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https://www.blogger.com/blog/post/edit/2133355681582705445/7525853431614485065 we now begin the panel on mercantilism where the second third and fourth largest economies in the world are all export led current account surplus countries obviously there are questions to ask within the European system and questions asked within the world system to moderate this panel would be my nominee for the most valuable player of Berlin I net 2012 several months ago Peter young and joined the board of I net the governing board and because we were going to be in Germany I asked him to play a leadership role and I would say to you that almost every Wednesday thirsty Friday and either Saturday or Sunday since that time he and I have been on the phone multiple times he's been on the phone with my staff he has just been a tremendous powerhouse and I'd like you all to give him a round of applause because he is a true architect Peter thank you for your efforts and please take the stage thank you Robert it can't any it can't get any better for me so I better sit down and don't give you a wrong impression well I hope we will live up to the expectations for this afternoon's panel on mercantilism I will say a word or two to our panelists a bit later on rob has already mentioned what we are up to at this building here as we know that yesterday's building where we were at the morning was the seed of the rice bank and in 1931 Germany was insolvent the reason was an outflow of 1 billion US dollars and that left till the insolvency just to give you an idea on what size of problems there were or how small compared to today's before David Hume and Adam Smith's mercantilism was sort of the Rieger mercantilism was the dominant school. and it went from the 15th into the 18th century critics were then David Hume and Adam Smith as the founding fathers of the anti mercantilism and after those of them you mean his papers of the balance of trade and of the jealousy of trade we basically were done with mercantilism at least in economics and by 1860 in England had removed all elements of a mercantile system where we today today global exports are now about more than one-third of global GDP in 1870 a year before this country was founded world trade as a percentage of GDP were 4% and even in the sixties of last century were just talking about 12% since then we have had an incredible development in particular with the wall coming down in 1989 and the world grew by about two and a half times and before the crisis but world trade rose by about seven and a half time from two billion to seventeen billion roughly and if you look in this we see the most striking figures exports per capita from six US dollar in 1902 two thousand two hundred dollars now the players have been mentioned China of course the number one exporter now and it's amazing to see that China now exports on one day more Goods than in one year in the 70s so it's really becoming an issue which is dominating world trade and there the situation there what happened to China now is there back in eighteen of the last twenty centuries they were Asia was accounting for more than 50 percent as we all know and China was the number one country in terms of export in terms of growth and GDP content today the 31 Chinese provinces would be among the 32 fastest growing countries in the world if there would be independent a lot of them export driven as Rob said most post-war towers were export driven and that's true for China Japan Korea and of course Germany now it has always often been said and maybe that's for the is there a tradition in the German genes for exports if you look in the history it can't be really sad yes you know 1900 it was only 15% of GDP and now it is where it is but when we presented our book German and I three weeks ago in Beijing on the stores of export-led growth in the post-war economy we were particularly referring to the debate in the 60s on the backdrop of the development in Germany and the 70s and then in China now and the amazing similarities which we certainly will find out in the discussion but I want to make two remarks which maybe not in the mainstream debate the one is why did China fail in the last 200 years the answer is its innovation the lack of innovation the lack of openness and why the Western Europe and then the u.s. move on as we all know it's because of innovation is the emergence of industrialization and capitalism and the interesting thing is that still 50 of the the most innovative companies of the world 31 of the 50 are in the US and 10 in the EU if you look on the some of the problems in Europe and I'm sure we go into this further I want to add this in my second remark a more a micro view there is a study being recently published on hidden champions about 2,700 firms in the world who fulfill the following criteria they either number one in Europe or number one in the US and they have to be among the numbers first three leading firms in their sector in world these are mid-sized firms up to five billion in average they have four hundred million sales sixty percent export ratio they account for 70% of German exports and the amazing thing out of the 2700 there about 1300 in the german-speaking Europe it shows that obviously it is more than it's two entrepreneurial spirit and maybe for the discussion or whether it the government is influencing and providing the whole export framework coming to a close I like to say a word to our panelists in the sequence of their speaking where Paul Davidson the editor of the Journal of post-keynesian economics all the details are in the in the book so I don't have to go into this then we have Heiner Flassbeck director of the division on globalization and development strategy of the United Nations conference on Trade and Development of um tank we have Norbert Volta the former chief economist of Deutsche Bank and last but certainly not least Joe Stiglitz a friend and the Nobel laureate. we just met a couple of weeks ago at the China Development forum and