General economic policy



01. Approaches

02. Methods

03. Target analysis

04.  Means analysis

05.  Promoter analysis

06. Political economy

07. Welfare economy

08. Order analysis

09. Order conception

10. Order dynamics


Chapter 3a: Target analysis





0th Preliminary notes

1th The question about the normative content of political aims

2nd The question about the topicality of political aims

3rd The question about the reasons of political aims

4th The question about conflicts of aims

5th The question about the realistic of aims



0th Preliminary notes


Within the scope of the economic policy three fundamental questions are under discussion again and again. Firstly: What do we want to achieve? This is the question about the concrete aims of the economic policy. Secondly: How do we want to accomplish these aims? This is the question about the means (instruments) of the economic policy. Thirdly: by whom these tasks are to be solved; this is the question about the actors of the economic policy.


First it is necessary to clarify when we speak of aims and when of means. One might initially specify that one always wants to speak of aims when the tasks under discussion are pursued for its own sake, when thus the tasks own an intrinsic value. By contrast one would speak of means - according to this classification - when to be approached tasks possess no intrinsic value, and would thus be carried out in order to achieve superior aims.


However, in practice such a division meets difficulties. De facto namely almost all political tasks have a certain intrinsic value. Furthermore, it is necessary to consider that there is a hierarchy of aims, that certain tasks which are declared as aim in turn may represent only a sub-aim to achieve other, superior aims and in this sense can also be considered as means of achieving these superior aims.


One could indeed help oneself out of this difficulty, in that one views all the political tasks as aims, provided that the intrinsic value outweighs and the means character is of lesser importance. Conversely, one would always speak of means, if the intrinsic value of this measure would be of less importance, and this measure is striven primarily to achieve other superordinated aims.


But such a procedure also encounters difficulties, since such an approach would come into conflict with the current practice. For example, consider the task of fight against inflation. In practice, here it is almost always spoken of an aim. Nevertheless, this aim is at best recognized as having a low intrinsic value. We are generally not striving for a monetary stability for its own sake, but because we assume that an inflation emerges negative effects on allocation, distribution and possibly also on economic growth. Therefore obviously the means character of this aim has priority. Why then in this context nevertheless one always speaks of an economic policy aim and not of a means of economic policy?


This brings us to another possible classification. The reason why we do not consider the pursuit of monetary stability as a means but as an aim is namely because the policy - neither the central bank nor the state - has no opportunity to influence the value of money directly, that rather other measures - for example, an increase in the key interest rate of the central bank - are necessary in order to achieve in this indirect way, thus through the use of a further means, monetary stability.


The monetary value is defined as the reciprocal of the sum of the price changes. The monetary value is stable, so does not change when the price level remains constant. But if prices rise on average, the value of money falls. The price level results here from the average of the individual prices and these results, at least in a market economy, from the play of supply and demand. They therefore also cannot be directly changed by the policy.


Based on these considerations results a new classification of political activities in aims and means. We speak only of a political means, if the politicians can directly affect the to be changed variables, while whenever the to be influenced variables can only be influenced indirectly by the use of other instruments; it should be spoken of aims.


Now, wherein lays the task of general economic policy teaching? It wants to grant the politicians a decision aid in the question, which aims and means are to be chosen and to which agents these tasks are to be assigned. It is necessary for two questions to be clarified in this context.


Question no. 1: Is a decision aid on the part of science necessary and is it possible, further why science has to confine itself to an aid for decision, why can science, due to its larger store of knowledge, not recommend the politicians what is to be done?


The question no. 2 refers to what this decision aid of science consists of in detail.


Let us turn to the first question. Max Weber had - as shown in the previous chapter - postulated the principle of freedom from value judgment according to which the scientist in his capacity as a scientist does not have any possibility to prove or disprove ultimate values scientifically. The scientist would have therefore to abstain from the political evaluation of the core values if he imparts advice to the politicians as a scientist.


If one proceeds on this generally accepted principle, then the following conclusion is obvious: The question of the aims to be striven is solely a case for the politicians, the scientist could not (at least in his capacity as a scientist) contribute to this question.


