Planning the economy

Picture of German economist and politician Ludwig Erhard (1897-1977)
As federal economy minister from 1949 to 1963, Professor Ludwig Erhard, a firm believer in economic liberalism, unleashed postwar Germany’s “economic miracle” (source: dpa)
  • Economies are too complex to be planned and governments only cause trouble when they intervene
  • The 2008 financial crisis was a textbook example of what happens when politicians short-circuit the market
  • Lax monetary policies and unrestricted public debt have created a threat looming over the developed world

An economy is a complex, interactive structure. On one side, it engages suppliers and providers of goods and services; intermediaries such as trading companies, the transport industry and the financial system; and, finally, on the other side, consumers. It is a matrix of collaboration involving millions of agents with differing interests and business models.

Competition and freedom of choice allow these interactions to find a balance. The shorthand for this system is the market. Markets underpin the interaction between individuals and businesses, and also between countries. This mechanism can only work with free exchange and individual freedom of contracts. It requires some rules to function smoothly – helping markets develop and forming a legal framework and a judicial system to secure the enforcement of contracts. Also, failures must be accepted.

Taken together, these elements provide the foundation of probably the most efficient and sustainable economic system in human history. It was this system, called ordoliberalism, that made possible the German economy’s rapid recovery and modernization (the so-called Wirtschaftswunder) after World War II. The essence of ordoliberalism is to reduce the state’s role to a provider of the economy’s supporting framework. As much as possible, the public authorities abstain from any attempt to intervene in the economy or plan its development.

Political failure

However, humankind has a habit of “improving” good things. Governments and administrations are endlessly tempted to “manage” the markets. Eventually, the latter become hampered by political and bureaucratic interventions. When these practices lead, as they must, to a crisis, the problem is usually described as a “market failure” instead of what it is – a political and bureaucratic failure.

The crisis resulting from this folly took on epic proportions

The financial crisis of 2008 was a good illustration of misplaced blame. Markets crashed as a result of the so-called subprime crisis in the United States. The crisis was engineered by the administration of President Bill Clinton (1993-2001) who wanted to make housing affordable to all, regardless of their financial circumstances. Two government agencies, Fannie Mae and Freddie Mac, began issuing mortgage credits of up to 100 percent of a property’s value, while banks were encouraged to offer similar credits with cheap money provided by the Federal Reserve System (the U.S. central bank).

In the short term, this response enhanced consumption. The banking system bears some responsibility for associating itself with this shortsighted policy approach and creating deceitful financial instruments to carry it out. The operation continued until 2007, when it began to collapse on President George W. Bush’s watch. The crisis resulting from this folly took on epic proportions, yet again we heard talk of “market failure.”

Scapegoats wanted

Unwilling to learn from experience, governments and supranational organizations continue to plan economies. Many G20 resolutions have gone into that direction. Regulations encourage the policies of abundant money supply and unrestricted debt. Growth targets are not reached even while economies remain driven by debt. As the fake housing boom in the U.S. showed, a system of this kind cannot continue forever. The future does not look rosy.

These days, even Germany’s Federal Ministry of Economic Affairs is trying to plan the country’s manufacturing sector. The administration favors large companies, ignoring that such strategies have never worked and that the backbone of Germany’s economic might is its “hidden champions” – entrepreneur-driven, medium-sized global companies.

Two convenient new scapegoats will come in handy when the time comes to assign responsibility for the impending failure of the debt- and regulation-ridden economies of the developed world. U.S. President Donald Trump’s so-called “trade war” and Brexit have already become a focus for commentators and critics.

Fatal attraction

Trade wars, unfortunately, are nothing new and invariably damaging. Despite the World Trade Organization’s heroic efforts to liberate commerce, all major trading blocs, including the European Union and China, use protectionist measures. It can be expected, however, that in the end Beijing and Washington will find an acceptable compromise on trade. This trade war will not be the root cause of a lasting global economic crisis.

Brexit is a misfortune, but it is not going to impact the world economy drastically – no matter what problems it causes for the United Kingdom and the EU. When push comes to shove, one hopes, pragmatism will also awaken in London and Brussels.

The fundamental problem is not Brexit. Nor is it Mr. Trump’s “trade war,” which brought an existing, deep-seated multilateral issue into the open. Sino-American tensions may even prove a blessing in disguise, if they finally lead to freer and fairer trade all over the world. The real malady of today’s global economy is government intervention and runaway spending, which leads to excessive debt and damaging tax systems, wrong incentives, overregulation, protectionism and the fatal attraction of central planning.

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