Alain Alcouffe, Maurice Baslé and Monika Poettinger (eds.), Macroeconomic Theory and the Eurozone Crisis, Routledge, London 2019, 222 pages
The financial and the ensuing euro-area sovereign debt crisis gave rise to some sort of division of labor regarding the economic debate topics in the last ten years. Whereas the prompt reactions of many central banks and governments toward the financial crisis made the question about the role of economic policy negligible and the proper theoretical methods of explaining and predicting economic crises the sole debate issue, the subsequent sovereign debt crisis elevated the conduct of economic policy into the leading problem in the recent economic discussions. One of the reasons for this development originates from the rather unassertive reaction of the euro-area institutions toward the sovereign debt crisis. This issue even divided the economists on both sides of the Atlantic Ocean into two main groups. This antagonism was reflected in the book “The Euro and the Battle of Ideas” of Brunnermeier, James and Landau (2016), which distinguished between the rule-oriented and rather inflexible German political stance influenced by the intellectual legacy of Freiburg School and considered as the reason for the aforementioned European institutions’ undecisive reaction and thus the exacerbation of the sovereign debt crisis, on the one hand, and the more flexible and pragmatical French position reflecting rather the John M. Keynes’ ideas, on the other.
The antagonism between the German and French positions constitutes the main narrative of the book “Macroeconomic Theory and the Eurozone Crisis” (2019) published by Alain Alcouffe, Maurice Baslé and Monika Poettinger. The book consists of nine contributions divided into three sections: development of business cycle theories; monetary and fiscal policies: crisis and change; and economic thought and political confrontation. This book aims to elucidate the European understanding of economics and policy approach. The editors claim that the theoretical discussions represent a very small part in the recent debates during the financial and sovereign debt crises whereas the central topics were economic policy-oriented at stabilization of the economic system and restoration of the financial markets. For the editors, the national economic tradition shapes the narratives and even cited the book of Brunnermeier, etc. that “national economic traditions coexist among the state members” which the editors formulated as the reason why the economists in different countries insisted on different sets of policies aiming to foster growth and fight the cyclical fluctuation. The reader can recognize that the book pleads for a reform of the economic policy expressed by an increase in the set of choices available to the state. This would enable the state to prevent future breakdowns by improving the financial markets regulation, regulation for the banking sector responsive to risk and granting responsibility, etc. The volume rightly argues that the formulation of the appropriate economic policy necessitates better knowledge of economic theories and even the construction of better economic theories, particularly on business cycles. This review aims to contribute to the book’s argument by claiming that the history of economic thought also plays an enormous role in the quest for new economic theories. The review is structured as follows: the next section summarizes the main ideas of the book. The third section gives brief remarks on the German-language business cycle debate in the late 1920 s with the aim to show how Hayek’s and Eucken’s intellectual legacies evolved during this turbulent period. In this sense, the review intends to clear up some misconceptions about the two economists.
2 The Content of the Book
Bertram Schefold’s essay “Business Cycles Without Periodicity?” opens the volume and is one of the two essays that comprise the first part of the book concerned with the history of business cycle modeling. The main message of Schefold’s contribution is that methods used for explaining the crisis have changed and even become more important than the ideologies. As an example of this, the reader can recognize Schefold’s claim that the concept of a regular cycle of given length does not play any role in the business cycle research anymore, something which was the cornerstone for the theories in 19th century. Furthermore, the trigger causing the cycle has also changed its nature. In Schefold’s eye, the main reason for this is the growth of the research institutes which made modern perception start from more sophisticated statistical constructs that cannot be challenged or verified by a single mind. In this sense, Schefold cited the empirical evidence in Blanchard’s, Cerutti’s and Summers’ paper (2015), as an expression of the new neoclassical synthesis, whose main task is to explore the relationship between business cycle and output trend. This paper studied the output performance in 23 developed countries over the last 50 years concluding that their output is developing worse than the pre-recession period. Schefold delineated two opposing views that could explain this negative development. On the one hand, hysteresis can be treated as a possible explanation which means that the mere shock causes the structural downturn of the trend, i. e. the shock has a long-lasting impact on the system. On the other, reverse causality may be the explanation which implies that the negative output trend resulting from exogenous reasons is anticipated by the households and firms, which, in turn, causes the recession. Schefold’s economic policy proposal is that it does not matter what the explanation for the recession is, the demand management in a Keynesian sense is not sufficient to overcome it, but structural reforms are necessary to boost the development of the output. Schefold concluded that even though the impulse causing the cycle and the propagation mechanism responsible for the amplification of the shock has been differing throughout history, the problem of cyclical fluctuations remains a fundamental research problem.
