If you don’t have proportional representation (PR) then some voters get representatives they did not vote for. Thus it isn’t very democratic not to have PR.

The last weblog criticised the UK Electoral Reform Society (ERS) for erroneously claiming that Single Transferable Vote (STV) was PR.

ERS namely adopts districts, which causes STV to lose the limited PR properties that it has.

A persons affiliated with ERS answered to this criticism:

“We are well aware of the tension between the desire for (overall) proportionality and the desire for guaranteed local representation.  This tension is apparent among British electors when opinion polls have asked relevant questions about the outcomes of voting systems.  British electors want both overall proportionality (of parties) AND the local representation provided by exclusively single-member districts.  That is just not possible, so we aim for a compromise between local representation and overall proportionality through appropriately-sized multi-member districts. (…).” (Personal communication)

This is an unsatisfactory answer since there simply is no such “compromise”. When one must choose between a square and a circle then the answer is not some other graphic with some measure of deviation. If there is no PR then there is no PR, and then ERS should not claim that they have PR. To express their “compromise”, ERS speaks about “STV-PR” but this is like speaking about square-circles, and comes with the grating sound from nails across a blackboard.

If n is the number of voters, s the number of seats, then q = n / s is the threshold or quota, of voters per member. A candidate can be elected when he or she meets the quota. When the district size is 2q, then the district representative must get 50%+1 of the vote to attain the quota. At best s / 2 seats can be filled in this manner, since s / 2 * 2q = n again. All unfilled seats can be allocated using overall PR. This shows that districts are not a key design feature, while PR is. (These formulas can be adjusted for turnout, when district size is defined in terms of the electorate and not actual voters. See here.)

By focusing on districts, ERS loses track of the key design feature, and it lets its logic be occluded by a less relevant issue.

Wikipedia follows ERS

Apparently the editors at wikipedia follow ERS rather uncritically. The wikipedia statement in red is what ERS claims falsely and what is adopted by wikipedia too. The statement in green is true. Since the statement in green is true, the statement in red can only be true by chance.

Proportional representation (PR) characterizes electoral systems by which divisions in an electorate are reflected proportionately in the elected body. If n% of the electorate support a particular political party, then roughly n% of seats will be won by that party. The essence of such systems is that all votes contribute to the result: not just a plurality, or a bare majority, of them. Proportional representation requires the use of multiple-member voting districts (also called super-districts); it is not possible using single-member districts alone.[1][2][3] In fact, the most proportional representation is achieved when just one super-district is used.

The two most widely used families of PR electoral systems are party list PR and single transferable vote (STV).[4][5] Mixed member proportional representation (MMP), also known as the Additional Member System, is a hybrid Mixed Electoral System that uses party list PR as its proportional component. MMP has the potential to be proportional or semi-proportional depending on a number of factors such as the ratio of first past the post (FPTP) seats to PR seats, the existence or nonexistence of compensatory seats to make up for overhang seats, and election thresholds.[6][7][8][9]   (Source: Wikipedia on PR)

ERS thus is confusing the world including wikipedia. My advice for the editors of wikipedia (and the ERS) is:

  • Maintain conceptual integrity.
  • Restrict PR to the notion that p% of the votes translates into p% of the seats.
  • For PR the first preferences are relevant and not what is done with the subsequent preferences. Thus do not label STV as a PR-system but as “potentially PR”, or as STV-PPR.
  • For PR it suffices when the electorate selects parties. A single candidate is a party with a single candidate.
  • The professionals in parliament can use more complex systems like STV. The use of STV (there) must be compared to other systems, like Borda Fixed Point.
  • Get rid of the hangup on district representation.

Unfortunately, the person affiliated with ERS writes to me, with an unrelenting hangup about districts, and neglecting that PR should hold nation-wide:

“Neither the ERS nor I would be prepared to label STV-PT as “potentially PR” or anything similar.  I have seen some academics describe STV-PR as “a semi-proportional” system.  That is just nonsense.  For the same district magnitude, STV-PR and party-list PR both deliver the same degree of proportionality.  The fact that some electorates are prepared to accept electoral districts that cover the whole country for party-PR but don’t like the idea of “large” electoral districts for STV-PR is completely irrelevant.  It is the district magnitude that is the determining factor, not the voting system.”  (Personal communication)

Scotland is an example

Scotland has four electoral systems, and I copy from Wikipedia:

Does this mean that Scotland comprehends democracy or that they don’t ?

The Party List System as used for the EU Parliament generates proportional representation (PR), and this would be the criterion for representative democracy.

(Obviously, for the election of a local council, the norm for PR are the local votes, and not nationwide PR. Once the issue here is reduced to apportionment, then STV is one of the options and a choice depends upon one’s criteria.)

Let us look at the Scottish implementation Additional Member System (AMS) a.k.a. Supplementary Member System a.k.a. Mixed Member System (MMS). I would prefer the latter term, since there is nothing “additional” about an elected MP. Sometimes the term “Mixed Member Proportional” (MMP) is used but this is only warranted when there really is overall PR.

The current Scottish system

Scotland has 73 constituencies, in which the candidate is selected by FPTP. There are 8 regions with 7 seats per region, to a total of 56 regional seats. These “additional seats” are used to make the outcome more proportional. Brief explanations of the current Scottish system are by the Parliament itself and The Scotsman. The Scottish Parliament elections of May 5 2016 have these full data. The turnout was 55.6%.

Scotland like the UK has a hangup on the distinction between the local candidate and the party. It is claimed: “In the second vote the voter votes for a party rather than a candidate.” Indeed, when the first vote has a FPTP selection, then voters may be forced to vote strategically for a candidate of reduced preference, in trying to prevent that a worst candidate is selected. Thus the explanation about local representation may be a misrepresentation about what might really motivate voters.

When we compare the votes for the constituencies (districts) and the regions, then we don’t see much of a difference, except for the Greens and Others. (This are totals though, and there might be differences over districts.)

District

Region

Party

Votes

Votes

Con

501,844

524,222

Green

13,172

150,426

Lab

514,261

435,919

LD

178,238

119,284

SNP

1,059,898

953,587

Others

11,741

102,314

Total

2,279,154

2,285,752

We take the summed region vote as determining what the proportions for the parties should be. The additional 56 seats and their restriction to regions are not enough for correction of the error in the local vote. The SNP got 7% more seats than warranted under PR.

District

Region

 All
Party

Seats

Seats

Seats

%Seats

%Votes

%S-%V

Con

7

24

31

24.0

22.9

1.1

Green

0

6

6

4.7

6.6

-1.9

Lab

3

21

24

18.6

19.1

-0.5

LD

4

1

5

3.9

5.2

-1.3

SNP

59

4

63

48.8

41.7

7.1

Others

0

0

0

0.0

4.5

-4.5

Total

73

56

129

100.0

100.0

An alternative for Scotland

Let us consider a rough alternative for Scotland:

  • A local winner must get at least 50% of the vote of a district (constituency).
  • All 129 seats are allocated in proportion to the summed region vote.

The data file allows us to determine which candidates are elected now. This generates a quite different result. In the local vote, only 29 candidates manage to get at least 50% of their district (constituency). 95 candidates are selected via the Party List, which puts the ERS argument for locality into perspective. In this rough alternative, there are 5 seats that cannot be allocated due to rounding errors. But having 4% empty seats is not unfair given that 4.5% of the votes are wasted on the small parties.

District

Region

 All
Party

Seats

Seats

Seats

%Seats

%Votes

%S-%V

Con

1

29

30

23.3

22.9

0.3

Green

0

8

8

6.2

6.6

-0.4

Lab

0

25

25

19.4

19.1

0.3

LD

2

5

7

5.4

5.2

0.2

SNP

26

28

54

41.9

41.7

0.1

Others  0  0  0

0.0

4.5

-4.5

Total

29

95

124

96.1

100.0

A general observation

The quota is q = 2,285,752 / 129 = 17720. Above criterion of 50% of the local vote might be too lax. With 73 districts, the number or electors per district might be too small. If the number of districts is 129 / 2 ≈ 65, then the average district has size 2q, and the criterion of at least 50% of the votes would fit the overall condition of winning a seat via satisfying q.

A google showed this page by Andrew Ducker who also wondered about PR in Scotland. He mentions: (1) The region votes must be summed for nationwide PR indeed. (2) A 50%:50% distinction between local and national seats would be helpful indeed. In reply to this: why still allow FPTP when it may cause that a minority winner would become the “representative” ? It is better to require at least q and/or at least 50% of the district.

The UK Electoral Reform Society (ERS)

The UK ERS falsely claims that STV applied to districts would be PR while it is not. The ERS also criticises the Scottish system, but perhaps for the wrong reasons.

In 2011, the current Scottish system was already in place, and the ERS advised a change. See the Guardian or the BCC:

One of the authors of the report, Prof John Curtice of Strathclyde University, said: “The widespread expectation that the Scottish Parliament would be a multi-party parliament, in which no party would ever have an overall majority, has been dashed. “In truth, although the electoral system bequeathed to the Scottish Parliament by Labour was far more proportional than first-past-the-post, it was never one that was best fitted to the realisation of that original expectation. “It still favours larger parties over smaller ones, who, indeed, are actually being discouraged from standing in the constituency contests.” (BBC 2011-11-15)

A similar critique is given w.r.t. the 2016 outcome. Some changes like an “open party” list (i.e. the ability to vote for individual party candidates on the list) and the allocation of Sainte-Laguë may indeed be mentioned.

But this is small beer compared to the major critique on the Scottish system, that it still allows for the hangup on district representation.

While the ERS should warn voters and legislators about this hangup, the ERS suffers from this hangup itself too, and propounds STV for districts, which destroys PR.

The person affiliated with ERS writes to me:

I am not in favour of electing MPs (or other representatives) in two different ways. In Scotland we have experience of the Scottish Parliament where MSPs are elected by the Additional Member System (AMS = a regionalised version of MMP). Some of the worst problems of electing MSPs in two different ways (Constituency and Region) have abated over the years, but the tension remains and surfaces from time to time. It would have been much better if all the MSPs had been elected by STV-PR, but AMS was a political compromise as one the major parties (Labour) would just not accept STV-PR at any price. (Personal communication)

Again, this person at ERS suggests that STV would be PR, even calling it STV-PR, while the very application of STV to districts destroys the PR.

Missing Scottish voters

ERS Scotland director Willie Sullivan wrote a book about the structurally low turnout for Scottish elections: “The Missing Scotland: Why over a million Scots choose not to vote and what it means for our democracy” (publisher).

In an article, Sullivan summarises:

“If the working people wanted democracy, why do so many now not vote? Surely these are the people that should be most eager to flex their democratic muscle? In research for my book, Missing Scotland, I tried to find out why more than a million Scots choose not to vote. What I found is worrying. Most important of all, people don’t think voting will make anything better. They have tried voting, and they have tried not voting, and there is no difference. They think politicians are all the same, don’t understand their lives and they make promises they never keep. This is not a question of not caring. The people I spoke to care a lot about their families and communities. They are worried about losing their homes or their jobs. They even like the idea of democracy, they just don’t think we have it. Not voting is often a deliberate act.”