he was speaking a bit to the same topic so I'm very much looking forward to his in all the four contributions we have agreed that we will use not two full time for the contributions we'll do a second short round on the panel after the contributions and then we'll open up to the floor for some Q&A in order to have an interactive debate thank you very much for your intention and I would like now our first speakers to come up to the stage mr. donalsen thank you very much the topic the title of my paper which is not shown on the board is preventing the failures of mercantilism especially dead-end nation exhaustion. using the principles of Keynes liquidity theory and Soros as reflexivity and particularly in the International payment system is a great way of looking at how you solve the problem if you have old economic theory versus new economic theory countries that run export-led growth but run huge trade surpluses persistently we have heard that the media talking heads always say their economic miracles remember Japan in 1970s and 80s they were going to take over the world by the year 2000 these pundits told us Japan would be bigger than the United States and we might be on a yen standard rather than a dollar standard well look what happened after a couple of years of Japan being so powerful it had two decades of recession question is now China and Germany are like Japan in the 1970 running persistent trade surpluses can they be far behind Japan are they going to have decades of recession now we were told also if Greece only had its own currency it could solve the problem by devaluing the currency and there was even some talk that Canada was helped by a devaluation of the currency and old economic theory says when there's a debtor problem it's when there's a debt problem it's the debtors has to bear the burden of the adjustment and one of the things we say now say is well if you devalue if you have a chance to devalue you will make your industries more competitive and everybody's for computation of course in the 1930s when you devalued we that exporting your unemployment why because if you become more competitive the industry you're competing with must become less competitive and so they're going to have a problem now in Europe since Greece cannot devalue we're told instead you have to have austerity why austerity well if you cut back you create a little unemployment you'll put pressure on your employers your enterprises to reduce wages and fringe benefits and you become more competitive and again that will help those who believe in austerity I suggest that they look at the autobiography of Herbert Hoover requests when the Depression occurred mr. Hoover who was very sensitive to economic problems and distress kept calling mr. Mellon his secretary of treasury in to say can't we do something to relieve this unemployment depression problem and Hoover writes that as follows mr. Mellon has only one formula liquidate labor liquidate stocks liquidate the farmer liquidate real estate it will purge the rightness out of the system. people will work harder lead a more moral life unquote so that's what austerity is all about getting people to work hard lead a more moral life now Keynes argued that the classical theory classical theorists were wonderful because they offered us the supreme intellectual achievement of adopting the hypothetical world remote from experience as though it was the world of experience and then living in it consistently and that's what we see with old economic theory now Keynes argued that and he was the first new economic thinking I guess of the 20th century that the problem with the old economic thinking well they were usually clearly in geometers living in a non-euclidean world and observing parallel lines somehow crashing said they had to vote to avoid crashing and he said the problem was you had to throw over the axiom of parallels and work out a non-euclidean geometry something similar is required today in economics and what were the axioms at Keynes through / well there were three axioms the agaric axiom the neutral money axiom and the gross substitution axiom let me just talk about one of them if you're interested in the others you'll have to read the paper and that's the ergodic axiom this has to do with efficient markets time is the device which prevents everything from happening at once when we make an economic decision the payout is going to be weeks months years in advance particularly for investment but even for consumer goods if we decide to go to a restaurant for dinner tonight rather than eating here the question is which restaurants you pick well we'll pick the one that's going to give us the most utility best food for the price right and then how many have you ever gone to the restaurant and been disappointed with your choice obviously you chose the wrong thing why because you can't forecast the future now in old economic theory the future and we heard this we talked before the future is predictable Paul Samuelson says if economics there's going to be a science we have to institute the ergodic axiom what is the air ghatak axiom well if you want to say something about a universe information about a universe you have to do our sample from that universe and then calculate the moments around the mean so if you're going to say something about the universe that's going to exist tomorrow or the next year or to get a rate of return or what have you you have to do our sample from the future and then do your calculations well obviously a sample from the future is impossible so what you you Institute is the air ghatak axiom and the ergodic axiom says the probability distribution that govern the past will be the same probability distribution that governs the future and therefore you can take a sample from the fast it's the equivalent of taking from the sample from the future and therefore you can know the future in an actuarial sense and that's what makes markets efficient everybody knows accurately but the highest rates of return are going to be what your marginal utility