Saturday, May 19, 2007

Heusinger Knows Best (amv)

Credit growth in Germany slows down ... and, quite naturally, an expanionist like von Heusinger cannot live with it. To him, credit growth ensures that more and more investors are kept in thrall by the the capitalists urge to earn an interest. The burden of interest compels investors to overcome their natural laziness and to produce output. Ta-da! After almost 250 years of economic inquiry we came full circle to discover that the mercantilist were right after all: goods are not scarce, but money! Only more money makes us richer! This, of course, is simply false. The expansion of credit indeed reflects the willingness to produce more. But to do so the producer has to employ real savings, that is, resources that are not devoted to the production of immediate consumption. Whereas our modern banking system has loosened the link between saving and investment - allowing investment spending to occur before any saving decision has changed - it is always the quantity and the composition of real savings which bottlenecks growth. To produce more one has to employ more labor, more capital goods, more managers, more energy, etc. But, of course, the emergence of money out of thin air does alter the physical quantities of real savings available. Those who caused the credit expansion have to induce a shift in real savings. Even though they have control over more means of production, others have less. The increase in output of those who could obtain additional credit rises at the cost of the output of those, who cannot compete with the new funds. There are only two ways to circumvent the limitation imposed by the real savings.

First, productivity in general has to increase, either by employing more capital intensive techniques within a given technological paradigm, or by inducing technological change, that is, by innovating new factor combinations (to say it with Schumpeter). But who does really believe that money can induce exactly the shift in productivity growth it needs to lead to a sustainable shift in output growth? This would be a remarkable coincidence, indeed!

Second, resources may be umemployed and credit expansion annex them into the market process. But even though labor is underemployed in Germany, does anyone believe that this holds true for all the complementory factors that are needed to increase production? In this case the process is still bottlenecked. And what happens, if we stick to the Keynesian believe that both, labor and capital, are underemployed ... in this case we loose any explanation of prices as means of communicating scarcity. If it cannot be scarcity, what is it then?

Well, reading Heusinger's post one may receive the impression that wages and thus profits are governed by policy discretion instead of markets and that policy is advised best in asking Heusinger himself how to adjust wages. Forget about the market, Heusinger knows it better! And in accordance to his expansionist views, wages have to be increased as to squeeze profits. Consumers, so his saga goes, will become more confident (believing that more income today somehow ensures more income tomorrow) and thus will demand more credit. And because credit is always a good thing, anything which heats up optimisim and thus the demand for credit is good as well! If we just believe into a better future ... everything will be fine. Heureka!

Mmmmh. I, for my part, remain a nonbeliever into Heusinger's mystical ability to now better than the market process. As an economist I prefer the blasphemous view that prices are explained by scarcity instead of Heusinger's mental superpower.