I haven’t read this book, but only find it relevant enough to mention its existence. My guess is that Sullivan hasn’t mentioned two elements:

  1. When the Scottish electoral system was changed, they didn’t adopt the PR system like in Holland, but kept their hangup on districts, and ERS itself was an agent in this. Potentially Sullivan might feel ashamed that he doesn’t quite comprehend what democracy is.
  2. Scotland isn’t aware of the failure of the Trias Politica model and the need for an Economic Supreme Court.

Conclusion

My finding is that major political distortions in the UK, France, USA and India arise because of lack of PR.  A lobby for STV for districts doesn’t resolve this, and it is falsely claimed to be PR. Thus I would tend to advice electoral reform in this order of priority:

  • first PR, like the system in Holland or the EU Parliament (Open Party List)
  • if this is up and running, secondly allow for an element of locality for half of the seats (s / 2, district size 2q, and the district representative is elected with at least 50% of the district vote, potentially corrected for turnout)
  • if this is up and running, improve the system by allowing voters freedom on how they vote
  • compare STV and Borda Fixed Point and other methods for the selection of the local representative.

The UK Electoral Reform Society hinders clarity on electoral reform since they show a hangup on districts. They better focus on establishing Proportional Representation (PR), while regarding the issue of districts as of secondary importance.

Given overall PR, one might even let voters determine on the ballot how to deal with the district representation, for the s / 2 seats available for district representation.

  1. Some voters might vote for a party, and be done with that. Seats are allocated to the party in proportion to the total number of votes. (Closed Party List) Some voters might wish to select a party but also a particular person in that party, so that the party order takes over if the person would not be elected. (Open Party List) These approaches can be combined (as in Holland) when the Closed List voters vote for the party leader.
  2. Some voters might indicate where their vote would go, if their party of choice isn’t elected. (Remember that a single candidate is a party with a single candidate.)
  3. Other voters might wish to vote for particular candidates across parties, and then might want to indicate how votes would have to be transferred if the candidate doesn’t get elected. (Otherwise it is apportioned automatically.) There is still the comparison between STV and e.g. (repeated) application of the Borda Fixed Point method. STV runs the risk of eliminating a compromis candidate, who receives few votes in the initial stage, but who can collect support because of secondary preferences. This might not be relevant for the party proportion but be quite relevant for voters and the candidates themselves. This would not be an issue of PR but of Quality Representation (QR).

PS. Dan Hodges (Telegraph June 1 2015) has a very entertaining article “No, Britain does not want proportional representation“. The weak spot in his argument is that the 2011 referendum on AV was misrepresented as a referendum on PR while it actually was a referendum on AV. The strong point is that ERS cannot be convincing if its arguments are confused. There still is a case for sound arguments and good education.

PPS. The subtle relation between proportional representation (PR) and district representation (DR) shows also in the existence of a Senate or House of Lords, in which districts / States might be represented by 2 senators per State like in the USA. For a Senate the DR might be acceptable since the Senate has the role of guardian for the nation itself. The House would be sensitive to the preferences of the electorate, and in that case PR would be logical.

There is a bizarre incomprehension of democracy.

I was inclined to say in the English speaking world – UK, USA, India – but there is also France, with the upcoming elections for the French National Assembly 2017. Also France has a system of District Representation (DR) rather than Proportional Representation (PR). Examples of PR are Holland, Germany and to some extent the European Parliament.

Democratic theory favours PR above DR. It is a historical mistake that countries have DR.

The UK Electoral Reform Society (wikipedia) protests about the UK general elections 2017.

Electoral Reform Society, website June 2017

Indeed, there is this difference (wikipedia) between the UK system of DR with the better system of PR. While the popular vote gives a majority to Lab + SNP + LibDem, the majority in seats goes to Con + DUP.

Seats Votes
Con

317

48.8%

13,632,914

42.3%

DUP

10

1.5%

292,316

0.9%

Lab

262

40.3%

12,874,985

40.0%

SNP

35

5.4%

977,569

3.0%

LibDem

12

1.8%

2,371,772

7.4%

Other

14

2.2%

2,047,362

6.4%

Total

650

100.0%

32,196,918

100.0%

There is also the political dynamics of proportionality. Once a proportional system is in place then new parties will have a larger chance to get elected, and then they also have more scope to grow and to challenge the existing parties. We may observe that the UK 2017 outcome may be more proportional than in the past, but this still neglects the dynamics and the build-up of frustration amongst minorities that aren’t represented well.

The UK already has experience with the system of PR, namely for the European elections. While UKIP didn’t do so well within the UK system, Nigel Farage gained the limelight via the elections for the European Parliament.

The UK Electoral Reform Society fails too

Part of the bizarre situation is that the UK Electoral Reform Society (ERS) fails too. They favour the system of “Single Transferable Vote” (STV) and they call this a system of PR while it isn’t PR. It is rather bizarre that they do not comprehend this. The UK had a so-called “referendum on PR” in 2011, but this was actually on the system of “Instant Run-Off” (a.k.a. “Alternative Vote”).

Apparently, the UK has a hangup on DR. They think that districts allow voters to connect directly with the local politicians, and that this reduces the influence of the party bosses. This is a dubious argument. If a representative and party member is out of line with the party then the party might still sack him or her nevertheless. In PR it is easier to start a new political party and be elected (when the issue likely isn’t just local).

Thus the statements by the ERS about district representation derive from historical bias and not from clear theory and practical experience with PR.

Let me give an example how STV favoured by ERS is not PR at all, even though they claim that it would be PR.

Example that STV is not PR

Consider two districts with 30000 voters each. Each district has 2 seats, so that the Droop Quota is 30000 / (2 + 1) + 1 = 10001. Parties contending for these seats are Con, Lab, en LDP. In District 1, the Con are popular, and they present there a list with two candidates. In District 2 the Lab are popular, and they present there a list with two candidates. We consider a rather symmetrical situation as in the following table, also with the STV results.

In STV, voters vote only once, but they can assign a rank order of the candidates.

In District 1, 7503 Con1 voters give Con1 as their first choice and Con2 as their second choice. Also 7501 Con2 voters give Con2 as their first choice and Con1 as their second choice.

  1. In the first round, no candidate meets the quota. LDP1 has the minimal number of votes, 7494, and is eliminated.
  2. In the second round, Con2 has the minimal number of votes, 7501, and is eliminated.
  3. In the third round, the Con2 votes are allocated to Con1, and Con1 meets the quota and is elected.
  4. In the fourth round, Lab3 is the remaining candidate and thus is elected, though the 7502 votes are below the quota.

The situation in District 2 is analogous.

District 1 Votes District 2  Votes
Con1

7503

Elected Con3

7502

Elected

Con2

7501

Lab1

7503

Elected

Lab3

7502

Elected Lab2

7501

LDP1

7494

LDP2

7494

30000

30000

Let us now join the two districts, and look how STV works for the national vote.

There are 60000 voters and 4 seats, so the Droop Quota is 60000 / (4 + 1) + 1 = 12001.

The Con voters put the Con candidates of their district in the first places, and then the Con candidates of the other district. For example, the 7501 Con2 voters have the rank order {Con2, Con1, Con3}.

Because of the symmetrical structure of this example, there are some ties. Rather than using a coin, we use the alphabetical order.

  1. In the first round, no candidate meets the quota, and LDP1 is eliminated.
  2. In the second round, the LDP1 votes go to LDP2, and it is elected.
  3. In the third round, alphabetically Con2 has the minimal number of votes, and is eliminated.
  4. In the fourth round, Con2’s votes go to Con1, and it is elected.
  5. In the fifth round, alphabetically Lab2 has the minimal number of votes, and is eliminated.
  6. In the sixth round, Lab2 votes go to Lab1, and it is elected.
  7. In the seventh round, alphabetically Con3 has the minimal number of votes, 10506, and is eliminated.
  8. In the eighth round, Lab3 remains, and is elected, though with only 10506 votes.

Thus now LDP2, Con1, Lab1 and Lab3 are elected.

Upshot:

  • As the UK Electoral Reform Society (ERS) states that STV would generate proportional results, both {Con1, Con3, Lab1, Lab3} and {Con1, Lab1, Lab3, LDP2} would be proportional results, which however are quite different results, which destroys the meaning of proportionality.
  • With a hangup on DR, there will be little scope for fair representation of the minority LDP.
  • PR would require party representation with {37.5%, 37.5%, 25%} of the seats. Admittedly, this is difficult to achieve with 4 seats, but if the situation persists then one might change the number of seats. This uses the PR criterion rather than the STV criterion.

In these considerations, the notion of PR dominates DR.

Confusing information from Holland

Holland is a small country with some 10 million voters. One might think that its proportional system might not easily scale up to a large unit like the EU. If the EU Parliament would be fully proportional, then Germany might have too large a weight. However, there are also divisions along party lines, and proportionality still would be a fair choice.

Holland had general elections on March 15 2017, and political parties are still negotiating about a coalition government. This is bad advertisement for the system.

There is a confusion in Holland about desiring the minimal majority coalition, that bargains for an agreement that would apply for the next 4 years. It would be more rational to look for a larger majority, and rather set for a flexible agenda, so that issues can be dealt with in varying manner. See this paper of mine. It may also be better to have elections every year, so that Parliament becomes more sensitive to the popular vote. (If you would replace only 25% of the seats, then the electoral quota becomes 4 times larger, and this might be too high again.)

Most bizarre is that the Dutch party D66 wants to change the Dutch PR system into more use of districts … see here. Thus the good news about democracy in Holland is killed again by the campaigners on the D66 hobby horse.

Conclusion

We observe that the UK ERS protests against the failure of the UK electoral system, but we can also conclude that ERS doesn’t comprehend democracy.

We find similar confusions all over the world. The best advice is to change your national electoral system to the PR system like in Holland (or to some extent the EU parliament), yet many campaigners ride their hobby horses of wildly confusing varieties, and calling it “democracy” while it actually isn’t.

PM. A paper of mine on comparing PR and DR is here.

There is a useful interview with Bill Mitchell of December 2014 on Modern Monetary Theory (MMT) and unemployment. My only comment on this interview is that one should be aware that Mitchell gets wrong information from Holland, see this discussion.

Thinking about money I wondered about Bernard Lietaer. He has an impressive CV, so I watched most of this interview with him too. It appears that I can make the following comments. The main one is that Lietaer gets wrong information from Holland too. Apparently no one told him yet about the censorship of science at the Dutch Central Planning Bureau since 1990 and the relevance for his analysis on money.

Interest causes the need for growth ?