Arnaud Diemer’s essay can be considered as a continuation of Schefold’s message as he concentrated on the propagation mechanism in the business cycle theories. Diemer tried to update the existing methods and even expand the existing tools of analysis by stressing the relevance of the system dynamics. Diemer’s approach is based on the book Jay Wright Forrester’s book “Industrial Dynamics” (1961) laying the ground for future research concentrating on the system dynamics. Its initial idea was to study the behavior of the industrial system as an analytical tool to ascertain the effects of policy, decisions, structure, and delays and to show how they are interrelated to growth and stability. Diemer claimed that the system dynamics expressed by feedback loops and delays aim to emphasize the importance of the structure of a complex economic system, which, in turn, represents an important tool to study the severity of crises. The review claims that Diemer’s contribution narrows toward the main topic discussed during the business cycle debate of the 1920 s.
2.2 Economic Policy
The problem of economic policy represents to cornerstone and thus the largest part of the reviewed book. The review even divides this part into fiscal and monetary policy issues. The monetary policy plays without any doubt the central role in stabilizing the financial markets. The evolution of the tools of the ECB’s monetary policy is the topic, that Antonio Forte discussed in his contribution. He distinguished between the traditional tools that have been updated in order to preserve the banking system stability and the liquidity, and new unconventional measures that were launched during the last two crises. Even though Forte acknowledged that these measures prevented the prolongation of a financial crisis that even gave rise to the dissolution of the Eurozone, most of the liquidity did not reach the real economy. Furthermore, he claimed that the euro area firms are still paying different interest rates, which does not reflect their riskiness and efficiency, but their national problems or the drawbacks of the euro area institutional framework. In this vein, he appealed to the national governments and the European institutions for stronger engagement in fighting the disbalances in the euro-area.
An interesting approach delivered the Nicolas Barbaroux’ contribution discussing the hypothesis that Hayek’s idea of denationalization of money could be a possible new revolution in macro family tree just as New Neoclassical Synthesis and New Keynesian models. According to Barbaroux, the facts like the increasing liberalization and deregulation of financial markets, emergence of new crypto currencies and private types of money, gave rise to rethinking the traditional macroeconomics paradigm. In order to prove his argument, Barbaroux defined four elements that he perceived as constituting Hayek’s monetary reform for denationalization of money. First, private banks and not private firms should issue private currencies. Second, these private currencies should be commodity-based because this secures their intrinsic value. Third, the supply should be flexible in order to guarantee the purchase power and the last fourth point is that the state should carry out the regulation of monetary management because money is not like the traditional commodities being subject to free-market forces. Based on these elements, Barbaroux rightly rejected the view that bitcoins correspond to Hayek’s perception of private money. He argued further that the increasing regulations of the banking sector and financial markets reduce the probability that Hayek’s monetary reforms can become reality. Whereas the contributions of Forte and Barbaroux discuss the monetary policy issues, Maurice Baslé’s contribution concentrates on the role of fiscal policy during the sovereign debt crisis. Baslé emphasized the inefficiency and unrealism of the European Commission regarding the supervision of national budgets and pointed out that the current combination of procedures as supervision of national budgets, macroeconomic balances procedures and coordination of economic policies was not able to achieve the macroeconomic stabilization. According to Baslé, the only viable alternative is the foundation of the European Monetary Fund, European Treasury or some stabilization mechanism in the European budget.
