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Economic theory


It was disputed by Prof. Paquet at Carleton University, that economic theory is linked to the history of ideas. He considered the historical school to be just one branch of economic theory, and at that not a very acceptable one. Rather he was interested in the link between culture and economy to explain differences in entrepreneurship existing in Quebec compared with Ontario. While the former is French speaking, the latter is Anglo-Saxon in value orientation.

Alone such a dispute indicates that a lot more is needed to comprehend economic theory. However, it is helpful to know how economists and studies of economy evolved over time. It can start with Adam Smith 'Wealth of the Nations' and not end with the dispute between followers of Keynes and those who embraced Milton Friedman's monetary model based on the prime assumption that a life time income would influence the most consumer spending.

But whether or not any body of knowledge stands up to the challenges of the time, that question has to be asked in view of the economic development and behaviour of markets since 1945. Yet too often these models were abstract, indeed indifferent to human plight, even though they would talk about 'economies of scale', internal versus external economies, micro- and macro-economics etc. Amazing was that economic theory in 1966-69 considered the air to be an external factor free of any costs; pollution of the air and climate change was then not known and only vaguely was mentioned what happens if a factory throws dirt into the air and the wash hanging on a balcony of a house close to the factory goes dirty. Costs are incurred if the house wife had to do the wash again. This example showed what was recognized, what not.

More complex was the working of the market, including the financial one. The terms meant interest rates, circulation of money, balance of payments, flexible or fixed exchange rate etc. The new market in Europe meant as well studying the possible postive effect of many countries with a diverse cultural and historical background forming a single market. In terms of companies and their outputs, it would allow them to develop quite another scale of production since now the market had increased in size. Comparison to the advantages the United States enjoy were made. The single dollar helped to ease mobility of labour and goods while transfer of knowledge was facilitated by having one common language: English.

When studying economics and political science at Carleton University in Ottawa, Canada (1965-69), it was, however, becoming ever more apparent that economic theory did not really equip one to find answers to unemployment. It seemed the only answer to that was the structural approach, but it was a philosophical hunch never fully tested to prove its validity. Only someone like Michel Foucault could indicate how categories would work once they were linked to such definitions as the healthy soldier or worker. That meant a certain type was hired as institutions set up to mediate between the individual and the market. These were mostly educational and training institutes. A main point made by Prof. Bolle of FU Berlin was that in Germany of advantage was that a special training programme gave the qualified person a legal Right to demand a job in that specific category. It meant fitting into a pre designed scheme of how work was organized. And more so the structure could be linked to symbols and signs of representation by which organizational strategies would become transparent. Cultural adaptation in the widest sense would mean the individual was then disposed to a general job e.g. looking after children, while the educational system prepared him or her to specialize further once in such a specific job. That meant the person was then capable of fulfilling objective demands made on the job and for this work a definite payment was foreseen in accordance with the kind of salary scale which trade unions would have bargained for to bring about a general wage agreement. Hence in a society like Germany a minimum wage does have a significance while Greece pressurized by the Troika had to give up this guarantee in order to improve the competitiveness of the Greek economy by its labour force accepting more flexible working conditions.

Another variation of the structural approach was offered by John K. Galbraith who wrote in his book 'The New Industrial Age' about production facing a new condition, namely the time factor. Galbraith points out that Henry Ford took but three days to assemble materials on the first day, construct the car on the second and start selling the car on the third. By contrast, modern car manufacturers have to take into consideration the technology factor and that means producing a new car means at least four years before it can reach the market. Automatically it means the factory will face an uncertain factor whether or not the demand for the car shall be in four years high enough to cover the risk factor entailed by making such an investment. Often such a risk is overcome by the factory securing some stable contracts which can cover the initial investments. Airbus produces planes on the basis of orders which define the time line of having to meet certain targets, if to be successful in the final delivery. Any delay can mean immediately a huge set-back especially if confidence of the market in the firm recedes. That is why many companies prefer state contracts and therefore they make the state practically into a consumer or into an institution which can replace the volatile and uncertain 'free' market. Naturally this over dependency upon the state can lead to a glutton of production with no sustainable conditions being guaranteed as the decision to produce something is not made in accordance with a free demand and supply related margin of risk and profit. All the more reason to be alarmed by the growing weapons industry and weapons trade as most of the time the customers are states or semi-state organizations known for squandering resources as they are not really accountable to the market, never mind the public. Everything is instead clouded up by the term 'security' with no one really sure if ten more fighter jets will make a difference in how secure the inhabitants of that country will feel if they are not bought.