Question 3 “Why is money scarce?” gives Lietaer’s answer in minute 3-4 that interest mathematically would cause the need for growth. Consider an economy where all loans are $ 100 bn, and where all borrowers must pay an interest of 3%. Then the loans can only be repaid with interest to the sum of $ 103 bn, if, it is claimed, there is some growth of at least 3%. If there is less growth, then some borrowers would be forced into higher debt. In the past I have wondered about this phenomenon too. When you imagine that all loans are exactly from January 1 to December 31 then the argument seems to be compelling.

However, when I looked at this closer, I found the argument wanting. For, the 3% would be earnings by the banking system too, and thus be spent and injected into the economic cycle. Not all loans are exactly from January 1 to December 31. For this weblog article, I planned to make a diagram with the proper argument, but checked on google first whether someone had already debunked Lietaer’s argument. Indeed, Johan Rönnblom already gives a fine discussion with a diagram. He actually has some other good articles too (like on the Jesus myth).

Silvio Gesell’s decay / demurrage / negative interest

Lietaer repeats Silvio Gesell’s argument on money with decay or demurrage or negative interest. For example, a Decay-Euro might lose 2% of its value next month, so that you would have an incentive to spend it. He gives the example that this worked well in Egypt for 2000 years.

However,  we already have decay with inflation. Also, when part of your money earns interest in a bank, then the other part with no return has a relative penalty. These incentives are lost when there is deflation and a zero rate of interest, as has been the case nowadays. But there are other ways to bring money into circulation. (My conclusion is the need for national investment banks.)

Thus, there is no need for Silvio Gesell’s argument in this particular form. J.M. Keynes already though Gesell an interesting author because he pointed to the incentives to spend or hoard money, but there it stops.

Ecosystem of monies

Lietaer argues that a monoculture runs a large risk so that it is better to have an ecosystem of more monies.

This is somewhat problematic. W.r.t. Question 21 on the Euro, Lietaer appears to be in favour of it. But in subsequent discussion he states that his original wish was that all Eurozone nations had also kept their own currencies. This however is dubious. When we look at the case of Cuba with its CUC and CUP and informal use of the dollar (which the CUC is linked to), then this advice by Joseph Perry et al. is that the dollar should not be legal tender. Supposedly bad money drives out good money, but this applies to the hoarding of the good money, so that only the bad money is in circulation. The situation is different when the good money is amply available and doesn’t need to be hoarded. If the dollar would be legal tender then apparently it would annihilate the use of CUC and CUP. The mentioned advice refers to Panama and its use of the dollar. Thus, Lietaer’s preference for dual monies in the Eurozone cannot be maintained. If in Greece both Euro and Drachme would be legal tender, and be used to calculate and pay taxes, and when the Drachme would obviously tend to drop in value, then people would flee towards the use of the Euro. The use of a dual money would not only be against the spirit of the Eurozone but also be counterproductive, causing a resentment against the Euro that causes a devaluation of the Drachme.

I have the impression that the problem is rather nonexistent. What is important is the design of the system of money and banking with a single currency.

Obviously, when you don’t have a good design, then it might be a solution to have various monies with various designs in parallel, and hope that one of them works. But we already know plenty about money and there is no need for experimenting. Best is the observation that the Euro has a bad design, and that politicians did not pay sufficient attention to scientific advice. Each nation needs an Economic Supreme Court (ESC), to warrant the quality of information for policy making.

Complementary monies

The same holds for complementary monies like the Swiss WIR. There is no real need for them. It would not really differ from starting a community bank that has more creative criteria for credit. One might avoid taxes perhaps. I can imagine that complementary monies can work in times of crisis and a government that is fixed on some gold standard or so. For economists, however, the proper analysis should rather be criticism on the government for wrong policies and the absence of an Economic Supreme Court. For economists, the objective remains that people would use legal tender, and thus also be in the position to prosper in doing so.

World money

The world would be helped with a world currency. The current system with IMF and Worldbank would better be replaced with a more developed one (Keynes: “The fund is a bank, and the bank is a fund !”). The current system is remarkably resilient, perhaps also because of Lietaer’s involvement with floating exchange rates and the ECU. Yet there may be tough times ahead, and we should be able to make arrangements with the experience that we have. The notion of an optimal currency area goes against world money, but see my amendment in Money as gold versus money as water. Curiously, Lietaer also suggests to think about world money, but his proposal of an ecosystem would seem to go against it.

Supposedly a taboo ?

On Question 10 about the lack of discussion on these issues, Lietaer suggests that money is a taboo. I wonder. There are ample economists who study money. When some of Lietaer’s arguments aren’t convincing then this doesn’t necessarily mean that there isn’t enough discussion.

More reading

For a discussion about money, this article by Goodhart & Jensen is quite useful. (I thank H. Visser (VU) for alerting me to this.)

Let me refer also to my earlier discussion of the gold bugs and the paper Money as gold versus money as water.

Club of Rome: Money and sustainability: The missing link

There is also Lietaer’s book for the Club of Rome – and Finance Watch (with executive summary):

“Just as The Limits to Growth exposed the catastrophic flaws in our economic system, this new Report from the Club of Rome exposes the systemic flaws in our money system and the wrong thinking that underpins it. It describes the ongoing currency and banking crises we must expect if we continue with the current monopoly system – and the vicious impact of these crises on our communities, our society as a whole and our environment.”

Comments are:

  1. I haven’t read this book. Here are reviews.
  2. I am sympathetic to the subject area, see my draft book on the analysis by Tinbergen & Hueting on the economics of ecological survival. See Hueting’s site.
  3. I am afraid that the presumed mathematical necessity from interest to growth forms part of the argument, which has been debunked above.
  4. A bad system of money and banking will obviously hamper the economy, and thus also environmental sustainability. But the issues are logically independent. The summary by Dennis Meadows in the Preface (excecutive summary) doesn’t indicate to me that we can expect a proof of logical dependence.
  5. A good system of money and banking is here: Money as gold versus money as water and the suggestion by Kotlikoff.

Dennis Meadows still isn’t an economist

The mentioned preface by Meadows has some relevance here. Meadows is an engineer (systems dynamics) (like Lietaer started out too) but his report “limits to growth” was criticised by economists for not having prices, income effects and substitutions. Apparently, Meadows never took up the challenge to study economics, and now he is taken in by Lietaer’s incomplete economic analysis on money as if this would be the true story.

“I did not think about the money system at all. I took it for granted as a neutral and inevitable aspect of human society.” (Meadows, Executive Summary, p6)

Well, any macro economist has money as a subject in his or her training, and all would know that the idea of “money is a veil” is only a particular assumption (which students might later forget, that is true).

“a devastating critique of traditional economic thinking” (Meadows, p7)

He cannot say so, since he didn’t study economics and thus cannot judge about what Lietaer claims. I am very much a traditional thinking economist, but do not accuse me of errors that fellow economists are making.

The analysis in “limits to growth” was relevant because it pointed to the limits to natural resources and the ecology, but there it stops. For national decision making, democracies require Economic Supreme Courts that check the quality of information. Part of their task is to make sure that the information from the various sciences is integrated, so that parliaments can trust that decisions are based upon the best information available.

Potentially a link to the Dutch Sustainable Finance Lab

Potentially there is a link in the latter issue with the Dutch Sustainable Finance Lab. See their malconduct here and here.

Potentially disinformation at the Club of Rome too

There may also be disinformation at the Club of Rome. Wouter van Dieren (b 1941) is presented as a scientist, but he is mainly an activist, after first starting as a journalist. His prominence at the Club of Rome can only be explained by his prominence at the Club of Rome. Van Dieren supported drilling for gas and oil in the Wadden Sea and use the proceeds to buy out clam fishermen, apparently neglecting issues of sustainability and earthquakes.

Conclusion

Looking back at these points, my impression is that Lietaer is a relevant author who mentions relevant aspects to consider, yet, that the discussion of his work requires a much more critical evaluation than it has received. Somehow Lietaer’s work has become popular in “alternative” circles who lack the required critical attitude, and that is a pity also for Lietaer’s work itself.

Lietaer’s argument that interest either requires growth or causes more debt is wanting. The proper argument seems to be that people borrow too much or that banks are less successful in judging creditworthiness, but this is a different issue with different remedies.

I did not spot a compelling summary that inspires me to read more. I expect that a rewrite would help, but it would not be for me myself to try to do so.

This continues from former weblog text.

In the past, Dutch society had the pillars, or segregation – though not in the extreme form of Apartheid – notably between Protestants and Catholics, but also for the socialist labour movement. People could live in their own community without the need to deal with other concepts or to develop a personal sense of tolerance and open-mindedness. Only the leaders of the pillars had to bargain with one-another, and this could be restricted to more practical issues.This pillarisation started to break down in the 1960s and 1970s with the increased welfare and freedom and the advent of television and “globalisation”. Yet, there are still relevant structures, e.g. in political party memberships and newsmedia subscriptions and such.

“In their search for the conditions of stable and democratic political rule most of these political scientists came to believe that political fragmentation of a society poses enormous obstacles to the realization of stability and democracy. In their view the cleavages or fragmentation, created by differing social, ethnic, religious, and cultural groups, had somehow to be overcome before there could be any prospect of a stable, democratic regime. About fifteen years ago this dominant belief among political scientists was challenged by the young Dutch Arend Lijphart. In 1968 he published his The Politics of Accommodation: Pluralism and Democracy in The Netherlands. Both within the country and elsewhere (thanks to the English edition) the work was highly acclaimed. Its success was due, in large part, to his description of Dutch politics as a paradoxical case of strong social segmentation or pillarization which was also marked by stability and democracy. That is, contrary to expectations, Holland is both stable and democratic despite its extensive social cleavages.” (M. van Schendelen around 1985).

While the pillars have mainly disappeared, Dutch culture hasn’t developed yet the personal sense of tolerance and open-mindedness that is required for this new situation. Dutch people are no orphans without self-confidence, but the metaphor might be helpful. If I am correct, in the USA, there is now strong antagonism between strands of Democrats and (Tea Party) Republicans, but there is also an underlying idea of mutual respect, and the attitude that opponents have the right to speak their minds, which also involves the obligation to listen to them. Perhaps this is the pioneering spirit that relies on individual strength. Though, in Hollywood comedies, it are the eternal misunderstandings that cause most laughs. Whatever that be, my suggestion is that in Holland, discussions break down far too soon. One is treated at best with a smile but no longer listened to, with the hint that you should go and look for your own pillar to talk to.

Thus, Dutch people might seem open minded but actually there is fundamentalism, fueled by uncertainty and the need to cling on to something.

A course “Economics from a pluralistic perspective” (newspeak)

The example in this weblog entry concerns what professors Irene van Staveren and Rob van Tulder call “pluralism“. This appears to be Orwellian newspeak for something that excludes key information that proper pluralism would include. It is “Free of charge to follow the course, € 50 to get a certificate”, though apparently you still must register with Coursera.

