Putting an End to Darwinian Competition in Europe
A new book criticizes the EU's competition policy as destructive and instead calls for a competition of innovation-with an active state steering wage and fiscal policy.
PUBLISHED10. FEBRUARY 2022
READING TIME5 MIN
The idea of competition is the pillar of the European single market. Firmly anchored in the four fundamental freedoms, it reflects sympathy for an ordoliberal ideology that sees competition itself as the force of progress. Hardly anywhere is it greater than in Germany, which has cemented its mantra of competitiveness in massive export surpluses. Admittedly, this only works because other economies absorb the surpluses – in the form of deficits.
In a region like the euro zone, where there is no longer any possibility of currency appreciation or depreciation, fierce competition creates enormous political and economic pressure to lower wages and make labor markets more flexible in order to remain attractive to foreign capital and competitive. Since the euro crisis, this is even more true. According to the neoclassical paradigm, which sees competition as a prerequisite for economic development, Europe should hence have prospered more than almost any other region. In reality, the opposite has been the case.
This is where the recently published book ‘Clash of Nations‘ by development economist Dr. Patrick Kaczmarczyk comes in. A doctoral fellow of the UK government’s Economic and Social Research Council (ESRC) at the University of Sheffield’s Institute of Political Economy (SPERI), he explains in his book that the competitive dogmatism prevalent in Europe is – contrary to popular belief – anti-developmental in its Darwinian nature. He proves his thesis with the help of two “frames of reference.” One – theoretical – is the economist Joseph Schumpeter, the other – practical – is the German automotive industry. In doing so, the author explains his points in a comprehensible, non-technical manner; the book can easily be read by an audience outside the field.
Competition according to Schumpeter
Famous for his concept of creative destruction, the Austrian development economist Schumpeter is also a vehement critic of neoclassical equilibrium thinking. Unlike neoclassicism, which assumes that the economy always strives toward equilibrium and regards technological progress as an exogenous factor, Schumpeter defines development as something that only comes about through innovation, i.e. the creation of something new. It is precisely this Schumpeter to whom Kaczmarczyk refers in his book in order to theoretically substantiate that instead of the quantity of competition, it is rather its quality that is important. Competition has quality when companies secure their margins not by combining a given productivity with lower wages, but by investing. In doing so, he also breaks with the assumption that innovative competition is always about efficiency, as the Darwinian competition model of neoclassicism insinuates.
Kaczmarczyk argues that there is currently no room for innovation in the eurozone, as this would mean short-term inefficiencies that firms cannot afford in a competitive market. He uses the example of the German automotive industry to illustrate the practical consequences of this.
The Darwinian model student automotive industry
German carmakers are often regarded as Germany’s showcase industry – a flawed impression according to Kaczmarczyk’s analysis, as they have high nominal profits but low cash flows (cash receipts in the companies’ bank accounts). Sales are financed by the company’s own automotive banks, into which 3-4 times as much money flows as into development and research. According to the author, the industry has been able to gain market share not primarily through its technical edge, but through production outsourcing and price wars in the refinancing market. “The industry optimizes instead of innovating,” writes Kaczmarczyk – and thus ranks as a prime example of Darwinian competition.
All in all, the book paints a bleak picture of European economic policy up to this point. To promote real economic progress, Kaczmarczyk calls for a move away from “state vs. market” thinking and for a state that strategically directs economic activity in terms of wage and fiscal policy. In this way, the author joins a growing number of economists who are calling for a more active, a better state; a state that acts in a mission-oriented manner. Even in the German government, Olaf Scholz is now a prominent representative of mission-oriented policy.
Kaczmarczyk calls on policymakers to set a framework that leaves companies no choice but to invest. This presupposes a level playing field, he says, in which companies can only gain competitiveness through higher productivity. To achieve this, he sets out three minimum requirements. First and foremost, the ECB must be given formal permission to buy government bonds, even on the primary market, in order to put an end to different yields on government bonds – and thus to spreads that distort competition. It also calls for a wage policy aligned with the inflation target (a golden wage rule (1), orchestrated by the state), which would also have to be applied internationally, where it should be linked to direct investment to create compulsory incentives for innovation – and to prevent countries from gaining unfair advantages by lowering wages. These demands are likely to cause at least some controversy in Berlin and Brussels, even though it was Schumpeter who suggested that the state should play the role of ephor in financing and the decision-maker in important investment issues. That the neoliberal paradigm has failed in relation to reality is proven not only by Darwinian competition. However, with its analysis of European competition and the German automotive industry, ‘Kampf der Nationen’ certainly provides a further impetus to rethink the common narrative of success.