wealth was a promise by other countries to pay their bills, while some of them don’t.


This is the reason why the German “Growth and Stability Act” from the 1960s stipulated an equilibrium in foreign trade as an objective of German economic policy. One could also say: Being export champion is not sustainable.


Instead of international competitiveness I would like to suggest adopting the objective of increasing “productivity”. In order to illustrate the difference between international competitiveness and high productivity, let us, for a moment, imagine that our economy is a closed one, an island, if you wish, with no foreign trade. If the productivity of that economy is so low that all its production is just sufficient to feed its inhabitants and to provide them with clothes and housing, all production is consumed. Wealth (or rather: poverty) is stable. Now, if some innovation allows this economy to fabricate the same amount of products with less amount of work, the redundant workers are free to produce other additional products. This increase of productivity is equal to an increase of wealth.


Now, let us open up our model economy to trade with its neighbor country. If the two countries have a similar level of productivity and increase it proportionately, neither will gain a competitive advantage over the other. Their wealth, however, would rise due to rising productivity. If only one country increases its productivity or if it does so faster than the other one, then it will gain that competitive edge. It will probably export more products to the other country than it will import from it. If the two countries have different currencies, a revaluation of exchange rates may level out the difference in productivity – sooner or later. But if the two have a common currency the exchange rate mechanism does not exist. So the importing country would have to borrow from the exporting country to be able to pay for the import bills – with all the unsatisfactory consequences which we have already talked about.


Again: It is the level of productivity, not that of international competitiveness which is decisive for a nation’s wealth.


How else could we explain that the US, in the 20thcentury, has become the wealthiest country in the world? A country whose economy has been exporting only a tiny fraction of its total output! It hasn’t been exports, it has been the high productivity of its workforce that made Americans rich. The problem with the US of today is that Americans started to perceive themselves as being rich when the majority of them weren’t any more and that they have started buying consumer goods from other countries on credit. That is how the US became the country with the highest foreign debt in the world. How are they going to pay for their debt?


And there is another important aspect to it. In Germany, we pride ourselves on having implemented reforms which have helped to lower our unit labour costs. And indeed, as the competitiveness of the German economy has increased, so exports and employment have grown significantly.


But there is a paradox. While low labour costs bring export benefits and these might look like higher productivity, they do not encourage enterprises to increase their real productivity. Other things being equal, enterprises with lower labour costs are encouraged to fabricate the same amount of goods with more people. In other words, they can be less productive.


From this perspective there are good reasons to call the policy of ever lower labour costs the most stupid way of increasing exports and employment, because such reforms do not increase our wealth. Instead, they discourage enterprises from real innovation and, thus, from real productivity gains which are the sole sources of growing wealth.


To make things worse, the German government is now pressuring the highly indebted European countries to lower their unit labour costs through reforms of the labour markets…


Money or ethics? Again: The concept of international competitiveness might be a quick fix for an ailing economy, but it is still based on a wrong presumption.




Now, I would like to draw your attention to another matter. Usually, we all identify ourselves with our country of origin – more or less. We are Austrians or Germans or Hungarians or Slovenians or whatever. We look at our respective government as the one institution that should care for or guarantee our well-being. But, as a matter of fact, our countries and we as their citizens are all part of a globalized economy. And not only the economy is globalized. Climate is a global phenomenon, the digital networks are globalized. The workforce seems to be affected by global developments.


Let us look a bit closer at this last point. It was only some decades ago, that, in each of our countries, there were vibrant textile industries. The jobs in this industry were juridically and socially well secured, more or less like in other industries. Some 50 years ago, things started to change.


In 1962 we had the Agreement in International Trade in Cotton Textiles, which was followed by the Multifibre Agreement in 1974. In 1995 came the Agreement on Textiles and Clothing and since 2005 the rules of the World Trade Organization are also applicable on the trade in textiles and clothing. Today, the vast majority of all textiles and clothes that we buy are produced in Bangladesh, China and some other countries. The textile industries of our European countries has gone. Or should we say: We have exchanged the juridically and socially well secured jobs of our own textile industry for jobs in other countries, where they are hardly secured in any way? More often than not, workers there are not even properly secured against fire and the stability of the buildings where the factories are located.


This is just one example in order to illustrate this: Our lives and our jobs have been and are increasingly shaped and influenced by international rules and agreements – in many instances more than by our national governments. It is not only the European Union which influences our well-being.


And in some instances we tend to discover that a lack of international rules and agreements is influencing our lives and jobs. Take the global warming as an example. If it is true that carbon dioxide is responsible for global warming than we should make sure that CO2 emissions are kept under control. It does not help that one country or a dozen European countries reduce their CO2emissions, while countries like China or India increase their emissions. It is a global problem demanding a global answer. We need international agreements on this issue.


Or take the digital infrastructure of our globalized economy. I’m talking about the telecommunications and information technology networks. The internet has become a part of our commercial and our private lives. And recently we learned that secret services have installed themselves at the great junctions of those networks in order to register who is contacting whom at what time and day to communicate on which matter. In other words: We have installed those international networks and forgot to talk about rules. Politicians are now demanding that it is the duty of national governments to secure our privacy. But as Hans-Günter Papier, the former President of the German Constitutional Court, recently pointed out: You can only commit governments to do so if they are juridically and factually able to comply. But the fact of the matter is that they are not able to protect our privacy within worldwide digital networks. What is needed is a global and effective agreement that would commit signatory states to respect the privacy of the citizens of all other signatory states.


What I wish to illustrate is this: There are many issues where we as citizens or employees or business persons have to overcome our thinking in national terms because the solutions to global problems can only be global ones. Concerning other issues, we must think as Europeans, when the solution to a European problem can only be a European one.