“Wondering why economists have not predicted serious financial crises? Shocked by economic assumptions of human behavior as self-centered and focusing only on what can be measured? Asking yourself if there are no sensible economic alternatives to free markets? Then you are at the right place to learn economics! Economic pluralism means that a plurality of theoretical and methodological viewpoints is regarded as valuable in itself and is simply the best way in which economics can make progress in understanding the world. This MOOC will illustrate economic pluralism not only in substance but also in form.” (EUR website)

This case concerns science and education, and involves Van Staveren’s and Van Tulder’s suppression of scientific ideas that they apparently don’t want to hear and don’t want to tell their students about. A scientist might specialise, and no longer be able to see beyond the blinders of this specialisation. In that case the scientist is no different than any other lay person, except for a general training in methodology and integrity of science. In this case, we are dealing with pluralism and generalisation, which are the opposite of specialisation. Hence the omission of key information is a much more serious issue.

My analysis in 1990 was that the Trias Politica fails, and that democracy requires an Economic Supreme Court. The economic crisis 2007+ confirms this analysis. Now, fellow economists may have other analyses, but it would be unscientific not to mention my analysis. Certainly when you target for pluralism, then also the proper analysis better be mentioned.

The former weblog entry already mentioned some important elements. We continue with the list.

Sustainable Finance Lab

Irene van Staveren is member of the so-called “Sustainable Finance Lab” (SFL) at Utrecht University. There is no good reason to combine finance and sustainability, but it might be good marketing for some bankers, and fashionable for the news media and students looking for something to study. Former RABO banker Herman Wijffels can call himself a professor now, and redirect criticism on his former banking activities to his new image on sustainability. In Dutch there is this 2013 warning by me.

I alerted Van Staveren about the malconduct by Klaas van Egmond at SFL. Van Egmond is an engineer in food technology, who has insufficient background in economics, but who doesn’t care about this, since engineers know better. He switched to the issue of the environment, and became head of the Dutch research institute on the environment. There he maltreated Roefie Hueting’s analysis on environmental sustainability. With the 2007+ economic crisis, he presented Dutch parliament with a model exercise that flies in the face of economics. These two issues are discussed here. Van Staveren didn’t respond to my criticism though she could at least have asked her SFL partners to reply to the criticism.

Holland also has environmental researchers like Rob van Dorland who do serious work on the environment. I am afraid that they get so-called “information” about economics from confused Klaas van Egmond. When I alerted Van Dorland about this issue, he rejected my warning as “spam”. Well, this is curious. The email exchange is here. This was part of the exchange above, that Van Staveren neglects to look into. It would have been better when she had corrected Van Egmond and informed Van Dorland that my information and warning had been correct.

At SFL there is also Dirk Bezemer, who disinforms the world about economists who warned about the 2007+ crisis.

At SFL there is also Mark Sanders, who advises the scientific department of the political party D66. I have asked Sanders to look in the D66 claims on improved democracy with district voting, referenda, and direct elections of prime minister and mayors. He refused to do so, and didn’t transfer my request to other people at that D66 department so that my new analysis would be looked into. Dutch readers can look here. A recent discussion on voting theory on this weblog is here.

Poor families paying for environmental costs

With global warming and deteriorating environment, the costs of the environment rise, and thus also costs for families, either directly or via taxes. For some persons this might be an argument not to include environmental costs into prices, since it would increase poverty.

“In the near future, an average three-person household will spend about €90 a month for electricity. That’s about twice as much as in 2000.
Two-thirds of the price increase is due to new government fees, surcharges and taxes. But despite those price hikes, government pensions and social welfare payments have not been adjusted. As a result, every new fee becomes a threat to low-income consumers.” (Der Spiegel 2013)

“Americans can’t afford higher electricity prices.” (Forbes 2013)

However, this situation is not fundamentally different from the past, when families already faced the question of survival and subsistence. Let me thus refer to my analysis on unemployment and poverty in DRGTPE. A short text is “Don’t tax sweat“. Dutch readers might look at this.

However, for some students of environmental economics this still might seem to be a new issue. I don’t know whether this is the case with Van Staveren and Van Tulder. They neglect to respond, and thus I really don’t know. Given that they neglect me, I presume that they also neglect my work, so that they might have above confusion.

Unemployment and poverty in general

In 1996 Ruigrok & Van Tulder “The logic of international restructuring” presented the important insight that globalisation actually was regionalisation. Fears about global competition were exaggerated. For Dutch readers: see this. This analysis fitted an earlier study by Andre Middelhoek at CPB in an evaluation of the Treaty of Rome, that there was mainly intra-industry specialisation.

In 1998 I gave Van Tulder a copy of the Dutch book “Werkloosheid en armoede, de oplossing die werkt (W&A) (pdf online). Van Tulder would look into it and get back to me. He hasn’t.

Date: Wed, 15 Apr 1998
To: Thomas Cool
From: Rob_van_Tulder
Subject: Re: Boekje over werkloosheid en armoede, i.v.m. uw analyse;  reactie?

Geachte mijnheer Cool,
ik heb uw boekje in goede orde ontvangen. Ik heb het slechts kunnen
doorbladeren. Momenteel is me weinig tijd gegeven voor enig substantieel
leeswerk. Dat zal in de komende weken z’n beslag kunnen nemen. Ik zal dan
graag contact met u nemen.
met vriendelijke groeten,
rob van tulder

Google Translate:

I have received your book in good order. I’ve been able to browse only. At present, I have little time for any substantial reading. That will be possible in the next few weeks. I will be happy to contact you.

Now I see that Van Tulder made a 2008 study about poverty for UNRISD, the United Nations Research Institute for Social Development. There is no reference to this book or my work.

“This paper addresses the way in which the largest firms in the world are coping with their involvement in the issue of poverty at home and abroad. It will be analysed in particular whether different ‘varieties of capitalism’ (VOC) or ‘business systems’ (Cf. e.g. Whitley, 1999; Jackson and Deeg, 2008) and different industries lead to different approaches towards poverty. The paper focuses on the one hundred largest firms in the world – as measured by 2006 turnover (see Annex). The sample contains sufficient representative firms from five industries and three different varieties of capitalism, to facilitate international comparison: (1) Anglo-Saxon (containing in particular US firms), (2) Continental European (in particular French and German firms) and (3) East Asian (in particular Chinese and Japanese firms). This paper is largely descriptive. It aims at identifying and documenting various strategies that can be and are employed by corporations to reduce poverty, it tries to come to a first assessment on the profoundness of these strategies, while also considering which variety of capitalism (and business leadership) seems to develop the most pro-active strategies towards poverty reduction.” (Van Tulder 2008, UNRISD)

The study targets businesses, but a key point for such a study would be:

  • Business leaders should plea with the government for a general policy to alleviate poverty, since it is the government that can resolve main issues, including the prisoners’ dilemma for the individual companies.
  • Resolution of poverty in OECD countries would be an important step, since it would set an example for countries with less democracy and resources.

Indeed Van Tulder in his chapter 2 presents a more general discussion how businesses are getting involved in the poverty issue, and W&A fits in this general framework, but isn’t referred to.

Why oh why did Van Tulder not get back to me about this book that I gave him ? It might be that he simply forgot ?

Wage moderation policy

Van Tulder (2000) (in Dutch) p178 & 180 refers to the Dutch wage moderation policy, but without the criticism given by Kleinknecht, see this earlier weblog entry.

The policy of wage moderation is also discussed in W&A as a key angle to understand unemployment and poverty in Holland and the OECD. See DRGTPE on exposed and sheltered sectors of the economy.

Reading DRGTPE

In 2010, I alerted Van Staveren about DRGTPE and the Dutch booklet DOK for a general public. Van Staveren indicated that she would look at it, so I sent her the relevant links. I haven’t received a reaction since. A 2014 discussion about the failure of the Trias Politica and need for Economic Supreme Courts is here.

From: “Staveren, I. van (Irene)”
To: ‘Thomas Cool / Thomas Colignatus’
Date: Tue, 16 Feb 2010
Subject: RE: Mijn analyse over werkloosheid en armoede

Geachte Thomas Cool,

Hartelijk dank voor uw mailtje en interesse in mijn werk. Als u me (een link naar) uw werk over de Trias Politica en uitbreiding met een Economische Hof zou willen toesturen, zal ik dat met belangstelling lezen.

Ik neem aan dat u bekend bent met mijn boek waarin ik betoog dat er drie economische waardendomeinen zijn en dat een economie pas goed functioneert als die drie (vrijheid/ruil; rechtvaardigheid/herverdeling; zorgzaamheid/de gift) in evenwicht zijn? (Voor de zekerheid: Irene van Staveren, The Values of Economics – an Aristotelian Perspective. Routledge, 2001.)

Hartelijke groeten, Irene van Staveren.

Google Translate:

Thank you for your email and interest in my work. If you would like to send me a link to your work on the Trias Politica and expansion with an Economic Court, I will read that with interest.

I assume you are familiar with my book that I argue that there are three economic value domains, and that an economy only works well if those three (freedom / exchange, justice / redistribution, care / gift) are balanced? (For sure: Irene van Staveren, The Values ​​of Economics – An Aristotelian Perspective. Routledge, 2001.)

PM. I am aware of the work by Arjo Klamer and Deirdre McCloskey on (virtue) ethics. Van Staveren wrote her thesis with Klamer and McCloskey was in the thesis commission. It had been my intention to look at Van Staveren’s thesis, but this hasn’t been urgent for me to do so yet.

Closing off

This discussion already takes two weblog entries. Let me close this off now, with a salute to George Orwell, apparently born in the same year as Jan Tinbergen (1903-1994).

Eric Blair / George Orwell (1903-1950)

Five years ago I discussed the “Dutch Taliban“. I can now include Dutch “pluralist economics” to this narrative.

There is this particular course “Economics from a pluralist perspective” in English though created by two Dutch professors Irene van Staveren (ISS) and Rob van Tulder (RSM) and a PhD student. I have no access to this course so I cannot check whether they refer to my analysis in DRGTPE and CSBH or not. I presume that I would have been informed if they had. The following is conditional on the probable assumption of neglect.

I will refer to some books that I haven’t read, and explain why I will not read them. One book by Van Staveren that I haven’t read deals with economists who aren’t read. I understand that she doesn’t include me as an economist who isn’t read.

I already wrote about “Economics as a zoo” in 2005, and pointed to the terms of orthodoxy and heterodoxy as inadequate. Much is plain old history of economic thought. Apparently the new term is “pluralism”. Also, I was one of the economists who warned before the 2007+ crisis, yet Dutch economists neglect my work and neglect my protest against censorship, and apparently I am in some other dimension than their “pluralism”.

I regard myself as a neoclassical economist, in the term as coined by Paul Samuelson. I am eclectic and open to ideas but for practical work there must be a model, using theory and tested by statistics. My work is not mainstream yet because my work has been hit by censorship. My work rejects neoliberal economics (Robert Lucas), but anyone can check that neoliberal economics is emperically untenable. Readers should not confuse neoclassical economics with neoliberal economics.