2.3 The Role of Economic Ideas
The third section, as the editors stress, focuses on the confrontation between Neoliberalism, Ordoliberalism, and Keynesian ideas during and after the euro-area crisis. Peter Nedergaard’s contribution concentrates on the relationship between the idea of Ordoliberalism and sovereign debt crisis. Nedergaard claims that the ordoliberal ideas were constitutional for the creation of the Eurozone. However, most of the members and even Germany had never followed this paradigm. During the sovereign debt crisis, according to Nedergaard, the Germans became dominant in the procedure of formulation of euro-area economic policy. In this time, they stuck to the principles of the Ordoliberalism that gave rise to extreme reaction of many members and even caused the rise of populist movements. For him, the Ordoliberalism stands behind the terms of the Greek rescue package and credit facilities to other euro-area countries. This idea gave rise to the rejection of the debt-cutting to the highly indebted countries or the issuance of Eurobonds because of moral hazard problems. However, Nedergaard praised the ECB that it did not behave in an ordoliberal sense because it carried out bailouts via the purchasing of national bonds, i. e. OMT.
Newspapers always play an enormous role regarding shaping the public opinion. In his book “The Sleepwalkers” (2013), Christopher Clark discussed in the context of the turbulences in Europe before the First World War how powerful the newspapers could be in influencing the public opinion of each European nation regarding their governments’ aggressive foreign policy, something, that contributed to the outbreak of this war (Clark 2013, 226–239). A tantamount study was undertaken by Monika Poettinger which explores how newspapers popularized the economic ideas into the general culture and how this affected the social and broad collective decisions. The study concentrated on four leading European newspapers: Frankfurter Allgemeine Zeitung for Germany, Le Monde for France, and Corriere della Sera and Repubblica for Italy. She divided her study into two periods: the first one encompasses the financial crisis, whereas the second – the sovereign debt crisis. Her findings are that during the financial crisis the newspapers were united by the Marxian ideas and the tensions between Keynesianism and Liberalism. The main narrative was the instability of capitalism and that markets always tend to failures. The sovereign debt crisis, however, divided the newspapers where the nationalism and prejudiced interpretation of the crisis occupied many leading articles. Here, Poettinger also recognized that during the sovereign debt crisis the gap between the German and French positions and the public opinion expressed in newspapers increased: whereas France and Italy proposed Keynesian and alternative liberalist solutions, Germany advocated structural reforms thereby emphasizing on the relevance of the future institutional structure of Europe.
3 The Economic Crisis as a Social Phenomenon – Comments
All in all, the book represents a fruitful basis for further discussions and this section aims to respond to it by formulating a short note on the relationship between economic theory and economic policy, a subject, fundamental for the reviewed book. The preface justly cited Jean-Claude Trichet’s quotation who warned against the use of one tool of analysis, methodology or paradigm. Trichet reminded that DSGE models should not be abandoned, perhaps due to their inability to forecast and explain the last financial crisis (e. g. Stiglitz 2018), but the set of analytical tools should be expanded by broadening the theoretical perspectives and the range of empirical approaches. This review raises the concern in which manner the book was able to broaden the theoretical perspectives or even to inspire particularly the young economists to be interested in new approaches. The main cause for the rather “uninspired” economic students can be recognized if one studies how the science of economics changed its subjects and methods, an issue, that became rather neglected in recent years. After the Second World War, the Neoclassical Synthesis representing the cornerstone of Paul Samuelson’s paradigm became the leading doctrine in the economic textbooks which was based on the main Keynesian pillars as consumption function, investment function and the money demand function (Landmann 2015, 8). This review claims that economists have not emancipated themselves from this doctrine. It is not a coincidence that Kenneth E. Boulding raised the vindicated question “After Paul Samuelson, Who Needs Adam Smith?” (1971). There, Boulding indicated Samuelson as embodiment of the modern “antihistorical” economic student who has not read “anything published more than ten years ago”. This makes the modern student “ignorant of the details of economic institutions, who [has, LG] no sense at all of the blood, sweat, and tears that have gone into the making of economics and very little sense of any reality which lies beyond [her, LG] data” (Boulding 1971, 233).