Money or ethics? The ethics part in this context is that we have to revaluate our traditional values from time to time.




Some thoughts about finance. The more policy makers take decisions with one eye focused on “the markets”, the more these decisions are dominated by finance. In consequence, our lives have been dominated and shaped by “the markets”. The proper role of the finance sector, however, is that of a service provider. It is not just a linguistic gimmick to emphasize that the term “service” inhibits the verb “to serve”. The main function of banks, for example, is to take up savings and to use them to help fund the extension of credit to persons and companies to finance investments in new products or more efficient production lines.


More recently, however, banks have given a rising share of their credits to financial investors and a smaller share to the real economy. This has taken place during the real estate bubble in Japan during the late 1980s, it happened again more recently during the real estate bubbles in the US and in some European countries. And at the same time, banks have given a rising share of their credits to other banks and shadow banks to finance investments in financial assets. Like Asset Based Securities (ABS), for example, and other securities which are based on bundles of credits of other banks.


I will not horrify you with lots of mathematics. I would just like to show you one equation and a variation of it to illustrate the difference between credit to the real economy and credit for financial investments.


 MV = PQ


This is the basic transaction equation which is true under any circumstances. That is why we call it a tautology. The equation says: The amount of money changing hands in economic transactions (left) is equal to the nominal value of those transactions (right).


M = money supply

V = velocity of circulation

P = price of transactions

Q = quantity of transaction


The equation also shows this: If you increase the money supply M while the velocity of circulation remains stable, there must be an increase of PQ. Either the prices will rise or the number of transactions would increase or both parameters increase in some proportion.


Now, we have to bear in mind that banks, by giving credit, create money. If a bank would give me a credit, a deposit shows up on my bank account – an amount of money which did not exist the day before. So, giving a credit to someone increases MV in our transaction equation.


1. Transactions in the real economy which increase GNP


2. Financial transactions which do not affect GNP.


When someone buys a pen or a car, this sales transaction will increase GNP.


If I buy a stock or a bond from you, this transaction will not count for GNP. The share or the bond existed before the transaction and afterwards, it just changes hands. So, we can state that such financial transactions do not affect GNP.





Here we have separated the money supply according to what it is used for, equally we have separated the two spheres on the transaction side. PRQR stand for transactions in the real economy affecting GNP, PFQFmirrors purely financial transactions. And we can see at first sight that the relationship between the money supply on the left hand side and the transaction side of the equation has become much more complicated.


Traditional economists have neglected this relationship between money supply and the different ways it is used. They have been focusing on transactions in the real economy only because only those affect GNP and generate income. That is why traditional economic theory is hardly able to explain a disproportionate rise of asset prices, that is why traditional economists have a hard time in detecting asset price bubbles. Such asset price bubbles have been, however, the main cause of most of the financial crises of the last centuries – with all their dramatic consequences for the real economy when asset price bubbles blow up.


As a matter of fact: We are in desperate need of thorough studies of and theories about the consequences of extensive borrowing for financial investments, how to evade such borrowing and how to handle crises after an asset price bubble blew up.


Money or ethics? Economists have neglected to look at some important phenomena in our reality.




Let us move on to the final part with the Question mark: Do individual values help to make the right decisions?


Talking about our globalized economy and the striving for higher international competitiveness: We all have experienced a growing pressure for higher job performance. Work has almost become like an Olympic discipline: higher, faster, further – and longer hours. Employees sticking strictly to the rules are putting their career at risk.


In parallel to the rising work load another debate has been going on. When more and more women entered the workforce, there was this debate about compatibility of job and family or that of job and being a mother.


Today, this debate is still going on, but now it does not only concern women, but also men – not in their function as being a “mother” of course, but as spouses and fathers who, nowadays, take up a larger share of household duties.


Imagine that you are asked to work long hours or to go on business travel early in the morning and get back late or to move to another city or country. Almost everyone who agrees to such a demand does so with some kind of misgivings. At least when he/she has his or her own family and when there are children. Even if we are not all that conscious about misgivings, our guts tell us.


Behind it is the demand to make a choice: Job or family, career or children. Or, on a more abstract level: Money or ethics. No matter how a given person decides, in most cases we tend to compromise either our career expectations or our family duties. And in most cases we tend to make a decision intuitively. But in fact the decision is taken according to the individual’s set of values.


Employees of a bank may get into a similar situation of having to make a choice when you give advice to clients. At least in some banks, purely fictitious ones of course, there are clear performance targets which include the sales numbers of certain products. In some cases there may be a gulf between the client’s needs and what you are asked to sell in high numbers. How do you decide? What advice do you give to your client? Again, it seems to be a matter of your individual set of values.


In this – again: purely fictitious – case the right decision is not just a matter of your individual set of values and of how you decide. In this case it’s a matter of the structure which you are working in. The structural framework of your job may get you into a conflict. A conflict between what your company wants you to do and what your guts tell you to do. In such a case you still have a choice. But this is a theoretical choice. Incentives and sanctions may be a strong force to make you decide in a certain way. And the same is true for the choice between job and family.


If you take many of your decisions (or make choices) with some misgiving, the only meaningful way to get rid of those misgivings is to try to change the structural framework of your workplace in such a way that you feel enabled and encouraged to make decisions in compliance with your own moral or cultural values.


Morals and business – how do the two fit together? Banks nowadays get a hard illustration of what will happen when bankers (definitely not all of them, but many) do their business without moral limitations. They get regulated! If you think, it is too much regulation, then check the way banking has been done in the recent past and compare it to your moral values.

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