My impression is that “pluralist” economists might so much fear mainstream economics and also so much desire to be accepted, that they opt for versions of “pluralism” that are not really dangerous to mainstream economics. Which means that their “pluralism” is useless. But they can applaud each other greatly in their mutual admiration bubble.

Pluralist economics, before or after the crisis ?

The two professors cause the tantalising question whether pluralism starts before or after the 2007+ crisis.

The online course refers to Irene van Staveren’s matricola textbook Economics After the Crisis. An Introduction to Economics from a Pluralist and Global Perspective.  ($61.53) (Dutch: Managementboek).

The online course manual states clearly that this textbook is not necessary for the course itself. This is fine, since the book is rather expensive, and one would wish for open access books nowadays. (See here for a cheap solution for open access publishing.) They state that the book will be helpful if you want to read from paper. The professors apparently thus think that the economic crisis hasn’t been a natural experiment that explains which approach was empirically most relevant, but only provides a case for more pluralism, perhaps to allow for more natural experiments by economists who don’t know what to think because they have so many theories to choose from.

Pluralism as Orwellian newspeak

Dutch pluralist economics is Orwellian newspeak for anything fashionable, as long as it neglects the censorship of science since 1990 by the directorate of the Dutch Central Planning Bureau (CPB). Dutch pluralist economics has these fundamental tenets:

  • Economics is an empirical science, and the censorship at CPB doesn’t exist so it cannot be observed. Any fact on this can be neglected. (If I worked there and there aren’t CPB publications to my name, then this must have another explanation than censorship.)
  • Scientists will protest against censorship, and since scientists don’t protest then apparently there is no censorship. Hail to free society and the wisdom of Dutch government and Dutch economists. Except criticism for pluralism, of course.
  • Errors by the directorate of the CPB might be made, but not on censorship and dismissals with untruths. If the Dutch legal system allows such censorship and untruths because judges assume that the Dutch government wouldn’t do such things, then this only proves that there is no censorship.
  • The censorship has no consequences for policy making either, since something that doesn’t exist clearly can have no consequences.
  • It is only possible to know what the censorship is about once it has been lifted, but since it doesn’t exist it must be about nothing.
  • The economic crisis of 2007+ confirms my analysis of 1990, yet for Dutch economists there is the special task to completely neglect his work and his protest against censorship, since Thomas and his work do not exist, as proven in the above.
  • Well, Thomas might exist as a lunatic, see his protest against this censorship by the directorate of CPB. Completely irresponsible about such a respected institute (even though the directorate goofed on the crisis and its treatment and the policy of wage moderation).

What might seem tolerant or pluralist appears to be another form of fundamentalism. Professors Irene van Staveren (ISS) and Rob van Tulder (RSM) show engaging smiles that however hide mental niqabs or beards. (There is no need to overdo the metaphor with Photoshop.)

Van Staveren is anabaptist and her answer to neighbourly love is that she selects which neighbour to love. Van Tulder has a book for students about the essential skills for studying. Indeed, in our knowledge society, studying is actually a job too, and I am in favour of a student wage. Van Tulder’s book has the advice: “Dare to build upon research from others” – and apparently he has found other others than me who he really dares to build upon for his version of pluralism.

 

Smiles that hide fundamentalism. (Source: RSM and wikimedia)

Amartya Sen, voting theory and the Brexit referendum question

Irene van Staveren states that she derives much inspiration from the work of Amartya Sen. Sen however is a very mainstream economist and is seriously misguided on some key issues, so that one wonders what Van Staveren finds so inspiring. Sen is famous and fashionable, true, but fame and fashion are not scientific criteria.

  • One of my papers that got hit by the censorship deconstructs Kenneth Arrow’s impossibility theorem. (CPB internal memo 90-III-37, but better start now with my book Voting Theory for Democracy (VTFD).) Sen in his Collective Choice and Social Welfare gives a useful standard presentation of Arrow’s theorem. One can check that Sen doesn’t understand it. (Dutch readers can look here.) With Arrow, Sen actually helps to destroy democracy.
  • One can check that Sen’s own theorem on the supposed impossibility of a Paretian liberal is misguided as well, see VTFD.
  • Sen’s book Development as freedom is a collection of platitudes and open doors, comparable to “don’t give money but a fishing rod”.
  • Sen contributed to the Stiglitz-Sen-Fitoussi report, but this neglects the work by Tinbergen and Hueting on the economics of ecological survival (see my draft book).
  • Sen’s argument that democracies have less famines than non-democracies is questionable, see India itself. It is a better argument that the Trias Politica model of democracy fails, also in the case of hunger, whence each democracy requires an Economic Supreme Court.

While Sen has a training as an economist and mathematician, all this suggests that he is more inclided to abstract thought as a mathematician and less as an empiricist. It is not clear to me what Van Staveren’s background w.r.t. mathematics is.

It are such uncritical professors like Irene van Staveren who cause that Sen has gotten such authority in some circles. This is not without consequences. Sen’s misconception on voting theory shows also in his article with Eric Maskin in the NY Review of Books on electoral reform in the USA. The key advice that voting theorists can give to democracies is to switch to proportional representation (PR) in the House of Commons of parliament, and the selection of the executive power (ministers including PM) by such a PR House of Commons. Instead, Maskin and Sen stick to direct election of the US President, which however is subject to many voting paradoxes as has been illuminated by Arrow’s theorem. They adopt the best way to destroy democracy, namely by using methods that are unconvincing for the general population. There are various techniques of voting, but these better be used by parliament itself, once parliament has been chosen by PR. (Compare Holland with the UK.) Thus, Maskin and Sen, in their lack of understanding of voting theory, keep the US caught in suboptimality and cynicism. If there are no good alternatives, then Trump perhaps really was the democratically best choice. Similarly for the UK and India indeed. And Van Staveren cheers on, finding inspiration in Sen, and neglecting the censorship of science by the directorate of the CPB w.r.t. my work that contains the scientifically correct analysis.

Another example is Brexit. Undoubtedly many UK policy advisors have been trained either directly or via their teachers on Sen’s Collective Choice and Social Welfare as well. See my article in the RES Newsletter, April 2017, and reproduced on the LSE Brexit blog.

Environmental sustainability

A bit more can be said about sustainability, apart from Sen. Rob van Tulder has a major teaching engagement on management of sustainability in businesses. If prices aren’t right, then companies might make amends themselves. It seems that he neglects Tinbergen and Hueting’s on environmental sustainability. It would be much more effective to argue that environmental costs are included in the prices, since companies should not do what only the government can do properly.

“Professor van Tulder is co-founder of RSM’s Department of Business-Society Management, a world-leading department on the issues surrounding sustainability. The department offers a highly successful master’s specialising in sustainability.”

Also, Irene van Staveren and Jan Peil have edited this Handbook of Economics and Ethics. (2009), £168.30 in a period where open access already was a known concept.

  • Hans Opschoor there explains the topic of sustainability. I don’t have the text and would be interested to see what he states about Hueting’s work, since there are remarkable confusions about it. Opschoor coined the term “milieugebruiksruimte” (environmental carrying capacity) in 1989, but this is only an application of Hueting’s notion of environmental functions of 1974, after which Opschoor got citations that should have gone to Hueting. In this short text of 2016 Opschoor only refers to Hueting”s 1974 thesis but not to his later notion of environmentally sustainable national income (eSNI).
  • My own analysis on Arrow’s impossibility theorem might be included too, since Arrow claims moral desirability for the demolition of democracy, while I use deontic logic to show that this is unwarranted, see VTFD chapter 9.2 on page 239. (And perhaps read “Deontology” by Mark D. White.)  Yet, why would my analysis be included in this book behind a paywall, as VTFD is already online ? Hopefully some of the authors refer properly.
  • There is a chapter on Sen by Sabina Alkire, and hopefully she was aware of the above.
  • There is a chapter on poverty by Andy Sumner and on minimum wages by Ellen Mutari, and I can only hope that they have been aware of the following below.

Unemployment and poverty

In 1998 I gave Van Tulder a copy of this Dutch book on unemployment and poverty. He would read it and get back to me. This didn’t happen. Perhaps Van Tulder did not like the book ? We can only guess. This is a nice review in Dutch at DISK (lay people) and this is a misguided and misleading review by a Dutch economist, Joan Muysken, which case I already discussed on CofFEE or latte. If Van Tulder had misgivings in 1998 he could have discussed those with me. My impression is that Van Staveren can be annoyed towards Van Tulder that his silence on this may have caused her the lost years of 1998-2017 of looking for a good analysis, and the rest of the world the actual crisis of 2007+.

The book is a text for the general public, and fellow economists can find the same analysis in DRGTPE. However, journalists Hans Hulst and Auke Hulst report also on some events w.r.t. CPB which isn’t in DRGTPE.

Van Staveren’s co-editor Jan Peil, from above book on economics and ethics, also collaborated on a Dutch book on poverty and social exclusion. Translation: “Almost a million people in Holland have to deal with poverty.” This is a review at DISK in Dutch of 2007. DISK has been abolished now. Above book W&A had been reviewed also by DISK, but the review might no longer be at their site. My impression is that various channels of information have not been used.

Economists who (almost) aren’t read anymore

Van Staveren also wrote a book (EUR 22.50) for the general public, in Dutch, about economists “who (almost) aren’t read anymore”. (The brackets are logically strange.) There exists already a Dutch translation of Heilbroner’s masterpiece, but Van Staveren wants to link up to the 2007+ crisis.

The book’s cover has a problematic claim. Let me use Google Translate for the fun of it, and it actually does a remarkable good job. The first sentence is that neoclassical economics seemed to be the only relevant theory.

“After the Cold War, the only relevant theory seemed to understand the economy and influence the neoclassical. Economists who thought otherwise were dismissed as naive, or worse, as stupid. The financial crisis has painfully shown that this limited look is unjustified and can even cause a lot of damage. Irene van Staveren therefore advocates a pluralistic approach to the economy.” (Google Translate of: “Na de Koude Oorlog leek de enige relevante theorie om de economie te begrijpen en te beïnvloeden de neoklassieke. Economen die anders dachten, werden afgedaan als naïef, of nog erger, als dom. De financiële crisis heeft op pijnlijke wijze laten zien dat deze beperkte blik onterecht is en zelfs veel schade kan toebrengen. Irene van Staveren pleit daarom voor een pluralistische benadering van de economie”)

It is incorrect to say that other thoughts were generally dismissed. Perhaps there were instances, but not over the board. Good economists have kept an interest in the history of economic theory. But not everything can be used at the relevant job at hand. When there has been bad policy, a main factor has been the failure of the Trias Politica model of democracy, with too much room for politicians to manipulate information. See my advice for an Economic Supreme Court.

