Changing the “Grundgesetz” to overcome the Euro Area Crisis

Paris, August 11th, 2013

Reflecting on the disastrous economic situation in so many euro area countries again and again I could not escape the feeling that the German World Championship on exports is very much at the root of the situation. On my old MIME site I had referred to the criticism of Michael Schlecht, member of the German Parliament (Die Linke) against Merkel, “Merkel rollt über Europa”. And this is indeed what she is doing and most likely she will be reelected! A scandal that is that the German Left has no alternative.

When searching now on the discussion on the violation of the balance of foreign trade I found again some important information on Michael Schlechts homepage. He quotes former chancellor Helmut Schmidt on the issue. It turns out that Schmidt (age 92) had given a speech at a SPD party congress already in december 2011 in which he had attacked the arrogance of Merkel and Westerwelle (German foreign minister). Here is an exerpt of his speech at the Swiss “Tagesanzeiger”, indeed a very decent and balanced view on the situation. Schmidt beats them all! His SPD party comrades should take courses on my Marxian economics. This would enable them to develop a vision for victory against the German reaction. At the moment they are just a part of it!

The austerity policies forced upon the highly indebted euro area member states is partly due to the imbalances of trade within the euro area.

The problem stated by Schmidt:

“At the same time a serious error of development has shown up, namely sustained enormous surpluses of our trade and our current account. Surpluses making for years about 5 percent of our national product. (…) All of our surpluses are in fact the deficits of others. The claims we have towards the others are their debts. It is an annoying injury of what once we had raised to the legal ideal of “external economic equilibrium.” This injury must trouble our partners.” (translated by the editor, emphasis added).

He is referring to the so called “Stabilitätsgesetz”, a law of a keynesian spirit to stabilize the economy which was introduced in 1967 after a first crack in the “Wirtschaftswunder”. It introduced the legitimacy of public debt in order to stabilize the economic development. It’s first article sets as the objective of the governments economic policy the attainment of the four goals of price stability, full employment, economic growth and balanced foreign trade.

Or, it is precisely the balanced foreign trade objective, which is neglected and which imposes incredible costs on Europe. It is not that Germans should sell less. No, they have to buy more imports. Why don’t they follow the Americans in this aspect at least.

So the answer to Merkel’s unlawful strategy must be to make her responsible and to sharpen the legal control. I therefore propose a change of the German constitution or simply a change of the “Stabilitätsgesetz” in order to save Europe, a law which obliges the German government to establish balanced foreign trade. Any reduction of this surplus will create jobs in Europe and diminish the debts of the European partners.

As one can see I am certainly not the only one who proposes this, but I am the only one who has come to this conclusion via a Marxian analysis of labour values and exploitation. And I am the only one – even the macro-economists close to the trade unions like Eckhard Hein etc. defend the productivity rule of wage increases! – who tries to solve the issue via the reinforcement of the trade unions and the establishment of economic democracy. This is the gist of the demand for the introduction of investment contributions as part of the salary. Those funds can well be used in the European setting to compensate for trade imbalances.

Here is the proposition of the new law, article or whatever is most suitable:

Proposition of a “Law to Enforce the Balancing of  Foreign Trade”

In the interest of maintaining peace in the world and the promotion of European integration, in particular the avoidance of quasi-colonial economic practices, the federal government is responsible to establish a balanced current account in Germany’s economic relations with countries with which the Federal Republic of Germany is engaged in a monetary union or has agreed upon fixed exchange rates or the adjustment of the balance of payments has to be achieved by balancing financial transactions.

To ensure balanced  trade, the federal government coordinates its economic and trade policies in close collaboration with its trading partners.

Paris, 11.8.2013

Klaus Hagendorf

The original proposal in German:

Gesetz zum Ausgleich der Leistungsbilanz

Im Interesse der Erhaltung des Friedens in der Welt und der Förderung der europäischen Integration, insbesondere der Vermeidung quasi-kolonialistischer Wirtschaftspraktiken, ist die Bundesregierung verpflichtet, gegenüber den Ländern, mit denen die Bundesrepublik Deutschland  eine Währungsunion oder feste Wechselkurse vereinbart hat, eine ausgeglichene Leistungsbilanz zu gewährleisten oder ausgleichende Finanztransaktionen zum Ausgleich der Zahlungsbilanz herbeizuführen.

Um den Handelsausgleich zu gewährleisten, koordiniert die Bunderegierung ihre Wirtschafts- und Handelspolitik in gegenseitigem Einvernehmen mit ihren Handelspartners.

Paris, 11.8.2013

Klaus Hagendorf



Posted in Uncategorized | 1 Comment

Why the Control over Investment is so important!

