Schumpeter On Manufactured Will

by Dirk Ehnts, Econoblog101

I am still wondering how it is possible that in Europe, more specifically, in the euro zone we are still in such a mess. Since I am working on a somewhat philosophical paper, I stumbled upon Schumpeter’s Capitalism, Socialsm and Democracy. On page 261-263 (Harper edition), he writes:

The reduced sense of responsibility and the absence of effective volition in turn explain the ordinary citizen’s ignorance and lack of judgment in matters of domestic and foreign policy which are if anything more shocking in the case of educated people and of people who are successfully active in non-political walks of life than it is with uneducated people in humble stations. […]

Second, however, the weaker the logical element in the processes of the public mind and the more complete the absence of rational criticism and of the rationalizing influence of presonal experience and responsibility, the greater are the opportunities for groups with an ax to grind. These groups may consist of professional politicians or of exponents of an economic interest or of idealists of one kind or another or of people simply interested in staging and managing political shows. The sociology of such groups is immaterial to the argument in hand. The only point that matters here is that, Human Nature in Politics being what it is, they are able to fashion and, within very wide limits, even to create the will of the people. What we are confronted with in the analysis of the political processes is largely not a genuine but manufactured will. And often this artefact is all that in reality corresponds to the volonté générale of the classical doctrine. So far as this is so, the will of the people is the product and not the motive of power in the political process.

I think that this very much describes the situation if not in Europe than at least in Germany. People are fooled by more or less elaborate attempts of blaming foreigners for the fact that investments made by German banks turned sour. Their lending to Spanish and Irish banks fuelled real estate bubbles there, which led to increased incomes and thus more exports of German products. Both export and financial industry made a killing. Now that it is clear that the strategy of lending money to nations, then selling products to them makes the German economy dependent on the ability of trade partners to repay their debts. Obviously, they are struggling and it is clear by now that there was too much money lent to Germany’s trade partners.

Why didn’t anybody say anything before the crisis? Well, many non-academic economists warned about this but the mainstream economists at universities all believe in markets (via models) so much that they could not understand that even if it is in the self interest of a company to not go bankrupt these things still could happen. The same goes for the media, where still there is not one German journalist who made his/her name as an investigative journalist in this crisis (almost there: Harald Schumann of the Berliner Tagesspiegel). As an academic, I am amazed about the ignorance that is ruling. Wikiquote has Wolfgang Schäuble on the record saying this:

“Der eine spart, der andere braucht Geld, das er noch nicht hat. Das muss organisiert werden. Das nennt man Bank. So einfach ist das.” – Stern Nr. 48/2008 vom 20. November 2008, S. 53

So, one is a saver, the other needs money that he does not have yet. That has to be organized. That is called bank. It’s that simple. No, Wolfgang Schäuble, with all due respect, it is not that simple. I don’t say that because I would like to steal votes away from the CDU (his party), but because an obviously flawed understanding of reality is bad for policy. (I stress the “obviously”.) Lately, Nachdenkseiten offered a nice video on how a financial system works. Here it is (in German):