The unread ones are supposedly: Karl Marx, Hyman Minsky, Keynes, Frank Knight, Barbara Bergmann, Thorstein Veblen, Amartya Sen, Gunnar Myrdal, Adam Smith and Joan Robinson.

Why doesn’t Van Staveren mention my work as largely unread ? For an answer, she only allows the categories that I would be naive or stupid. This doesn’t strike me as logically and empirically sound. Her book must be the product of a severely deluded bubble.

I wonder whether I should show Van Tulder’s “Dare to build upon research from others” to give some indications about these authors. I can spend only a line on each, and this might strike the reader as dismissive and disrepectful, while the fellow economist might have worked hard most of his or her life to contribute to economic science. I wouldn’t want that my own work would be dismissed disrespectfully either. Yet, Van Staveren’s selection strikes me as rather curious:

  • Of these fellow economists, I had never heard of Barbara Bergmann before. Apparently she looked at gender in economics, and this hasn’t been my topic of interest. I suppose however that she is well read by economists who deem gender an important aspect. (E.g. on risk taking.)
  • Karl Marx is only interesting for history, in the same way as one would read Julius Caesar.
  • Perhaps Gunnar Myrdal isn’t much read nowadays, but that requires a longer explanation, including the lifting of the censorship at CPB.
  • Hyman Minsky of course is the celebrated case, but the description about his lack of influence is more complicated than mere dismissal. He really was a professor of economics, and I am not. I wonder whether there weren’t more standard neoclassical authors who said much of the same, so that Minsky’s main advantage is that he now is the best known “neglected” one. The main point is not neglect, but the failure of the Trias Politica model of democracy.
  • Keynes would not be read ? Well, one might say that many neoliberals didn’t read much of Keynes before 2007, but Ben Bernanke was chairman of the US Fed in 2006-2014, and we can be assured that Bernanke read Keynes, and that he responded admirably to the crisis, for otherwise the world had imploded. Let me also mention the biography by Skidelsky, that generated a renewed interest in Keynes, starting in 1983.
  • Frank Knight gave wrong definitions of uncertainty and risk, see DRGTPE. What was relevant however got reworked by Keynes. The 2007+ crisis caused a renewed interest in the Chicago Plan, indeed. See the comment on Minsky.
  • Thorstein Veblen wasn’t read ? I cannot believe this.
  • Amartya Sen has been amply read, see above discussion. Van Staveren wants to portray him as unread only to promote her bubble.
  • Adam Smith unread ? I cannot believe this. Contrary to Marx, he is still quite relevant, see Heilbroner.
  • Joan Robinson ? Apparently her contribution on “imperfect competition” has been included in neoclassical economics. In heterodoxy, her writings have some popularity, but it is not clear to me why she should be read more widely. Her work never seemed to matter for my own work and I haven’t really read her. Perhaps she is relevant for other fields of economics, but I would not know.

Above indication isn’t intended to mark these authors in a particular manner. The only intention is to argue that Van Staveren’s selection is rather curious. Most likely the title of her book is plain wrong. The present title might be much of a marketing ploy. A neutral title might have been: Views from the history of economics on the economic crisis.

It matters a great deal how the issue is presented (framed):

  • My analysis is that economics already contained ample information, so that the crisis has been caused by failure of the Trias Politica by abuse by policy makers. For example, policy makers could and can cherry pick an economist to defend a particular policy. My advice is an Economic Supreme Court, so that such cherry picking is no longer possible, for the ESC will weigh arguments on content.
  • Irene van Staveren puts the blame of the crisis on the economics profession itself, also at the academia, instead of the policy makers. She wants the whole of the economics profession to function as an Economic Supreme Court. This is a category mistake, since the academia do not have the task to support policy making but to generate new insights and criticism.

Misleading the public

In her bubble, Van Staveren neglects my work, doesn’t mind about the censorship, and misleads the public.

A lay person’s review shows that Van Staveren partly did a good job in reaching out to the public.

“A few jumping points from the book: Not only did many scientists see the 2007 financial crisis, the same people predict that the weather will go wrong. According to them, nothing has changed, such as the strict separation of savings banks and business banks and insurance. Taxpayers have to pay billions to save banks that were too big to fail, the banks are still too big to fail and still sell incomprehensible and uncontrollable products, so soon we have to dock again. If we all agree to vote On politicians who send themselves through the bank lobby because we just do not understand well, we have to pay for our intellectual laziness.” (Google translate from: “Een paar springende punten uit het boek: niet alleen zagen veel wetenschappers de financiële crisis van 2007 aankomen, dezelfde mensen voorspellen dat het weer mis zal gaan. Er is volgens hen niks wezenlijks veranderd, zoals het strikt scheiden van spaarbanken en zakenbanken en verzekeringen. Belastingbetalers hebben miljarden moeten betalen om banken die too big to fail waren te redden, de banken zijn nog steeds too big to fail en verkopen nog steeds onbegrijpelijke en oncontroleerbare producten, dus binnenkort moeten we weer dokken. Als we met z’n allen blijven stemmen op politici die zich door de bankenlobby laten sturen, omdat we het gewoon niet goed begrijpen, zullen we dus voor onze intellectuele luiheid moeten boeten.”)

However, this message could also have been given without this particular book.

This lay person shows a confusion between neoclassical economics and neoliberal economics. Perhaps Van Staveren has this too ? Also, this lay reviewer states to have gotten an interest in Amartya Sen because of Van Staveren’s praise. Ouch.

More points tomorrow

There are some more points, see the next blog entry.

This discussion continues with the exchange of Flassbeck & Lapavitsas versus Storm.

My own position is as follows. Holland creates its own unemployment since 1970 by a wrong policy on taxes and premiums. Holland has the entrenched government policy of “solving” this by wage moderation and exporting its own unemployment to other nations. I present my alternative analysis since 1990. Economists at TU Delft have been arguing against this policy of wage moderation for decades too. They overlook the cause in taxes and premiums, and focus on technology. Schumpeterian innovation requires higher wages to get rid of obsolete technology. Now that Germany has had wage moderation too (because of the fall of the Berlin Wall and the Mark = Mark policy) the discussion on wage moderation moves to center stage for the survival of the Euro. Servaas Storm at TU Delft enters the European discussion again with arguments about technology, and again neglecting taxes and premiums, and neglecting the censorship of science by the Dutch government (what this weblog is about). Storm has an innovation in his analysis by including banking, and how international credits drive international trade, yet, he seems to neglect the phenomenon that trade surpluses generate funds that look for opportunities, often by providing credits that generate more surpluses. Thus Dutch and German wage moderation would be causally more important than bank credits.

PM. See also former IMF director Johannes Witteveen’s lecture on the Dutch export surplus and a need for an investment policy. There is also my discussion in 2009 with a chart of the Dutch export surplus in 1971-2010 (forecast). This is already 8 years ago.

Let me restate some basic economics for some readers who lack this.

Basic macro-economics

  • Let real national output (GDP) be y and the price level be p.
  • Let labour input be x and the wage be w.
  • Then labour productivity is λ = y / x and the Labour Income Quote is LIQ = w x / (p y).
  • Let there be a Cobb-Douglas production function: y = β x^α, with β containing capital and technology.
  • When producers maximize their profits π = p y w x subject to labour input x, then we can derive:
  • The first order condition: dπ / dx = 0 gives p β α x^(α – 1) – w = 0.
  • Or the wage can be set at w = p β α x^(α – 1) = p α y / x = p α λ, since the national labour supply is given as x.
  • This w = p α λ is the rule mentioned by Flassbeck & Lapavitsas: let wages grow with labour productivity and the agreed target of inflation of 2%.
  • From w = p α λ we can derive α = w x / (p y) or α = LIQ.
  • Unit labour costs are ULC = w x / y = w / λ = p LIQ. Thus alternatively w = p LIQ λ or w = ULC λ.

The assumption of the Cobb-Douglas function seems somewhat specific, but given the relatively small changes that we are considering the approximation is often so good that we almost seem to have a definition. The LIQ has the character of a structural parameter α, at least for annual changes.

If prices p and wages w and labour input x remain the same from one year to the other, and productivity rises by rate g, so that  =  (1 + g) y[-1], then α = LIQ = w x / (p y) = w x / (p (1 + g) y[-1]) = LIQ[-1] / (1 + g) = α[-1] / (1 + g). For example, if α[-1] = 80% and g = 2% then α ≈ 78%. In this case α would be stable if wages would rise by 2% too.

The w = p α λ condition is not in the EMU rules. The Eurozone countries apparently are less aware of the notion of “national bargaining” (as in the Dutch Polder model) and have been hesitant to include national wage agreements in the EMU and Stability & Growth Pact (SGP) and its updates. (Check for the word “wage” on this wiki page.)

Another possible rule might be a tax of 5% on the three year cumulative trade surplus (which may be seen as 15% for a single year), to be invested in productive capacity in the deficit countries via national investment banks. Such a tax would not be on export items (like a tariff) but levied on the Eurozone member governments of surplus countries. (At this applet, set the color bar to a score of 0, and slide over the years.)

It is unavoidable to think about such rules. Holland has been moderating its wages long before Germany did. The policy put pressure on the exchange rate of the guilder, but this was resolved by joining the Euro. Holland still is a small country and the impact wasn’t much felt. Now, Europe must explain to Germany that a raise of German wages is required, whatever they fear about inflation. It should help Germany to grow aware that my analysis (see DRGTPE) allows full employment at stable prices, not only by exports but also by stimulating the domestic market.

Shifting the blame

Both North and South Europe deviated from w = p α λ. Some Northerners blame the South, and some accept some blame themselves.

  • Sinn and Schäuble argue that Southern Europe should moderate their wages like Germany.
  • Bofinger and Flassbeck & Lapavitsas argue that Germany (and Holland) should raise their wages.

As Storm states:

“Their main point is that there would not have been large unsustainable current account imbalances within the Eurozone, and consequently no sovereign debt crisis in the deficit countries, if all member states had kept their nominal wage growth equal to labor productivity growth plus 2% (the inflation target). Professor Wren-Lewis (2016) has been making the same point. In this account, this delicate equilibrium has been deliberately upset by nominal wage moderation in mercantilist Germany, with a growing German trade surplus just being the flipside of the growing trade deficit in Southern Europe. It is rather ironic, in my opinion, that a similar logic is used by mainstream observers such as Sinn (2014) or even Mr. Schäuble himself, with this difference: Sinn and Schäuble argue that the current account imbalances were caused by a failure of the crisis countries to follow Germany’s successful example in cutting down their unit labor costs.”

Towards a collapse of the Euro

Sinn and Schäuble want to control inflation and they lack instruments to make sure that Southern Europe adheres to the EMU rules. Thus Sinn and Schäuble take the hard line that it is up to Southern Europe to choose themselves:

  • either unemployment because of high wages
  • or internal devaluation, and subsequent unemployment because of deficient internal demand.

