1.1 Understanding the Crisis in Order to Return to Prosperity
The current crisis is not transitoryâit is a profound upheaval that will upset our economic and social benchmarks for a long time to come. The structures and behavioural patterns of tomorrow must be created today because the road to durable prosperity will be long and difficult. This reality presents an exceptional opportunity. Fortunately, the profound effects of the current crisis, such as bankruptcies, frauds, and dismissals, were attenuated by financial first aid. Although the fire is out, it is still smouldering, as the basic causes of economic and social imbalance have not been addressed.
Expert voices are increasingly emerging, encouraging us to think deeply about this mega-crisis. Sociologist Alain Touraine (2010) analysed the crisis and the double death of all that is social, while Guy Sorman (2010) invoked the parable of Saint-Simon or the Disillusioned States. A recent book by Nobel Economy Prize winner Joseph Stiglitz (2010) highlights the current triumph of cupidity, and another work by philosopher Michel Serres (2009) is called Times of Crises. Opinions on the crisis are expressed daily in the media, popular works, and erudite publications, with critical opinions sometimes accompanied by proposals that deserve the attention of public and private industry decision-makers, company directors, management, personnel, andâlast but not leastâcitizens. In our recent research on the worrying phenomenon of tetranormalization, which heralded the current crisis (Savall and Zardet 2005), we conclude that thought trends are strong signals of a vast decennial movement and a host of innovations that will impact all aspects of economic and social life within all organizations, markets, and territories and, in fact, society as a whole. Tetranormalization refers to the avalanche of contradictory standards that are grouped into four principal themes and that disturb the operations of the economic and social universe and delay the decisions needed to protect business and citizens.
This forecast is also a result of the numerous experiments that the Institut de Socio-Ă©conomie des Entreprises et des Organisations (ISEOR) researchers in firms and organizations have conducted over the last 44 years on the beneficial and encouraging results of an innovative management system that integrates social variables and economic performance.
Our very first study led us to an extraordinarily original pioneering theory by a somewhat unknown Spanish economist, the neglected inspiration for the world-renowned Keynes (Savall 1973, 1975b). In a 1922 article, GermĂĄn BernĂĄcer proposes an explanation for recurring crises that is congenital with the existence of speculative markets, such as property and works of art, long-term money markets, and commercial trading (materials and energy). These speculative markets abound in financial capital, attracting and capturing it. This capital then becomes scarce in production industries where real value is created, thereby draining these industriesâ financing.
History repeats itself: 1929, 2007â2008, and 2012.
The most recent economic crisis, which was of an unexpected acuity and magnitude and was worse than any previous crisis, calls for major reflections and actions to avoid global catastrophe or an economic and social meltdown in the countries that intensely experience the effects of a global economy.
Supported by many years of research and observation as the Research Director for the Bank of Spain, GermĂĄn BernĂĄcer offers a luminous, basic, and original explanation for the origin of crises and how to avoid them.
Currently, no one dares to advocate for a return to a planned, centralized economy, as it failed with the fall of the Berlin Wall in 1989. Instead, all members of society currently feel the ferocity of the aberrant attacks that destroy jobs, economic prosperity, and social well-being. These attacks are dangerous for political democracy and are caused by the uncontrolled excess of the financial hurricanes that periodically wreak havoc on the real economy. This reality reveals the cynical arrogance of the excesses of chaotic speculative markets. Currently, given that most States are bankrupt (with recurring deficits and over-borrowing), we are occasionally tempted to rely on the illusory Keynesian promise of a Welfare Government that can help poor, defenceless citizens. In this context, it is important to shine light on the robust theory forged by GermĂĄn BernĂĄcer regarding the structural and chronic explanation for crises, which calls for more radical and more durable economic and financial policies than vain monetary manipulations or ineffective gesticulations aimed at polemically regulating financial marketsâ outrageous speculative activities.
A visionary equipped with a rigorous scientific method inherited from his training as a physicist (he taught Physics throughout his life), BernĂĄcer published a book entitled Society and Happiness. An Essay in Social Mechanics in 1916. A few years later, in 1922, he published a famous article that proposed the theory of availabilities to explain economic crises and the social problem of unemployment. This article inspired several reputed Anglo-Saxon and German economists. Long before Keynesâ The General Theory of Employment, Interest and Money (1936), BernĂĄcer laid the foundations for modern macroeconomic theory: the functional theory of money, a synthetic and functional theory of interest rates and a basic theory of economic crises, which, according to him, are attributable to the existence of speculative markets for unearned income yielding assets, that is, goods that provide incomes without the counterpart of work, entrepreneurial risk, or the creation of real value-addedâthat is, the revenue to be shared between the economic and social parties.
At first sight, certain aspects of BernĂĄcerâs economic policy recommendations may seem utopian or too radical, such as the elimination of stock markets and interest. Nevertheless, BernĂĄcerâs prolonged demonstration of the inevitable chronic instability and under-employment that results from the existence of these unearned income yielding assets, which are recurrently impacted by speculation and are typically found in the financial, real estate, art, raw materials and energy marketsâparticularly in long-term marketsâcould be meaningfully explored to create more effective and efficient economic and financial policies at the national and international levels after the 2012 crisis.