Akin to Trichet’s appeal that we cannot throw out the DSGE models, but we should broaden our theoretical perspectives, Boulding formulated the message that we are not allowed to abandon Samuelson, but we should also read Adam Smith. This is a claim that modern economics ought to go hand in hand with history of economic thought. This is necessary because as Schefold vaguely stressed the methods and the questions of business cycle theories have changed over the years. The modern economic student is not able to grasp what business cycle theorists as Joseph A. Schumpeter and Arthur Spiethoff treated as causes for crises. But, in this sense, the justified question arises: how can we get the inspiration for new methods and analytical tools without knowing how the existing tools were developed? This is a justified question because the history of economic thought allows us to re-evaluate past ideas from other perspectives and place them in a more comprehensive and reflective context. This helps us gain a more reflective view of what is happening now, which contributes to a more comprehensive approach to today’s problems (Backhaus 1982).
In this vein, for example, the reader is able to grasp the evolution of business cycle theories within the impulse/propagation mechanism tradition: an impulse that causes the cycle and propagation mechanism that is responsible for the amplification of the initial shock (see Dal Pont Legrand and Hagemann 2019, 2–5). The nowadays business cycle theory concentrates more on the nature of the impulse, i. e. the shocks, whereas before Paul Samuelson’s doctrine the propagation mechanism played the primary role for the explanation of the persistence of crises. This propagation mechanism is narrowly related to the structure of the economic system which occupied the minds of the younger German economists in the middle of the 1920 s as Adolf Löwe, Friedrich A. Hayek and Walter Eucken. For them, the exchange relationships were this analytical tool to explain the phenomenon of crisis which represents a continuation of Adam Smith’s intellectual legacy (see also Horn 2019, 9). Whereas Löwe influenced by Schumpeter formulated that the technological progress causes this disturbance and hence the general downturn, Hayek stressed that credits impair the exchange relationships which makes the problem of credit not only the impulse, but also part of propagation mechanism in his understanding of cyclical fluctuations (Dal Pont Legrand and Hagemann 2019, 9). Hayek argued that prices incorporate an important information function which the economic agents use in their planning procedures about investment and saving activities. Any change in the credit supply affects adversely the price structure of the economy which in turn impairs their information function. This makes entrepreneurs develop unsustainable plans that have to be reversed with crisis and depression (e. g. Boettke 2018).
Hayek continued his research on the concept of knowledge and transmission of knowledge as fundamental for the coordination process in economy, Eucken also studied the problem of coordination in the economy by developing ideal types which represent models of exchange relationship where prices play a leading role. In this vein, Hayek’s intellectual legacy is narrowly connected with Eucken’s research program (for more about Hayek and the Ordoliberalism see Kolev 2010). But in contrast to Diemer’s idea of dynamic of system, Hayek and Eucken assumed individuals with their contextual knowledge as the constituting elements of the system and that this knowledge results from previous experience confined to their environment within which they act. In such a world, where knowledge is dispersed among the members of society and these members are fallible and capable individuals, the problems of interaction and coordination of plans become central for their economic analysis. This explains why Hayek and Eucken stressed the relevance of institutions and rules because they help individuals to learn what they want to learn in order to achieve their goals (Boettke 2018; Boettke et al. 2016).
Their normative approach was the construction of competitive order because this not only promotes the discovery process fundamental for the dynamics of the economy, but also, particularly in Eucken’s research program, this order preserves the stability of the economy against exogenous shock. Empirical evidence for this represents the robustness of Irish, Estonian or even Slovenian economies during the financial crisis, in contrast to the Greek and Italian economic orders. The latter have still been struggling with the remnants of the financial crisis. Only in this vein, Schefold’s proposal for structural reforms can become convincing and the relevance of Freiburg School’s research program can be understood, a research program, that never called for austerity, when the free order of the society is jeopardized by the rise of populist political movements. Hence, this research program became unduly a subject of harsh criticisms whose causes can be sought in neglecting the history of economic thought, on the one hand, and the relevance of the institutional framework for facilitating the exchange process, on the other. This is a research program that allows us to grasp why different economic systems perform differently during an economic crisis, an approach, that with Paul Samuelson’s “revolution” became completely forgotten.
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