Hence we can understand Flassbeck & Lapavitsas:

“Germans ought to know better than all others about the difficulties caused by wage divergences in a currency union. The deviation of East German wages as measured in international currency, following the German Monetary Union of 1990, destroyed East German industry and forced a transfer union. Unfortunately, for the EU and the EMU the option of a transfer union is simply not available. As long as Germany persists with its policy of wage moderation, the only future for the EMU is collapse.”

Check how I criticised Angela Merkel for her deceit at the German elections in 2013. Given German policies on wage moderation, standard economic theory allows her the choice between a transfer union or a breakup, but she kept silent about this. Of course there is my amendment to the theory of the optimal currency area, see MPRA or RWER, but as long as German policy makers do not indicate that they understand his amendment, we must conclude that they disinform their electorate.

How does Storm handle this ?

How does Storm handle this reference to basic economics ? He misstates the argument, and then rejects it.

“(…) that Eurozone imbalances were driven by (exogenous) losses or gains in unit labor cost competitiveness (…) is a myth (…)”

Storm’s problem is on causality: “what drives what”. Yet this is not quite what this discussion is about. What Storm calls a myth are basically accounting rules.

  • Use GDP = Y = p y = C + I + G + X – M, with consumption C, investments I, government G, exports X and imports M.
  • The current account CA = X – M is also the increase in foreign assets FA = X – M (NY FED).
  • National income, employment and wage translate into LIQ and λ. This is mere accounting.
  • Compare two situations for the same country with only a difference in M. In the first situation there is Y1 with a surplus on the current account, or M < X. In the second situation there is Y2 with a deficit or M > X. Thus Y1 > Y2. Assume the same output price p and working force x so that y1 / x > y2 / x, or λ1 > λ2. The productivity with a surplus is higher than with a deficit. For example, in the second case the country worked as hard as usual, but also imported a car by borrowing from abroad. Mere accounting causes that observed productivity drops. Similarly we have w x / y1 < w x / y2 or ULC1 < ULC2, or that the deficit situation has higher unit labour costs.

Economics is about causality and not about accounting, but it is important to be aware of accounting effects. Regressions with statistical data that contain these accounting effects must be judged carefully.

In above example of importing a car, causality seems to run from first importing to secondly a statistical observation on productivity. This is Storm’s view. But this is not the only causal possibility. Sinn and Schäuble might argue that higher productivity might have been feasible if the car hadn’t been imported but e.g. produced in the country itself with a creditor in the country itself. Thus there seems to be more complexity than Storm allows for (though he already makes a complex case). And Sinn and Schäuble might state more clearly that they also plea for the demise of the German car industry.

Storm’s five arguments

Storm has five arguments that we may indicate shortly. Apparently he repeats himself at points, but this is okay since we look at the arguments and not their number.

  1. Banks in Northern Europe lent to customers in Southern Europe, assuming that loans in Euro were safe anywhere. (Comment: True. However, if there hadn’t been surpluses on the Northern current accounts, then these banks would have had less funds. We are not speaking about a single year, but a prolonged period of surplus funds looking for “investment” opportunities.)
  2. German firms, producing high-tech, high value-added, high-priced and mostly very complex manufacturing goods, do not directly compete with Spanish, Portuguese, Greek or even most Italian firms, which are specializing in lower-tech, lower value-added, low-price and less complex goods (Simonazzi et al. 2013).” (Comment: This is not relevant, since differences in quality are corrected by differences in wages, whence we compare w1 / λ1 and w2 / λ2.)
  3. Four empirical “facts”. (a) Elasticities. (b) In Spain imports grew while exports were unaffected. (c) World income explains exports, and national income explains imports. (Costs might have a one-time effect but then are stable.) (d) There were first the imbalances and only later the worse ULCs. (Comment: Basically agreed on (a)-(c). However, this (d) is the same as (1). We are not speaking about a single year, but about a prolonged period of imbalance and funds looking for profit.)
  4. A more theoretical discussion of (3c), with the example of (2). “These asymmetric growth patterns are the direct consequence of structural differences in productive specialization (Simonazzi et al. 2013).” (However, see (2). Obviously, the EMU doesn’t have an exchange rate regime to correct sustained imbalances. Apparently governments must impose what otherwise would have been done by exchange rate markets.)
  5. “Higher Wages and Higher Inflation in Germany Will Not Help.”

Storm on point 5:

“German exports and imports, as I argued above, are not very sensitive to changes in relative unit labor costs, however, and hence there will be only a limited amount of expenditure switching (away from German products and toward foreign goods), as has also been convincingly shown by Schröder (2015). Let me repeat for clarity’s sake that I am strongly in favor of higher nominal wage growth (in excess of labor productivity growth plus 2%) in Germany. It will definitely help Germany. But it will not help the crisis-countries of the Eurozone.”

“The assumption is that German GDP increases by € 100 billion (which means German GDP is growing at 3.7%). Through global production chains, [my emphasis] German growth creates € 29.5 billion of income in the rest of the world and about € 7 billion in the selected European countries listed in Table 1.”

This looks at production chains (Germany, USA, Korea) ! This may well be. But higher German wages would also mean higher German imports for consumption.

Storm’s view on the real issues (again)

Storm repeats what he regards as the real issues:

“(…) the common currency and monetary unification have led to a centrifugal process of structural divergence in terms of structures of production, employment and trade (as explained in my earlier notes).”

“German wage moderation mattered a lot, not through its supposed impact on cost competitiveness, but via its negative impacts on (wage-led) German growth and inflation, which in turn prompted the ECB to lower the interest rate in the first place.” (Comment: This “negative impact” is TU Delft slang for the idea that low wages reduce the need for Schumpeterian innovation.)

“The consequent crisis of the Eurozone is a deep crisis of inadequate aggregate demand in the short run and unmanageable structural divergence between major member states in the long run.”

I wonder. If Germany provided the European industrial zone and Southern Europe provided the European vineyards, olive trees and universities, then this might still work and everyone might be happy, provided that the prices of cars, wine, olive oil and Ph. D. doctorates would be right. Wage levels in Southern Europe might still be lower, but with a purchasing power parity (PPP) living standards might still be quite comparable. Sinn and Schäuble might like an argument that EU support for investments in Southern Europe should not be competitive to the German car industry (see here on the restauration of the Colosseum).

But this is not the full story. The Po valley has fine cars and machinery too. Italy itself has a North-South problem. Spain has the difference between Catalunya and Andalusia. And Germany has Laender who don’t do as well as Bayern.

Closing this review

This exchange started with Bofinger’s argument that German wages should be raised. This argument is fine. It will stimulate Germany’s domestic economy and imports. The obvious ceiling is provided by risks of unemployment and inflation, but the rule of a wage rise with productivity and the target of 2% inflation is fine too. Germany also has some catching up to do.

It is correct that German exports might not be much affected, and thus neither employment in the exporting sector, because the productivity growth in the exporting sector likely is larger than this growth in the domestic sector. But the rise of imports would still help in reducing the surplus on the external account.

Storm’s arguments on competitiveness & wage moderation are a different subject. This is basically the subject of investments and regional development, and the role of banking. Germany is advised to focus on domestic investments.

Economic analysis would be served by having another indicator alongside GDP, namely a correction of GDP for borrowed funds. The X – M correction works fine for foreign assets, but a correction for domestic borrowing would be helpful too. If one buys a domestic car with credit, then this domestic car really has been produced, but it would be indicative to know whether 10% or 25% of GDP would be from credit.

Overall I can repeat that my analysis of 1990 is still very relevant for understanding and solving the Great Stagflation since 1970. There are DRGTPE dating before the 2007+ crisis and CSBH after it. DRGTPE already has a chapter on the distinction between the exposed and sheltered sectors, and CSBH has a refinement of that argumentation.

It is unfortunate that our fellow economists at TU Delft have been neglecting that analysis since 1990, whence they still lack the full picture. But every day starts with a new sunrise.

This is a remarkable exchange of articles:

Storm’s criticism shows some kind of trauma at TU Delft. Like Germany has the trauma of hyperinflation, TU Delft has the trauma of wage moderation. The Dutch government has an entrenched policy of wage moderation, and the research group at Delft TU has been arguing against this for so long, that when they hear the term “wage moderation” then they automatically argue against this. The research group and everyone else better be warned that this hangup better be resolved. Economists in the world are being disinformed.

Readers would be advised to first read the two articles by Bofinger (VoxEU and “Friendly Fire”), then below discussion, and then Storm’s articles to verify that there must be something like this trauma at TU Delft indeed.

Supportive material would be Storm on how Brexit challenges economic thinking, 2016-06-26. Storm indicates that he still is looking for the proper analysis, so that we can infer that his position on wage moderation forms only part of a puzzle.

“We desperately need a new paradigm to reform the system and make it work for the majority (…) Unless there is serious new economic thinking beyond austerity, deregulated finance, and a corporate dominated politics and state, social and political tensions will continue to build up within the E.U.”

Bofinger’s “Friendly fire” response contains a graph that shows the close connection of German productivity per person and per hour. Presuming that this also holds for other countries then this distinction need not confuse the argument.

Storm’s earlier key statement

In July 2015, Storm & Naastepad of TU Delft already presented this key statement:

“Myths, Mix-ups and Mishandlings: What Caused the Eurozone Crisis?

The Eurozone crisis has been wrongly interpreted as either a crisis of fiscal profligacy or of deteriorating unit-labour cost competitiveness (caused by rigid labour markets), or a combination of both.
 
Based on these diagnoses, crisis-countries have been treated with the bitter medicines of fiscal austerity, drastic wage reductions, and far-reaching labour market deregulation—all in the expectation that these would restore cost competitiveness and revive growth (through exports), while at the same time allowing for fiscal consolidation and private-sector debt deleveraging. The medicines did not work and almost killed the patients. The problem lies with the diagnoses: the real cause of the Eurozone crisis resides in unsustainable private sector debt leverage, which was aided and abetted by the liberalization of (integrating) European financial markets and a “global banking glut”.”

Thus, curiously, the TU Delft researchers of productivity repeat the finding by our colleagues who look for restructuring debt and financial markets. In itself I support the diagnosis that 1981-2007 are Keynesian years. I also support notions of restructuring of money and finance, see my paper Money as gold versus money as water. Yet,my point for this current weblog entry is that the TU Delft has a hangup on wage moderation, and that this causes disinformation and needless discussion, in a similar fashion as the German hangup on hyperinflation. Economic advisors might be in need of psychiatrists who help them deal with their anxieties.

Supplementary

Supplementary, there is my own text on the myth on German wage bargaining.

German readers might benefit from this text by Kleinknecht & Kleinknecht (2015) (in German), “The Erosion of “Made in Germany”: What Germans Should (Not) Learn From the Dutch“,  ZBW – Leibniz-Informationszentrum Wirtschaft.

Dutch readers would look at this 1996 discussion of mine on the three approaches: CPB, me, and Kleinknecht. Useful is also Bomhoff, NRC 1994-10-24.

