Debating a comment by the Prudent Investor 

One comment like this (re:new German left/Austria) by the Prudent Investor (PI) is enough to keep my blogger-heart beating for at least another month. Since he mentioned his interest in debate, I'll address some of his main points below:
PI: Liberalism and efficient state-regulation are ideal in theory, but contradict themselves in practice as this will end only in corruption on a massive scale. It always has.
This is why the efficiency aspect - along with transparency and participatory models - is so important, as I tried to propagate here recently in the Cowen-Gusenbauer post. It is also why changes have to proceed in incremental steps. I hold a belief that information technology and other recent developments have the potential to facilitate a political system that performs better on efficiency, transparency, participation. If that is true, then the state can reasonably become more ambitious without necessarily falling prey to the dangers of corruption.
PI: I am advocating economic education in the first place as I can see there is lack of it in our school system (Geographie und WIrtschaftskunde, LOL) below the university level. Then people can work out for themselves which direction the political debate should take.
Good point, 100% agreement.
PI: But a political system that effectively excludes some 8 % of the population from the workforce - and blames them for their 'failure' - is standing on the brink anyway, as soon as we close in on Germany's unemployment rates. ... Looking at Austria with one eye only as I am preoccupied with the foreseeable demise of the USA I still can say that the next election will be very difficult for me. If I could, I would vote for Lafontaine as he is the only intellectual counterweight to the unfettered capitalism Austria is sliding into too.
Maybe I do Lafontaine injustice, but isn't he basically arguing for deficit spending, where the state uses money it doesn't have to pump up demand in the hope of generating economic growth? Hasn't the economic history of the 1970s and 1980s shown that this doesn't work in the general case and in the long run, because state spending is empirically too wasteful? And isn't protectionism a second pillar of Lafontaine-type leftism, which only nurses moribund, incompetitive industries? I would love to see the contours of a workable alternative to mainstream economic policy in Lafontaine's direction, but I persistently fail to see it. That's why my basically pessimistic conclusion is that the core mechanisms of economic policy should remain (or become) liberal, and that poverty relief should be given much more resources - but it should operate on top of that liberal economic core.


Liberalism is fine - as long as there are no economic problems. But protectionism rises as soon as this is not the case. A good example for this conflict of interest was personified in Joseph Schumpeter. Although an advocate of a free market economy, Schumpeter turned to protective ideas after having failed first as Austrian finance minister (inflation rocketed into triple-digit area) and then in the free market. (He set up a private bank that went bankrupt in the banking crisis of the 1920's, an era of liberalism.)
Had he first noted on the US depression 1839-1843 that the economic devastation caused by recessionary periods is essentially a process of "creative destruction" and such periods are essential to the advance of capitalism, his views changed with his personal fate, a situation remarkably similar to the change of attitude towards free trade of US policymakers nowadays.
To quote Schumpeter, “I need only quote the wide spread belief, that every export means a gain and every import means a loss to the nation; or that it is always an advantage to produce at home, instead of importing, a commodity which a nation is able to produce, and that we ought to rejoice in every national industry created by a protective duty; or that tariffs remedy unemployment; or safeguard the national currency; or that they are necessary to keep up a high standard of wages; or that it is their function to equalize cost of production at home and abroad and to enable the home industry to compete with foreign products on what has been called ‘fair’ terms.
All this is wrong. The last argument for instance, which is so popular in the United States runs directly against the very meaning of international trade. What other reason can there be for importing a commodity from abroad, and why is international trade advantageous if not for the reason that a nation may, importing, get a commodity with less effort that is to say, at less cost, than if it produced it at home?
Hence, equalizing costs at home and abroad would, if carried out to its logical consequences, put a stop to importation and exportation and amount to prohibition of international trade. And if we want this, it is much more logical and much simpler to say so and to prohibit imports entirely, instead of creating in the public mind a vague impression that equalizing costs of production at home and abroad only eliminates some ‘unfairness’ from international trade but is not really meant to prevent imports.
Yet, although protectionist arguments can often be proved to be nothing else but errors, it does not follow that protection itself is always wrong.
Indeed, few modern economists will hold the free-trade argument so absolutely as the classics did. They will hold rather that every case has to be dealt with individually and that it is impossible to recommend free trade on general grounds, and for all times and places.“ This quote was taken from a lecture in Tokyo in January 1931.
Not from Schumpeter, but still valid is the view that the depressions of 1839-1843 and that of 1929-1934 acted as a catalyst for economic and political reform in the US (liberation of slaves, New Deal).
Am I a doomsayer when I expect this to take place in Europe in the medium term future? I think I am only realistic, given the problems of high unemployment, worsening demographics and Austria's rank in the PISA-study.
This will lead to a forced goodbye from the welfare state anyway.
Not that I am welcoming this. I always considered the welfare state a sign of the development of our civilization where we finally separated from Darwinist principles. And I prefer a high-cost welfare state to the conditions in the first Austrian republic which ultimately led to the darkest chapter in our history.
There is a lot of buzz in tabloids about the abuse of the welfare system. If these papers would devote as much space to ongoing fraud with EU subsidies in all industry sectors and the injustice of tax rebates which benefit upper incomes exponentially, the ink would be spent better. I have no reliable figures to underline this, but a rough estimate shows that fraud and tax rebates cost several multiples of welfare abuse.
Your point of deficit spending is correct, it won't work forever. First one to fall is the US, who constantly spends 6 % percent more than it takes in (unprecedented in economic history) but this will then ripple through the whole world when the biggest consumer suddenly contracts.
The end of deficit spending will come through the onset of inflation and the rise of interest rates. But I fear it only happens at the point of time when it will be too late. According to Kondratieff's long cycle theory the next depression is just around the corner as the last big invention (digital computing) was 65 years ago and catapulted the (western) world out of the last depression. According to Schumpeter this coming depression will lead to the necessary political innovations. And it will be again a new technological innovation that will fuel growth afterwards.
My veering from one argument to the next shows that I have no workable recipe either. But only discussion can lead to something new. And something new we need badly.

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