On the other hand the question is, by which means a given aim is to be realized, a problem that could be resolved solely and completely by the science, politicians could not make any contribution to this issue, it would be best if the politicians would follow the advice of scientists.


These conclusions would be, however, clearly wrong. Neither it is true that the scientist can make no contribution at all to the question of the desired aims, nor it is true that a scientist is able to decide the question of the desired choice of means conclusively and completely at predetermined aims.


In the further sections about the aim analysis we will show in detail that the scientist may very well make a real contribution to the aim finding with regard to several issues. Here at this point it is merely to be shown an example in which then, among others, the contribution of the scientist to the aim finding may consist of.


We have already discussed above that in the real world we have to proceed on the assumption that in general there is a variety of aims, which are mostly in a hierarchical relationship to each other. There are ultimate core values and there are other aims that can be derived from these core values. The ultimate core values are usually laid down in a constitution and therefore are no more, or only in a few cases, up for discussion in practical politics.


The majority of the aims for which struggle the politicians are sub aims, which can be derived from the ultimate core values. Sub aims have always - as already indicated - also a means character. Just if one considers that the scientist may very well contribute to the question by which means a specific aim is to be achieved, the scientist can - without exceeding his limits - also help to clarify the extent to which concretely pursued aims support or hinder superordinated core values.


For what reasons, however, the scientist on the other hand is not able to decide conclusively and alone the question of what means are to be used for predetermined aims? The reason is that in practice almost all political activities, including the use of means, are adjudged a positive or negative intrinsic value.


We take the example of the national debt. The scientist may still be able so much to prove that a deficit in the state budget under certain conditions allows for a reduction in unemployment and thus constitutes an appropriate means to combat unemployment. We always have to expect that politicians and citizens may reject an indebtedness of the state as such, thus grant a negative intrinsic value to a deficit of the state budget and for these reasons speak out against this specific measure. However, the scientist cannot take a final decision about the validity of such a negative or positive intrinsic value. Here applies the by Max Weber formulated postulate of freedom from value judgment.


Now we get to the question no. 2: Wherein lies the decision aid of a scientist to solve problems of economic policy? The scientist can provide political decision aid by applying economic theory to the practical problems of economic policy. Let us realize this relationship by an example.


Let us take again the example of employment policy. Politicians are faced with the fact that - for whatever reason - employment declines and thereby unemployment arises and this to an extent which does not appear politically acceptable. A need for political action arises.


Politicians pursue the aim to increase the level of employment and thereby to reduce unemployment. As a means for increasing employment a Keynesian employment policy, namely an increase in the deficit of the state budget, is up for discussion. The difficulty of such a policy, that is the question of whether a Keynesian policy is really always successful, we want to disregard here consciously.


The scientist is asked now if this means appears suitable to increase the level of employment. The scientist can answer this question by drawing on the theory of employment, where we want to insinuate that the scientist acknowledges the employment theory developed by Keynes as a relevant and accepted theory.


This employment theory has - like any other theory - certain problem sizes, which are necessary to be explained; in our case the overall economic volume of employment shall be explained. Furthermore, the Keynesian employment theory leads their problem size back to other economically relevant data sizes.


In case of the employment theory developed by Keynes, the employment is seen in the immediate dependence of the domestic production. Whereupon the volume of domestic production is on his part determined by the effective demand. Therefore on one hand it is determined by the consumer and investment demand. And on the other hand it depends on the level of the deficit-financed government expenditures as well as on the current account surplus.


The employment theory then shows how a change in e.g. the amount of the state budget deficit affects the domestic product and indirectly the employment. So the theory could e.g. come to the conclusion that an increase in the deficit of the state budget by € 1 billion would lead to an increase in the domestic product of € 3 billion and that this production increase would have a more employment of 100,000 workers as a consequence. (The quantitative examples are, of course, arbitrarily selected here)


Now what is a problem size for economic theory is an aim size for economic policy. The employment theory wants to explain the volume of employment; the politician wants to pursue the aim of increasing the volume of employment. At the same time applies, that the deficit in the state budget applies to employment theory as one of the possible determinants of employment, while in the politics this budget deficit is seen as a means of employment policy. One can therefore say that the application of economic theory on the economic policy lies in a socio-technical reformulation of economic theory. Causes or determinants become means, problem variables become aim values.