This discussion brings up an ethical dimension within studies and what sort of knowledge is pursuited while at university. London School of Economics is right now reflecting this in terms of whether or not an university should have a 'public mission', or follow an ethical charta? During the time of the student movement, there was this ethical question being raised. In response to what went on in Viet Nam companies were banned from coming on campus to hire students. It was a time when corporate financing intertwined with research grants provided by companies deeply involved in military production was heavily criticized. The military-industrial complex was then huge. In 2012 it is evident that the Pentagon is still involved in financing such research which is deemed beneficial for both the military and economic interests. For instance, the recently released announcement of heavy mineral resources having been found in Afghanistan by geologists working together with Pentagon officials underlines once again how military strategies are linked to securing resources, and not merely oil, for the minerals to be exacavated in Afghanistan are those heavily used in the construction of laptops and other light materials which the computer industry needs nowadays.

This is to say that not everything goes together, but also not all things are disconnected. The question is how best to reflect some pertinent discussions points within the field of the economy, if not by tracing as well the differences between Friedman and Keynes when it comes to conceiving future development strategies. That was the case at LSE in 1969-70 when studying there, and still, it was not enough. A crucial complementary was given by Prof. Glass, an expert on demographical studies leading on to social policy issues which can be defined overtly as the make-up of society e.g. family planning in France compared to Germany.

As Europe was then still in the making, today's crisis is of a different order. This is the case when Moody can downgrade governmental bonds issued by the State of Greece to junk status (June 15, 2010). The impact of that can mean strategies are at work to make Greece default on account of its debts no longer being repayable. It is called the search for an elegant "exist strategy", but the interests linked to what bonds American, German, French and Greek banks hold have not only that in mind. A sell-out is also a chance of buying in. Following story shall illustrate that.

My great uncle Franz Kuhn was a tremendous translator of Chinese Literature into German. Most of these novels dealt with the sixteenth century or thereabouts. Thus it was completely strange once accustomed to descriptions of the life style prevailing back then to read suddenly in his last translation of "Shanghai in Twilight" how headlights of a car were touching ahead as to where the road was going. A car, not some rider on a donkey was heading towards the city. It was around the time when the Communist Army was engaged in a fight with the Nationalists. Of interest was the tactic the Communist Party deployed to take over Shanghai. The Communist members inside gave instructions to the Army fighting outside the gates of Shanghai the Nationalist army to retreat out of tactical reasons and to fake a defeat. Once that happened everyone hopeful the Nationalists would still pull it off rejoinced. Stocks soared that day on the stockmarket of Shanghai. Then the Communist army attacked. The Nationalist army suffered one of its worst defeats. Immediately the shares dropped into the cellar. This is when the Communist members moved in and bought up everything. The city was taken even before the first soldiers of the Communist army set foot into the city of Shanghai.

What is being played, what is being organised, what brings entire states onto the knees, that may be a story still to be told and then translated into Chinese many centuries from now, that is in a time which looks back upon the 21st century as one having lost its mind over all kinds of speculations and ended up in high fever, but also apprehensions about the near future with no prospect of money to be earned under reasonable conditions.

The following wisdom is making these days the rounds: everyone knows everything is connected with one another somehow, but no one seems to be able to do anything about it. Moody Ratings downgraded Greek state bonds to Junk, as if this is not enough to turn the mood into something less optimistic than when the Blues were played by Jazzmen like Louis Armstrong.

HF 16.6.2010 (8.12.2012)

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