Newsletter: Good Economists, Bad Economists

Given that it is the 21st century AD, a remarkably simple approach to the question of what constitutes good economics has survived in Germany. Good is what is market-based. Or pure regulatory policy. Anyone who (sometimes) favours state correction, on the other hand, is a believer in the state, i.e. bad. This is what you read more often these days when official or unofficial opposition politicians such as commentators or representatives of business organisations assess the policies of the government and its advisors. Or decide which of the experts from the German Council of Economic Advisors currently in dispute (who are still romantically called “Wirtschaftsweise” in Germany) are good (Grimm) or not good (all the others). Amazing.

If the state of research and science has taught us anything, and not just since yesterday, it is that things are hardly all that simple. That financial markets do not always react efficiently, on the contrary, as even the head of the Bundesbank, Joachim Nagel, admitted in the latest Forum Talk with Moritz Schularick – something that Bundesbank heads, as guardians of the ordoliberal grail, would never have done in the past. Or that relying on the market alone will not save the climate. Or that it makes economic sense to introduce minimum wages. Or that it is not optimal to organise health services in a “market economy”; according to a recent study, it even measurably increases the number of unnecessary deaths. These are just a few of the now well-researched examples. Modern economics.

This makes it all the more disconcerting to judge all those as good who, like the above-mentioned experts or others, are per se in favour of “market-based” solutions. Economics from Fairyland (don’t play with names). In his book “Economics in America”, Nobel laureate Angus Deaton impressively and critically explained that this is not just a German phenomenon – and this week in our New Economy Short Cut he discussed it again with Christoph Schmidt, head of the RWI Institute in Essen and former member of the German Council of Economic Experts (see above) – the body that once vehemently opposed the minimum wage and was therefore very wrong. A fascinating hour – watch the replay here.

The problems are too serious for that. There is little to suggest that climate change can be stopped by ordoliberal principles alone – unless the roles of the market and the state are rebalanced. Nor does it help to invoke the free forces of the market when those market forces have contributed to disasters such as the China shock in the US, which in turn, according to the now predominant empirical evidence, was crucial to Donald Trump’s victory in 2016.

In the coming weeks and months, we will be focusing on what exactly can be done to counter growing discontent and the threat of new waves of populism – not least with a view on the US elections in November, which will also be a referendum on whether what has been dubbed “Bidenomics” is already gaining traction as an alternative and a prescription against discontent: A policy that specifically seeks to create good jobs and economic performance where most people have been left behind; and that seeks to repair much of the damage caused by an overly naive belief in market forces. No market dogma can help here either.

Our work will focus on bringing together the latest research on the causes of populism, looking at how Biden’s IRA, for example, is helping to reduce resentment, or comparing the early results of the current US climate policy of massive subsidies with those of a more conventional – market-based – focus on higher CO2 prices. All this will be discussed at a major meeting in May. More on that soon.

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