Now let us turn to the question about what the economist can contribute to aim finding in economic policy. Here we want to differentiate five criteria.


First, it has to be stated that politicians are often striving to express their aim formulations very vague and indeterminate. For the control by the voters, which a politician should be exposed to in a democracy, it is though essential that the aims are clearly formulated and have a concrete content. The task of science in this case may be that it checks the normative content of the individual aims (1st question about the normative content of aims).


As second, it has been assumed that aims are formulated by the politicians particularly to eliminate specific problems-situations or at least to reduce them. Here, the aims striven by the politicians can be topical in a quite varying degree. We take the case that politicians hold out the prospect that also workers should be involved in the acquisition of shares, but it is unclear to what extent the workers are already in possession of shares previously. It is necessary for science to clarify, in the sense of a situation analysis, to which extent the aims, put forward by politicians, have already been realized and therefore how urgent it is to implement measures to achieve these aims (2nd question about the topicality of aims).


Thirdly, it is to be noted that politicians are generally striving to justify the pursuit of certain aims and to defend them. Therefore they generally rely on factual connections, thus theories that can be right or wrong, and whose accuracy often cannot be checked directly by the individual voter. Here it is the task of science to clarify to what extent these factual connections are confirmed in the scope of scientific and particularly empirical research, or are still controversial in scientific circles. (3rd question about the aim reason).


Fourthly, we must assume that politicians strive for a variety of aims simultaneously. These aims can be in a very different relationship to one another, they can mutual presuppose or even exclude each other. Whether each aim complements the other or whether a conflict of aims exists, this question can only be answered in the context of a scientific analysis (4th question of possible conflicts of aims).


Fifth, one could also see a scientific contribution to the aim finding in checking if the aims striven for by the politicians are realizable at all, or whether the aims have a utopian character. This question also can basically be clarified definitely by the scientists, although here it has to be distinguished whether an aim must be classified generally as always utopian according to today's knowledge or if only under the present conditions it must be expected that this aim can not be realized at the moment, but that it can be very well expected in the future, that this aim can be realized later.


Let us take for example the aim to liberate an employee from any uncertainties. Here we must recognize faultlessly that this aim can never be achieved. That this aim has to be clearly classified as utopian, because we can never have the knowledge, due to permanent changes in the data of economic activity, that we would need to liberate each worker from all uncertainty.


But even if an aim has to be regarded as utopian in this sense, it may well be justified to strive to approach this aim as close as possible, even if one has to realize that this aim can never be achieved a hundred per cent. In most cases we can assume in fact that together with the achievement the expected benefit increase can be partly achieved even when we approach the aim without ever achieving this aim completely.


Take as a further aim the elimination of customs duties of any kind. Here it is about an aim that in principle can certainly be realized and had been realized almost a hundred per cent repeatedly in the past, at least between single states. Thus, for example, one can certainly say that since the establishment of the European Community all the customs duties towards other European countries were abolished in principle.


Let us take, however, the time immediately after the end of World War II, then it would have been politically totally utopian to immediately abolish the customs duties within Europe and to create a European Free Trade Association. A scientist may still be so very convinced of the benefits of free trade, but he has to admit in such a situation that at the moment this aim cannot be realized at all, due to circumstances that cannot be changed right now.



1 The question about the normative content of political aims


Let us now turn somewhat more detailed to the 1st criterion, the question about the normative character of a political aim. We can assume that there are a lot of possible action alternatives with regard to the issues discussed in the context of politics. The methodology has now indicated that it is the task of an empirical scientific theory to exclude, among the thinkable possible approaches, those which are in fact impossible.