Paris, July 28, 2013

My research on the labour theory of value has led me to the insight that Marx’ vision as expressed in Vol. I of Capital is basically correct. In a competitive economy prices are proportional to labour values, commodities exchange according to their labour values.

In Marx’ analysis the markets have the role of establishing prices through supply and demand which reflect the abstract labour which is socially necessary to produce the commodities. These prices, of course include the capitalist’s profit margins, that is that part of socially necessary labour which is exploited from the labourers and appropriated by the capitalists.

Marx, considering profits, had concentrated on this aspect of exploitation and “Entfremdung” or alienation of labour. But for him it was clear that these profits were socially necessary in order to accumulate. After all the progressiveness of capitalists as opposed to the feudal classes is precisely the fact that they accumulate capital in the form of means of production. But how they do that does not coincide with the interests of society as a whole and because they pursue their private individual interests in an anarchic manner or under “organised capitalism” as a class their class interests that accumulation of capital becomes a nightmare for the great majority of society, the wage-earners.

However, the process of capital accumulation is a very important socially necessary activity and the costs involved, that is the labour which is devoted to it is reflected in the market prices and under competitive conditions these correspond to the prices of production.

It is a serious fallacy of Western Marxist economists and indeed of the Marxists of the Second Internationale not to have understood this properly. This led them to the erroneous proposition that prices of production are not proportional to labour values and they got lost in their, that is Engel’s, “invention” in Vol. III of Capital, that values are transformed into prices. Pseudo-Marxists up to the present times are trying to defend this error by sticking to the “naive conception of labour value” which simply neglects these costs of capital accumulation as part of socially necessary labour. This is the core of the crisis of Marxism, because once the link between prices and labour values is broken, labour, the activity of keeping humans alive, ceases to be the determinate factor of the history of mankind!

The central issue is the understanding of investment, that is capital accumulation, as a socially necessary activity and its costs as part of the prices of production and labour values. But then it becomes immediately clear that the task of the labour movement is to take control over this activity of capital accumulation which the capitalists and their economists insist that it is their exclusive right to exercise. And this is indeed the ultima ratio of power of the capitalist class!

Here is a quote from John R. Hicks on the powerful force making … unemployment:

“an increase in the supply of capital will raise the real wage at which a given number of labourers can be employed; similarly it will raise the number who can be employed at a given level of real wages. On the other hand, a reduction in the supply of capital will reduce the number whose employment at a given wage-level is consistent with equilibrium. Thus, if capital is destroyed, through firms becoming bankrupt, and replacement funds and circulating capital being paid out in dividends and not reinvested, that is a powerful force making for the increase of unemployment.”

John R. Hicks. 1932 (2nd ed. 1963). The Theory of Wages. Chap. X. p. 199.

Hicks points here to the power of the capitalists as a class to control the level of employment and indeed the reserve army. Hick in his seminal book which is one of the founding bricks of modern economics does not speak of labour values, he does not even discuss the concept and defends a wrong definition of exploitation. According to his analysis, in equilibrium, the worker is payed a wage equal to the value of the marginal product of labour. But he does not mention at all the fact implicit in his argument, that the output of the working process is evaluated at marginal labour value, which is the reciprocal of the marginal product of labour. The difference is gross surplus value. As we may have to assume Hick’s had well read Jevon’s chapter V of “The Theory of Political Economy” and may be even H. H. Gossen’s “Entwickelung der Gesetze”. Hicks does refer in chapter X of his “Theory of Wages” to von Hayek, who, in 1927, just a couple of years before, had prefaced a new edition of Gossen’s book. Gossen’s Theory of Pleasure is nothing else but a general equilibrium analysis based on labour values!  But this leads us too far.

It is precisely because the accumulation of capital is deciding over the destiny of society that society as a whole has to take control over it via investment contributions as part of the salary and collective investment funds, controlled by the representatives of the wage-earners, the trade unions. Either the labour movement learns to control capital and the accumulation of capital or it remains under the control of that capital.

Workers of All Countries Unite to Control Capital!

Best regards

Klaus Hagendorf






Posted in Accumulation of capital, John R. Hicks, Labour Value | Leave a comment

I have just missed Barack Obama’s speech at the Brandenburg Gate, Berlin

Paris, 19.6.2013

because I was busy building the new MIME Internet site. Tackling the economic crisis is surely the most important task ahead and the MIME site has to be adapted to this. And surely we cannot overcome the crisis without taking the lessons of the past. So I googled for “the history of economic policy” and found a speech the Russian American economist Alexander Gerschenkron had delivered at the American Economic Association’s annual conference in 1968 in honour of Richard T. Ely, together with John Bates Clark one of the founders of the AEA in 1885. Clark and Ely had both studied at Heidelberg University under Professor Karl Knies in the 1870s. The successor to Karl Knies at that chair at Heidelberg University was Max Weber. In a paper on H.H. Gossen I have suggested that they were not only studying Gossen’s Theory of Pleasure but were actually also practicing it in the wine bars of Heidelberg. Up to now I have not received any criticism concerning this thesis although the CJE had rejected the paper but on other grounds.
But now to the economic crisis and A. Gerschenkron’s speech on “The history of economic doctrines and economic history”. There we find the following remarks about the German economic policies after the Crash of 1929.