is going to be the ordering axiom by the way is the equivalent if you have a deterministic model of the axiom of the ergodic action okay now George Soros Keynes said that was nonsense that you can't predict the future you talked about uncertainty and I have argued that if you read Keynes did not know about stochastic theory because it was being developed in Moscow in the 1930s and he did not read Russian although his life probably could have read it to him but he throws his his comments about Tinbergen indicate that he under he knew intuitively that the air Ghatak axiom didn't work because he says economic data is non-homogeneous over time and no in homogeneity is a sufficient condition for nonagon disappea okay now Soros in his reflexivity was attacked by the economists and he wrote a letter in to the Economist to explain why he understood science and he points out that that in in March 1997 he says that Samuelson's insistence on the air ghatak axiom is wrong and it does not permit the reflexive quote the reflex of interaction between participants thinking in the actual state of affairs and closed so in essence what I'm saying is Saros is reflexivity although it uses different terminology comes out to be the same idea exchanges idea about financial markets you have to reject the organic axiom you can create the future you don't just discover it organic axiom efficient market theory says the future is already predetermined and like Columbus you just have to discover it Nonnie ergodic economic says if you go out on the ocean you will create North America it wasn't there before okay so Robert Lucas on the other hand has boasted that old economic theory axioms are quote artificial abstract and patently unreal unquote but they are good because they make the the system tractable and we can solve this problem now the quants on Wall Street have built all sorts of computer models based on sampling from the past to tell us about risk management and of course they're assuming the agaric axiom if you think as I do and it's changed it and as Soros obviously does as well that the system is nonlinear ghatak then these courts have developed models which we might call weapons of mass destruction ok now in his book against the gods which was about risk management Peter Bernstein says the story that he has to tell is between those who argue that the best way for making decisions is based on quantification and numbers determined in the past by patterns in the past and those who base their decisions on a more subjective degree of belief about the uncertain future this is a controversy that has never been resolved and he says we would like to resolve it in his book I think given the collapse of the risk management models of the in the two thousand seven and eight I think we have evidence that the past is not a very good statistically reliable about the future now what is it that we're talking about in New Economics and how does this relate to this balance of payments well axel mentioned the web of contracts. the essence of Keynes's Theory is the contract the money contract I have a quote from Aaron Horan I won't bother you with it but he says at the end of it says if a serious monetary Theory comes to be written the fact that contracts are made in terms of money will be of considerable importance unquote as old economic theory said theory contracts always made in terms of real his money now why do we make contracts in money terms all entrepreneurial capitalist systems organize all production and exchanges in terms of money contracts both spot and forward why because you and I know that our future determines our standard of living but we don't know what the future is we know the world is not a gothic we know we don't know so we in order to get some control over our economic future we enter into all sorts of contracts for cash inflows and cash outflows and the whole we spend all of our time trying to make sure that the cash inflows at least equal to cash outflows if they don't we have to borrow in order to keep us - in the living and sooner or later we become a debt problem well the same thing is questioned about international monetary system look if we were classical theorists we say we don't have to worry because there cannot be persistent bouncer trade problems you would exploit your unemployment by evaluating making more competitive and so on on the other hand Keynes presented a plan called the Keynes plan at Bretton Woods in which he said there is no reason to believe that you can have a system of free trade free capital mobility and maintained balance of payments and the question then was what are you going to do if you don't have that in fact his argument was free trade and free capital mobility and free destruction of exchange rates were likely to create problems not solve problems okay and so he had this super national central bank and the bankers and so on well we saw it I should apologize to some people here who often ECB but we saw if you have a super national central bank that doesn't solve the problems per se and so I developed a using the same principle changed it a much smaller system called an international monetary clearing Union and the the idea of this clearing unit is to make sure that the burden of correcting a trade deficit is not placed on the debtor completely but primarily on the creditor nation why on the creditor nation because they have the wherewithal to solve the problem okay where's the debtor nation as we know once you get into debt you don't have the wherewithal to solve the problem it only gets worse and worse now Keynes's position was very simple what you needed to do was if a country banned persistent trade surpluses such as China Japan Germany what have you that you had to have some mechanism which said after a while you're not allowed to build up these balances and they were built up in this super national central banker or in this clearing unit it says that the the creditor balance at running persistent balance of trades has to get rid of its credits or at least