If by a theory none of the thinkable possible solutions are excluded, then all solutions are considered possible and, moreover, may also be considered as equally probable, thus one speaks of an empty formula, of a statement formulated tautologically. A theory, which confines itself to tautologically correct statements, has no semantic content at all. On the other hand if a theory would succeed to exclude among the thinkable possible solutions all as factually not possible except one, then it would have the highest conceivable validity.


We can illustrate this relationship on the basis of the by Pareto established theory of choice. We assume that the welfare of a society depends on how much is produced of a good 1 and another good 2, and we will take the amounts of these two produced goods down on the coordinate axes. Now any combination of these two goods is conceivable, so every point in this chart.


In this chart we now draw a transformation curve, indicating which goods combinations can be realized at all with a given stock of resources. In this way the plurality of the thinkable possible solutions is confined to a few factual possible alternatives. Only the combinations located on or below the transformation curve are factually possible.





The task of norms we can now see in creating a hierarchy of desirability of these alternatives under the factually possible solutions and to determine which solutions are most preferred, what solutions may occupy a same rank and what other solutions are finally considered undesirable. An aim formulation in which no factually possible alternatives are excluded and all factually possible solutions are to be considered as desirable, would then be regarded as normative empty formula, the normative content of such an aim would be zero.


Now we have already pointed out that politicians tend to formulate their aims as vague as possible, thus with a conceivable low normative content. This is the fact because the future operational freedom of the politician is the lower, the more the politician has committed himself in the past and therefore the greater is the normative content of an aim setting.


There are now several reasons why before the election a politician is striving to leave open many possibilities for action and to be preferably noncommittal. Before an election the politician faces the compulsion to win over as many voters as possible, to score as well as possible and to win the elections. Now the more concrete the aims are, which politicians hold out in prospect, the more it must be expected that individual voters discover that they are disadvantaged and therefore decide in favor of another candidate.


If the politician, however, does not commit himself, there is the chance that many voters, who have different ideas about the desired political solutions, mistakenly interpret all these promises in a way that they will benefit from these activities, although at a concretization would become clear very quickly that a part of the voters would come out with nothing, or would even be disadvantaged. We think e.g. about that before the election the politicians promise to abolish unjustified subsidies. Of course, each voter assumes that the subsidies, which he himself receives, are justified and that he therefore is not among the losers of this decision.


Precisely because in this case a part of the electors is deceived and the election decision is unfavorable for them, this approach is generally politically highly undesirable. The control of politicians that should be given by the elections, in a democracy is undermined here. Here it is the task of the scientist to disclose how little the politicians have actually held out in prospect at empty formulaic promises and therewith contribute that voters can make an election decision which is more in line with their own interests.


Political decisions necessitate compromises. Now compromises are mostly unpopular, since they require that the individual subgroups are making concessions of their individual aims. As a cheap but not satisfying solution offers itself that all serious conflict areas between the contending parties are excluded, and that this way one takes refuge to high-sounding, but largely meaningless formulations and in reality only pretends a true compromise.


However, it must be noted that striving for the highest possible scope of action may also have other reasons. The necessity for a certain scope of action increases namely in the extent to which a society developed further. The more data changes have occurred since the last election, the more the possibility has to be expected that the aims expressed before the election must be adapted to the changed situation. Without a certain scope a reasonable political action would no longer be possible. So it might be necessary to adjust upwards or downwards promised assistance in the case of inundations, due to the short term changed situation.


The Parliament will therefore attempt to pass the laws in such a way that the implementing authorities have a scope of action and are able to correspond to the data changes that occurred in the meantime. This scope of action is especially necessary where the law - e.g. a constitutional amendment - shall be passed for a very long time and therefore many changes in the circumstances are to be expected.


Furthermore, scope of action may be necessary anywhere where political decisions are increasingly entrusted to the central regional authorities. A political decision, taken on the community level, may still respond to the particularities of this community. The more central, though, the political level is, the more must be assumed that in the individual sub-regions, for which the law applies, there are different initial situations, such that already for reasons of fairness some scope of action for the implementing authorities should be allowed to correspond to the different initial conditions of the individual sub-regions.