BernĂĄcer shows that interest rates are a chronic cause of inflation and artificially increase the cost of financing the real economy without contributing any effective counterpart to economic and social activity. He recommends interest rates that are lower than observed inflation ratesâand even zero interest rate for some activities privileged by national or international social policies or for financing structural projects. In addition, based on BernĂĄcerâs very convincing demonstration of the origin of the succession of chronic, recurring, and cyclic crises, the most disastrous effects of which are unemployment and latent under-employment, we suggest abolishing or strongly restricting medium- and long-term financial marketsâas well as the raw materials and energy trading marketsâfrom being excessively speculative. In short, eliminating speculation would significantly contribute to supporting economic and social development and enable resources to be directed towards activities that create true value -added to be shared between all participating parties. Eliminating speculation would also prevent the recurring financial bubbles that accompany global business cycles at increasingly frequent intervals.
Before Maurice Allais, BernĂĄcer (1916, 1922, 1945, 1955) proposed The General Theory of Employment, Unearned Income and Double Hoarding based on the idea that rigorous financial management of economic and social activities, a balanced budget, and price stability contribute to durable economic prosperity, safeguard employment levels, and encourage the creation of new jobs, new products, and new wealth. Allais, the first French Nobel Economics Prize Winner before Jean Tirole, was also shunned by academics before he received the Swedish Academy Award.
In the current debate, some experts prefer demagogic facility and âshort-term actionâ with the recourse of increasing the money supply, which worsens the debt position of States and public administrations and increases companiesâ finance charges as they resort to expensive day-to-day borrowing to finance working capital.
Additionally, a demagogic recourse to the Mint (systematic budget deficits) is added. States and national and international central banks have acknowledged their incapacity to explain to their citizens the need for good housekeeping with balanced budgets, which is the source of ethical behaviour, social justice, and confidence by savers both large and small.
What we currently call austerity plans are only palliatives applied with detrimental brutality, given the accumulation of long periods of inaction and repeated drifts. For many years, even several decades, budgetary and monetary carelessness was privileged by States and many players in the economy who preferred easy living and speculation rather than the occasionally risky innovation that creates wealth to be shared between participating parties.
We do not advise brutal rigour here, but ratherâbased on the theory suggested by BernĂĄcerâa rigour integrated into the reflexes of everyday life and the recurring operation of the economic and social systems and built into decision-making models and tools on both the macro- and microeconomic levels. This behaviour would allow a dynamic financial balance in relations between stockholders to be maintained.
Inflation is a very dangerous mirage and misleading mask because it tends to hide the harmful effects of an effective rate of interest, that is, the nominal rate of interest after deducting the inflation rate. Nevertheless, this advantage is illusory because unstable prices and interest rates caused by continuous and ephemeral adjustments make it difficult to discern the path that should be followed among those suggested by traditional economic decision-making models.
As soon as Keynes published his The General Theory of Employment, Interest and Money in 1936, BernĂĄcer denounced its chronic inflationary nature that was generated by the imprudently systematic recourse to Government intervention in the event of private venture failure. Indeed, private ventures cannot continually finance with their own capital the infinite needs of all economic players or ensure the growth and qualitative development of their shared economic and social prosperity.
In the panic caused by the economic slump in 1929 and the rise of Fascism and Nazism in Europe, which seized the world between the two world wars in the twentieth century, Keynesâs proposals logically found support from politicians, who found their role enhanced as a result. Indeed, due to citizen strong fears and politician complicity and occasional cowardice, this period was the beginning of the logical and popular belief in the almost unlimited capacity of Government to pay for the financing, investment, and economic drive needed to ensure national prosperity. Keynes thus found âcustomersâ for his national economic policy ideas and was to some extent a very effective marketer of his own theory: in a time of distress and disorder, his ideas inspired the structural works policies, particularly in Italy and Germany, providing a conceptual framework that justified the relevance of government intervention, which thereby became an operator with the other economic players. The authorities assumed the initiative and regulation that the private industry failed to provide and questioned private industryâs ability to undertake creative and responsible initiatives, thereby indiscriminately incriminating very small, small, medium, large, and very large businesses.
The decisive role of private industry in economic buoyancy was demonstrated by the major Austrian economist Joseph Schumpeter, a contemporary of Keynes and BernĂĄcer (all three were born in 1883, the year Marx died). Schumpeter became a professor at Harvard University just before World War II.
The doubt that resulted from the combination of speculative and entrepreneurial capitalists, the perverted speculative market, and the real market, that is, the healthy conflict between the supply and demand for goods and services, was a very damaging historical mishap.
BernĂĄcer deplored this state of affairs in the interwar period, followed by François Perroux and Maurice Allais in France after World War II; all criticized the chronic inflation caused by Keynesian policy. Additionally, Keynesâs recommendations were attractive because, following the Yalta Conference, they offered an alternative to Marxism and centrally run national economies such as the USSR and Eastern Europe. These ideas were believed to threaten Western society and the âliberalâ economy. The renewal of the economies destroyed by World War II also played a very significant role in the prosperity experienced during this long period, called the â30 glorious yearsâ in France, Germany, the UK, and other Europe...