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Europe and economic philosophy : a necessary debate

By Ben Rees - posted Thursday, 21 June 2012


"Ideas, knowledge, science, hospitality, travel- these are things which should by their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national": J.M. Keynes,Dublin 1933

Europe is a financial mess that threatens another 1930 if Spain and Italy collapse. Underlying any economic system is an economic philosophy that determines policy direction and shapes the underlying structure of the economic system. Post World War II, the Bretton Woods international financial system based upon the economics of J. M. Keynes underwrote twenty five years of economic stability, full employment and rising living standards. When Bretton Woods collapsed in 1971, international financial arrangements were fluid until 1976 when the articles of the IMF were altered endorsing a different economic philosophy to Keynes.

The Bretton Woods era had as its objectives full employment and balanced trade. This was achieved through managed exchange rates and external policies that used protective instruments to ensure balanced trade and full employment. Modern monetarism, a particular school within neoclassical economic philosophy, replaced the economic philosophy of Bretton Woods. Modern monetarism has as central tenets free trade and globalized financial markets. A necessary requirement of both free trade and globalized capital flows is ineffectual national sovereignty. The lack of national sovereignty lies front and central in the crisis confronting the Euro area.

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Modern monetarism direction has been shaped by the G7 nations through political influence over important international institutions such as: IMF, World Bank, United Nations and WTO. The world is now being asked to trust the G7 and the IMF to solve a financial crisis that evolved on their watch. Undermining this trust is a post 1976 performance record plagued by one financial crisis after another . Between 1981 and 1994, the US financial system was brought to its knees when the thrift industry collapsed. The thrift collapse was compounded by unprecedented defaults on US investment bank loans to Latin America. In the mid 1990's, the Asian financial crisis erupted. In 2008, the GFC began in the US and quickly spread threatening the international financial system. In Europe, the aftermath of the GFC now confronts the world with a strong possibility of another Great Depression.

This discussion seeks to explain the weaknesses in contemporary economic philosophy; and hopefully, to generate a much needed questioning of a system that has failed. Europe is a particularly interesting example because the European Union is a long term real world model of free trade whilst the Euro area presents a working model of globalization.

Keynes 1933 above quote becomes a framework to discuss post 1976 economic philosophy

An important distinction between the economics of Keynes and neoclassical philosophy is morality. By using abstract mathematical concepts and models neoclassical economics removes the moral question from economics. Keynes brought morality back to economics by posing a simple question: "does the purchase of a luxury item by a rich man have the same meaning as the same purchase by a poor man?"

In Europe taxpayers must underwrite rescue programs caused by political and financial incompetence, malpractice and greed. Do austerity programs that demand taxpayers underwrite recue programs meet the morality criteria?

Production of Goods

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Free market theory relies upon an underlying model comprising a two country, three input model (land, labour, capital) that exchanges products in purely competitive markets. The model has neither a financial sector nor a government sector. Western governments and the European Union have pursued both domestic and international policy based upon this model.

Without a financial system, there is no monetary system. The model collapses into an exchange system in which goods are exchanged for goods. The model presents a make believe monetary system by imputing a notional price "p" multiplied by wages "w". With no monetary system, what does "p" mean? From where does capital originate? Is capital a factory or craft type activity? In effect the model reflects a labour theory of value in which goods are bartered for goods.

As there is no government, the model collapses into a tribal system in which two tribes exchange goods. In the models, cloth is exchanged for food. How is the imagined "capital" used in the production of theses product? How are the exchanged goods distributed amongst the members of the two tribes? When these questions are satisfactorily answered, then perhaps the ideology of free trade will gain some credibility

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About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

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