Now one may object that precisely the recently mentioned examples indicate that a high normative content of the policy aims can not be desired at all. This may be true. Nevertheless, there remains a risk that the politicians take these relationships as an occasion to choose empty formulaic formulations even there, where a large scope of action is actually undesirable.


Now let us try to apply these theoretical considerations to a concrete example. Almost all parties promise in their party programs to advocate for a more just income and wealth distribution. Of course, it can be assumed that each party pleads for a fair distribution of income; no party will support unjust solutions.


However, it is important that the ideas about what can be described as just, are very different. Often any impairment of the own interests is perceived as unjust and the struggle for justice is often not much more than a struggle to enforce the own interests.


In contrast, can only be spoken seriously of a better concept of justice, if at least an attempt is made to mediate between the different interests, to develop objective criteria under which conditions at a conflict between the various groups the interest of the individual has to come down in favor of another one.


Here it has to be clarified that the demand for justice without any further specification contains only a very low determination and that this is a prime example of an empty formulaic aim formulation. What specific income distribution is namely classified as just, on this question differ the Opinions.


Friedrich von Hayek has therefore even opposed any scientific debate about justice; the word 'justice' would be a weasel word in the sense that everyone would understand something different under this term.


In the skepticism towards the concept of justice no one has to go that far, with regard to the aim of justice it is certainly possible to find objective criteria for reconciliation of interests. So there shall be a broad agreement about that the distribution of income should be based on achievement and demand. Who achieves more, should also draw a higher income. At the same time, however, should also be taken into account during income distribution that in the context of parenting and the social risks are different levels of demand between individuals, wherein these differences in demand were not caused by the behavior of those affected.


Differences between the parties and interest groups exist, however, in what is meant in detail under achievement, in which weighting achievement and demand should be considered and the extent to which a more of justice should be enforced, even at the cost of other aims, particularly the aim of freedom.


Liberal politicians are characterized in that they measure the achievement by the prices of goods that are made on a free-functioning competitive market, therefore on the contribution of the individual to the domestic product. Direct interventions in the market are generally rejected as non-compliant to the market because they invalidate the allocation mechanism of the market. Liberals try to realize an equitable distribution mainly the way that they are trying to prevent monopolistic market structures through regulatory measures, and strive to reduce start inequities.


In contrast, socialist politicians understand under achievement a size more aligned on work suffering. They emphasize to a greater extent than the Liberals the need to complement the achievement principle by demand items, and try to enforce corrections to the income distribution even if this is connected to a limitation of market freedom.


The difference between liberals and socialists in the issue of fair distribution of income can be explained quite well on the basis of the by John Rawls formulated Maximin – principle. Socialists measure the degree of justice thereafter by the income leveling. Every reduction of income differentiation then represents a more of justice. According to the Maximin principle, however justice has to be measured by whether it is possible to increase the income of the lowest income classes absolutely and in reality.


If it is possible, to increase on policy measures the income of the lowest income classes absolutely and in reality, these measures will lead to more justice even then, if by this way the income of the wealthier population increases or even more increases than the income of the poor, when thus in other words, a further differentiation of the income enters. A Liberal is not so very interested in the question whether the distance of the incomes is reduced, but rather whether the absolute income of the poorer could be lifted.



2 The question about the topicality of political aims


A second contribution of economic policy teaching for aim finding is to review the question of how far then concrete aims of the politicians can be described as topical. How far the guiding principles pursued by politicians have already been realized? To what extent political activities are necessary to bring about the desired aim states?


Within the scope of the topicality analysis it is always about aims in terms of desired changes of state. The contribution of science on this issue is to clarify the actual conditions in a situation analysis.