hits quote excessive credits how should it get rid of its excessive credits well the answer was you're to spend your excessive credits on foreign goods it's a sort of safe law thing if you if you sell things you have to demand things from there fella only the sellers in a different world so one of the argument was if we had such as an institutional system we would require China Japan Germany when they build up reserves they're creating a debt a problem and the debtors ultimately going to get exhausted because of double-entry bookkeeping as somebody pointed out today if your creditor they must be a debt around the other side so spend your money spend it on goods and services which you can then make available to your consumers your local residents and that will improve this in the living just think of China bought more cantaloupes from California to reduce its trade surplus how much better the Chinese would be eating this exotic fruit called the cantaloupe instead of rice all the time okay so one thing is spend it on the foreign goods and that will solve the problem the data will work his way out of debt because she will be producing more things to sell to you which is we also think is the good way the second way of doing it is if well if you can't think of cantle enough cantaloupes to buy make a direct foreign investment in the debtor nation that would create jobs in the detonation build a factory what have you and that would get rid of your surplus and the third possible and least likely one was if you can't spend it on consumer goods you can't invest you give it away and let me give you a good historical example the Marshall Plan what was true after the Second World War Europe had no productive very little productive facilities it was clear to Cannes and to Harry Dexter white that Europe was going to have to borrow to defeat its population okay Keynes came up with this idea which was although he didn't say it the United States order gives the money to Europe and harried and he estimated that it would cost about fifteen billion dollars and Harry Dexter white said that's nonsense. the United States contra Congress will only go for three billion dollars not fifteen and so he vetoed the Keynes plan and IMF and the World Bank was put in it instead what happened of course was for political reasons I suspect Harry Truman and general Marshall introduced the Marshall Plan which gave away fifteen billion dollars not twelve billion which came said to over four years to the Europeans what was the result the european standard living was better and the united states was better for the first time in american history after a major war we did not suffer a major recession 9 million men and women came out of the armed forces and got jobs not only producing for the domestic market but for the export market and so it was a win-win situation ok so that's a good example of where the keynes plan worked the problem is of course if the for years it ended but the europeans were now in a position where they could produce and export as well by the way I should point out if you I can't explain it but if you're interested you can look look in the paper the law of comparative advantage you may not you may not believe this but in 1933 Keynes wrote about against outsourcing and his argument was the law of comparative Vantage only holds for natural resources and climate controlled industries such as agriculture for every other industry he says the law of comparative advantage is not important for an increasingly wide range of industrial products experience accumulates to prove that most mass production processes can be performed in most countries and climate with equal efficiency isn't that exactly what's happened with apple and corning glass and what have you but of course at much cheaper rates all right so unfortunately secretary Geithner and I'm afraid the Obama administration believes that the solution is to increase American exports by causing the talented to be devalued relative to the Chinese one and of course rather than us the value we want them to revalue unfortunately I don't think that would solve the problem it's the equivalent of exporting unemployment let me I think I'm running out with three minutes left so let me sum up as follows that if you look at the history of the of the United States from the 19th the early 20th century the two areas of greatest economic growth was during the Industrial Revolution which was under the gold standard and also from 1947 to 1973 when we had the Bretton Woods system operating since 1973 the united states has and the rest of the world has not had the same age of growth usual argument is the rest of the world could emulate the united states and they grow because we were so good but we grew at rates which we didn't have and who were relating okay so that the the system ultimately that i'm recommending and which is a new economic theory basically is that whenever there's an international balance of payments persistent problem we should have some mechanism which forces most of the adjustment on the creditor nation but we should be careful not to say let the debtor nation free at all some people say well why don't we just keep making i am a marshall loans or IMF grant loans to the debtor nations and the problem with that is if we don't get them to work their way out but if we just keep make make every day christmas they become addicted to these things and for what ethical reasons moral reasons whatever we want to believe that people will work their way out of debt now that doesn't solve the domestic problem. but i think it does in terms of domestic debts but again it seems to me that there's a implication here if we have problems with too much consumer debt and things of that sort the solution is not to force people to cut back you know in order to we'd lose there that's deleverage i guess you are the solution isn't somebody raised it to the Canadian Minister is to create more income for the debtors so that they can work their way out of that and with that moral I'll leave you