“I should like to refer to the fateful economic policies pursued in Germany during the Great Depression of the 1930′s, because they shed at least a negative light on the problem. Until a few years ago, I believed that those policies were essentially the result of the dominant traditional views. It is in these terms that they were contemporaneously presented and defended. The deflation had to run its course, and since rigid, because monopolistically held, prices and wages obstructed that natural course, they had to be forcibly cut by government decrees and at the same time budgetary expenditures drastically reduced. For the rest, there was nothing to do but waiting, not for Lefty or Godot, but for the Pigou effect-unconsciously, that is, and ante litteram.

I have come to understand that neither received opinion nor fear of runaway inflation can be seen as the strategic factor determining the complex of policies which filled what probably has been the most dramatic chapter of modem economic history, its contents demolishing all our artificial boundaries between disciplines and becoming an integral part of general history – not of Germany, but the world. For there is little doubt that those policies opened the door of the Chancellery of the Reich to Adolf Hitler and must be regarded as the primary, and not so very remote, cause of the second World War.

“The social-democratic labor movement in Germany had moved a long way from its original position of alienated orthodoxy, the Marxian ideology having indeed become a “false consciousness” as had been clearly and candidly recognized and said by one of the outstanding leaders of the movement, Rudolf Hilferding.[Rudolf Hilferding, "Probleme der Zeit," Die Gesellschaft, vol. I: 1 (April, 1924), p. 5]. But certain parts of the ideology were dormant rather than dead, and in a critical period they returned to life. Hence, despite occasional willingness to act as a physician at the “sickbed of capitalism,” as the phrase ran, there was much talk about the depression inevitably being “the last capitalist crisis” and the imminent collapse of capitalism, as predicted by Marx or at least by Rosa Luxemburg.”

“Wilhelm Lautenbach, … a fully fledged Keynesian before Keynes’s General Theory, … understood clearly (as he wrote in 1931) that “the natural way to overcome an economic and financial state of emergency (Notstand) in the capitalist economy is not contradiction but expansion”.

…”Under his guidance, ambitious plans for public works were being prepared, which, as Edgar Salin rightly notes, were subsequently generously drawn upon by Hitler’s government in its full employment measures. Why then did the Bruening government fail to follow what surely was a most promising alternative to the sterile policies to which it remained so stubbornly attached? Now, after the publication of the memoirs by the late Hans Luther, the president of the Reichsbank in those years, the reason has been authentically explained. It is simple and rather shocking. The government did not want an improvement in the economic conditions in Germany until the Allied powers could be induced to abolish the German Reparations. It wanted a deterioration. What mattered most was to reveal ad oculos Germany’s inability to pay, and the deflationary policies were indeed excellently suited to fit that purpose. Once the goal was attained-as it was then, posthumously for the Bruening government, in the treaty of Lausanne-the plan was radically to cut the rudder and to embark upon policies of rapid reduction of unemployment. Thus neither defunct theories nor an ideology that was perhaps not quite defunct, although it should have been, but an eminently political consideration, altogether informed by nationalistic aims, appears to have guided and misguided the policies.”

Gerschenkron, Alexander. “History of Economic Doctrines and Economic History.” The American Economic Review 59, no. 2 (1969): 1–17.

It is clear that the present crisis like the one in the 1930s can only be overcome with massive investment programs on a European scale. A characteristic of the European economic crisis is that a large part of profits generated in Europe are exported and not reinvested in the European economy. This is the most important problem which has to be overcome. And I propose therefore to introduce investment contributions as part of the salaries in order to cut into these profits and to channel them into collective investment funds, controlled democratically by the labour movement in order to re-establish full employment conditions.

Unfortunately, the trade unions and the left political parties are not even ready to discuss my proposal but it is certain, either the labour movement takes up the necessary steps to establish control over capital or capital shall continue to control the labour movement. The establishing of economic democracy is not a voluntary objective; it is the actual objectively necessary economic policy to overcome the economic crisis.

Proletarians of All Countries Unite in Order to Control Capital!

Paris, June 19th, 2013

Klaus Hagendorf

Posted in Uncategorized | Leave a comment