A first problem in this context consists in the prejudice that often exists in the public that therefore the assumptions in the public do not correspond to the actual conditions. It meets e.g. widespread opinion that almost all citizens of FRG derive an income that is above the subsistence level. In reality, however, far more than one million citizens are eligible for social assistance. If one regards the current social welfare payment rate as a benchmark that indicates how much income each citizen should dispose at least, then this means that more than one million citizens receive an income below the subsistence level. Task of science is in this context to overcome these prejudices by empirical studies.


A second problem arises from the fact that a deficient data base and insufficient statistics paint a false picture of reality. So show e.g. the official statistics a higher difference between standard wages and actual earnings than it corresponds to reality. The reason for this is the fact that it is not possible to capture statistically the multitude of collectively agreed special services; they are therefore not recorded in the official wage statistics, but in the statistics of the actual earnings. The consequence of this is that the scope of wage supplements above the agreed rate is shown as to high in official statistics. It is the task of science to draw attention to these deficiencies.


Thirdly, even the existing, in and of it quite correct statistics are often misinterpreted. This would be e.g. the case if one would evaluate the share of employees in the savings books as an indication to what extent the employees are participating in the earning assets at all. It is known that employees invest their savings primarily in savings books, while the self-employed persons view the accounts saving at best as a temporary investment and deposit their savings either in their own enterprises or by buying security papers. So in this case it would be wrong, if one would conclude from the in itself quite right parts of the statistics of assets and liabilities directly on the total range.


Fourthly, it should be adverted that statistics can only ever orient on facts, but that sometimes hidden evaluations of facts are issued as objectively given situation analysis.  Let us take the exploitation theory of the Marxists. At first this thesis has been understood thus a large proportion of workers have an income that does not even correspond to the subsistence level. If one now specifically defines how high a person's income has to be in order that the person has a subsistence level, can check empirically whether this hypothesis corresponds to reality.


The evidence that the average income of employees has risen sharply in the last century induced the Marxists, though, by no means to drop this thesis as empirically disproved, but they reinterpreted the exploitation thesis, in the sense that the share of employees in the domestic product has decreased relatively; and when even this thesis was empirically not confirmable, the Marxists spoke of a potential exploitation which de facto would not appear in the highly developed nations, as these countries were exploiting their colonies, so that the exploitation was moved to a different population.


In our previous consideration the situation analysis always referred to the currently available facts. In reality, however, a situation analysis has to consider as well the situation expected for the future. Namely, we have to assume that there always elapses a certain time until today initiated measures are showing an effect on the aim variables in reality. If today e.g. employment policies are initiated, then an increase in employment can be expected at the earliest after approximately one to one and a half years.


Thus for the assessment of this measure, it is not so important how high unemployment is at the time when this measure is discussed and introduced. Rather, it is important to know how high unemployment would be without these measures in the time in which the expected changes enter, and how high therefore the need for political action will be today.


The reasons why political action requires time are manifold. A certain time elapses until the occurring problem sizes are recognized in public. Here we speak of the 'recognition lag '.


Furthermore, time is passing in which the most appropriate measure is discussed on the political level. In a parliamentary democracy first of all the government sets a legislative proposal, which is then passed in Parliament in several readings. If we have a bicameral system (Federal Parliament and Federal Assembly), then occurs possibly a time-consuming negotiation between the two chambers. If the law is definitively decided, it must ultimately be promulgated by the Federal President after examination of constitutionality. Only from that date this law becomes effective. We are talking about the 'decision lag'.


Finally, once again elapses time until the market partners change their behavior on basis of that law so that the desired effects enter. If it is e.g. a job creation scheme, so it requires numerous investments to trigger an increase occupation, derived around an increase production and of this. If it is, for example, about an employment program, so it requires numerous investments to trigger an increase in production and, derived from it a more employment. Herein lies the so-called 'realization lag'.


Strictly speaking, these three different time delays are happening both at the level of policy (inside lag) and the companies (outside lay). It also applies to the enterprises that firstly, they must gain knowledge of the new laws, that secondly, they have to discuss the changes that in certain circumstances are to be achieved by consulting the workers' representatives and that thirdly, each introduced investment requires time until the new facilities are placed and the more production gets started and thus more workers are employed.