Alfred Kleinknecht and his focus on wage moderation

The TU Delft research group had been started by Alfred Kleinknecht (1951), now emeritus.

Kleinknecht had started originally at VU Amsterdam. His institute got financial support from the Dutch Ministry of Economic Affairs. The Ministry was clearly interested in economic analysis of technological development.

At that time, Dutch economic analysis was dominated by the VINTAF model at the Central Planning Bureau (CPB). This combined a “keynesian” demand side with a capital vintage supply function. There was no direct substitution between capital and labour, but a Leontief technology per vintage that increased the vintage effect. A high wage would cause the elimination of older technologies, and a subsequent reduction of the wage would not be able to restore what had been eliminated.

Kleinknecht has been arguing much of the same during his career: Higher wages will increase productivity, partly by eliminating older techniques and partly by spurring innovation. Kleinknecht’s argument is not always based upon the assumption of vintages, and rather upon Schumpeter’s “creative destruction” and more often upon empirical research that is neutral on assumptions on particular technologies. His recent estimate on 19 OECD countries for 1960-2004 is that 1% wage increase might cause 0.4% increase in productivity (“Erosion”, p 409), for me with some doubt of the causal order. It would be important that other researchers replicate that finding.

One might assume that the Dutch Ministry of Economic Affairs would embrace Kleinknecht. The opposite happened. They withdrew all subsidies, and Kleinknecht had to look for another place to work.

  • From the VINTAF discussion, Dutch policy makers including the labour unions concluded to a policy of wage moderation. Maintaining employment was more important than increase in productivity.
  • Kleinknecht published articles that criticised this policy of wage moderation, for causing lower welfare in the long run. Apparently, the Ministry did not enjoy this criticism.

Eventually, Kleinknecht was able to restart at TU Delft to proceed with his analysis. He also kept singing the same song, and was often ridiculed by other economists for not supporting the conventional wisdom of wage moderation. Yet his work was published in major journals, and we can observe that he has a major track record.

There are people who are critical about the EU austerity after the 2007+ financial and euro crises. Such arguments are often less developed with vague references to say Keynes and demand management. The criticism by Kleinknecht et al. is much more specific, with also strong arguments. For example, the EU encourages labour market flexibility and the abolition of various arrangements, but Kleinknecht points to the importance of stability on the labour market. Companies must make risky investments in new technology, and they require workers who commit themselves. Bomhoff, referred above, argues that new companies entering the market should be able to pay lower wages, but this is an argument rather on wage structure and not on flexibility.

PM. Another positive point about Kleinknecht is that he warned in 2007 about the risk of an “earthquake on financial markets” (see here). There is Dutch Dirk Bezemer (also at INET) who wrote about such warnings by economists, but Bezemer doesn’t mention Kleinknecht, just like Bezemer doesn’t mention my work.

How a focus causes a blind spot

As I already explained in 1996 (Dutch article) Kleinknecht wasn’t aware back then of my alternative analysis and criticism of the policy of wage moderation. Given my analysis, Kleinknecht’s analysis on technology is supportive but not crucial.

Apparently, Kleinknecht has never wanted to study my analysis. Part of his reluctance can be understood, since my analysis has also been hit by censorship so that there are key parts that are not available yet. Part may be that Kleinknecht didn’t want to have another clash with the establishment. He already had his own struggle and didn’t need another one for someone else. Yet the censorship by the directorate of CPB exists since 1990 and Kleinknecht had his inaugural lecture at VU only in 1994.

I can only speculate what his motivation might be, since he hasn’t been willing to discuss this with me, and there is no need for speculation. It suffices to observe, and check above ZBW 2015:

  • Kleinknecht has his focus on technology and wage moderation
  • he doesn’t refer to my work on the Great Stagflation in the OECD, including the Dutch policy of wage moderation
  • and he doesn’t inform other scientists about the censorship of science since 1990 by the directorate of the Dutch CPB.

The TU Delft research group

In the past I sent an occasional update email to Kleinknecht, since he was the director of the TU Delft research group. I did not communicate with his co-authors. It is unclear to me to what extent Kleinknecht has communicated to others about my work. Thus, now that he has retired, and when I see that Servaas Storm repeats some of the arguments, I wonder whether this might mean that there is scope for a fresh restart, or that the hangup on wage moderation has become part of the TU Delft paradigm.

A note on VINTAF

For the record: The VINTAF model died a soft death at CPB and was replaced by models without vintages. The major industrial effect in the Dutch economy was the demise of the industry of clothing and textiles. Once this had happened, there wasn’t cause to presume a major vintage effect. In my own analysis, the demise of the clothing and textile industry can also be explained by a wrong management of the wage structure. My criticism on VINTAF is also my criticism on Kleinknecht et al. They neglect the impact of taxation and social premiums on the wage structure. Low tax exemption causes high minimum wages, while this industry might have adapted better with lower wage costs and thus high tax exemption. Holland would be served by differential management of wages and taxes. The domestic market requires lower taxes and thus lower wage costs (for barbers and gardeners) and the export market can allow for higher taxes and higher wages (for high tech industry and agriculture). This can be regulated by high exemption for taxes and premiums, and a VAT at 1%. This alternative analysis started at CPB itself by Marein van Schaaijk and Anton Bakhoven. I supplemented this with the analysis of the tax void, dynamic marginal tax rate, shift of the Phillipscurve, and the need for an Economic Supreme Court, see DRGTPE.

Return to the beginning

The reader may now return to the beginning of this weblog entry. One may check what the exchange is all about.

My take on this

Let me also give you my take on this. In my perception, Storm is fighting Kleinknecht’s Dutch ghosts from the past.

Storm 2016-01-08 states:

“The sad truth, however, is that Bofinger and Wren-Lewis are right for the wrong reason—hence their interventions are less than helpful, because rather than knocking out the remaining errors in the “consensus diagnosis”, they help perpetuate a mistaken doctrine: that relative unit-labor-costs matter [?] are the prime determinant of a country’s international competitiveness, current account balance, and foreign indebtedness. “

This confuses description and cause. Statistics show such differences. If Southern Europe doesn’t invest in technology as Germany does, then we can observe such relative unit labour costs (ULC). The cause would be investments.

“Rising relative unit labor costs supposedly killed Southern Europe’s export growth, raised current account deficits, created unsustainable external debts and reduced fiscal policy space, and hence, when the crisis broke, these countries lacked the resilience to absorb the shock. It follows in this story that the only escape from recession is for the Southern European countries rebuild their cost competitiveness—cutting wage costs (because Eurozone members cannot devalue their currency) by as much as 30% (as proposed by Sinn 2014), which requires in turn that their labor markets be thoroughly deregulated.”

This looks like a chicken-egg problem. Who would invest in Southern Europe if wage costs are so high ? If there is wage restraint, then investments would not be so large to generate sufficiently low unit labour costs.

“Secondly, of course it is true that Germany and German wage moderation bear part of the responsibility for bringing about the Eurozone crisis. Bofinger and Wren-Lewis have the best intentions while making this point (alas, the road to hell is paved with good intentions ….), but their single-minded emphasis on the importance of relative unit labor cost competitiveness is misguided for at least the following three reasons.”

When Bofinger and Wren-Lewis point to a particular factor, one cannot call this “single-mindedness”. The model is obviously larger than a single variable. First Storm grants part of their argument and then denies all of it.

(1) “Unit labor costs make up less than 25% of the gross output price, while a second reason is that firms in general do not pass on all (but mostly only half of) unit labor cost increases onto market prices.  (…) Germany excels in non-price (technology-based) competitiveness and does not engage (much) in price competition.” It may be doubted that Germany could simply raise the prices of its quality export products without a dent in their exports. Thus the prices and labour costs matter. 

(2) “It was German engineering ingenuity, not nominal wage restraint or the Hartz “reforms”, which reduced its unit labor costs. Any talk of Germany deliberately undercutting its Eurozone neighbors is therefore beside the point. ” The point was that wage moderation had an important contribution, and this is not negated by pointing to something else.

(3) “The only rational explanation for the observed time-sequence is that Southern Europe first experienced a debt-led growth boom, which then led to higher imports and higher capital inflows leading only after a lag of many quarters to lower unemployment and higher wage growth in excess of labor productivity growth (see Storm and Naastepad 2015c).” He might have mentioned that low domestic demand in Germany also reduced the scope for exports by Southern Europe to Germany (like holidays). The German balance of payment surplus had to be invested abroad, simply because of accounting rules. Thus if Germany had targeted for a external balance, Southern Europe would have faced a different situation.

According to Storm German wage moderation would be a factor but not the key one:

“In a nutshell, since the mid-1990s, Germany has become stronger and more productive in high-value-added, higher-tech manufacturing (in conjunction with outsourcing to Eastern European countries), while Southern European countries became more strongly locked into lower-tech, lower value-added and, often, non-tradable activities (Storm and Naastepad 2015c).”

“Cheap credit in the South created unsustainable asset bubbles and facilitated untenable debt accumulation which fed into higher growth, lower unemployment and higher wages—but all concentrated in the non-dynamic and often non-tradable sectors of their economies.”

This repeats point (3) above, and is the common critique about irresponsible banks, who did not take proper account of the creditworthiness of their customers (or the system of central banks, that did not take account of these systemic effects).

Storm is a student of the economics of technology, but arrives at issues of finance:

“What is the appropriate interest rate for the structurally divergent “core” and “periphery” in a one-size-fits-all monetary union? And how can banks, the financial sector and capital flows be made to contribute to a process of convergence (rather than divergence)”

“(…) ditch the dangerous myth that unit labor cost competitiveness is the prime problem”

In reply:

  • Nobody put the notion of “primacy” on the table. The model has more variables. Storm seems to fear such primacy because of the TU Delft research group hangup on wage moderation.
  • He overlooks the observation by Keynes, and repeated by Bofinger, that surplus countries have a responsibility too. Bofinger explicitly argues for a rise of wages in Germany while those in Southern Europe are restrained. Bofinger’s analysis is targeted at explaining that German wages should rise, and the argument is sound.
  • Does Storm really imagine a banking system that facilitates investments in Southern Europe even when unit labour costs guarantee a capital loss ? (Though levels are important rather than changes. E.g. compare hourly wage costs in Germany about 34 and Spain about 22 EUR per hour, which then must be met with productivity.)

Political fall-out

Dutch Wikipedia reports that Kleinknecht in 2007-2008 was member of a committee that advised the GreenLeft political party about its programme principles. Potentially one might understand Kleinknecht’s hesitance as a scientist to study my analysis and join the protest against the censorship of science since 1990 by the directorate of the CPB, yet such hesitation also affects such advise in such political environments. The first is worse, since the second is politics only, and the GreenLeft might be deluded anyway, yet it overall makes one wary about the anatomy of Holland and the spillover effects on Europe and the world.

On Flassbeck and Lapavitsas later on.