To what extent reliable forecasts within the scope of the economic science can be formulated at all, is very controversial. So assumes e.g. Friedrich von Hayek that in economic theory only pattern forecasts, but no forecasts about concrete individual phenomena is possible because economic events are way too complex to predict actual impacts of certain measures.


Furthermore, emerge effects from forecasts which lead to self-affirmation or even a self-refutation of this forecast. We bring an example of a self-fulfilling forecast. It would have been predicted that on a consumer good x a high price increase is to be feared in the immediate future. This forecast will cause households to demand this good increased to cover future needs with today's lower prices. Thus, the demand is increasing, and with it the price. It occurs exactly what was predicted, but not necessarily because price-raising effects had to be expected actually, but rather because the forecast as such has triggered this price increase.


It could be objected, of course, that these price increases are only of temporary nature, as in the future with an unchanged structure of demand, demand will fall again, since the households already dispose of the required goods. However, this does not have to be. It is quite possible that due to the price increases the quantity of money and/or the velocity of circulation of money have been expanded, such that in the longer term a higher price level has to be expected also.


We bring an example of a self-refutation of a forecast. It is insinuated that for a particular production area an overcapacity was forecasted. Exactly this forecast can hold back single enterprises from carrying out planned investments now, since the enterprises have to fear at overcapacities that their own sales volume declines. In this case will be invested less in this area, the feared overcapacity does not occur at all, in fact again because a forecast was published.


How do these induced effects of a forecast have to be assessed now? If a forecast is a desired event (e.g. forecast of price reductions), so a self-affirmation would of course be also desirable, the prediction itself would act as a policy measure. On the other hand a self refutation also would be politically desirable at an event which is unwanted (e.g. overcapacities).


It will furthermore depend on the conduct of the market partners, how the induced effects are to be assessed. If economic agents react to the forecast (expectation) of a price change, we speak of speculations. These can act stabilizing but also destabilizating. If namely the demand rises due to the expectation of future prices (rates), then the prices rise, as shown, even more, the system becomes unstable.


However, individual economic agents can behave counter-cyclically, precisely because they expect these induced effects and, in our example, speculate for a price reduction. Here speculation would act stabilizing. In general, we assume that professional brokers speculate rather stabilizing, on the contrary, laymen speculate rather destabilizing.


Now let us try to apply these theoretical considerations in turn on a practical example. We want to ask for the economic political need of action. It is feared that the economic policy measures impact only after a time lag of about one to one and a half years. The question is, firstly, if we have sufficient economic theories at all to predict e.g. the level of employment in about 1 ½ years.


Even if we are able to do so, then arises, secondly, the question whether a politician in a democracy is not overstrained to initiate the economic policy measures at the right time. It would be necessary, already in a time in which the economy is still booming, to initiate expansive, employment-enhancing measures, and vice versa even in a time, when there is still a high level of unemployment, to implement cyclical dampening measures already.


Furthermore, it is to be considered, thirdly, that not every general price increase in the upswing and not every demand reduction in the incipient downturn is undesirable and therefore must be fought politically. As especially Joseph Alois Schumpeter has pointed out in the scope of his trade cycle theory, that price increases in the beginning upturn are the result of creation of deposit money by the banks, which in turn, by these activities itself, induce the entrepreneurs to risk innovations.


On the other hand redundancies in the incipient downturn are even necessary since also enterprises, in the course of recovery, have been able to establish and keep itselves, which are producing unprofitable under normal conditions. It is desirable that these unprofitable enterprises disappear from the market, since only at profitable production a long-lasting upswing is expected.


Finally, economic policy measures are fourthly especially questionable if the conditions of stagflation are present. We speak of stagflation, whenever at the same time occur price increases and high unemployment continues to be present. In times of stagnation a Keynesian-oriented trade cycle theory policy gets in trouble. If it conducts expansionary measures, then it exacerbates the existing inflation phenomena; if it confines itself, though, to contractionary measures, the existing unemployment rises further.



To be continued!