What drove you into reality

Un Auf in an interview with Marcel Fratzscher: Driven by reality

Marcel Fratzscher on challenges in business teaching, inequality in Germany and why he is a fan of Karl Popper.

Are economics too one-sided? Many economics students would like a paradigm shift, driven by a greater variety of theories and more realistic assumptions in the models. The predominant paradigm, neoclassical, dominates teaching at German universities, while other schools of thought, such as Keynesianism, institutional economics, ecological economics or behavioral economics, are only taught to a limited extent or not at all.

Marcel Fratzscher is not only Professor of Macroeconomics at Humboldt University, but also, as President of the German Institute for Economic Research (DIW), works to bring economic theories into harmony with reality. His economic and political positions do not always correspond to the majority view in Germany. He denounces the German “obsession to save” and speaks out in favor of increased state investment, especially in education, in order to create more equal opportunities and thus tackle the problem of poverty in Germany.

UnOn:In your position as President of DIW you represent many positions that are typically considered Keynesian, for example an expansive monetary policy as a reaction to crises. Would you say that you are mainly influenced by Keynes?

Marcel Fratzscher: To be honest, I find the dogma story incredibly difficult for me. It almost feels like a religious sect to me when people say they believe in neoclassicism, neo-Keynesianism or liberalism. I am a big fan of Karl Popper, who said that you can put forward a theory, but that it is only valid as long as it is empirically proven or refuted. I see myself as a scientist whose theories and arguments are primarily driven by facts, truth and reality. One problem I have with economics as it is practiced in Germany is that it is too often theory-driven. People have a great theory and say, “This is how I see the world” and then try to arrange the world in such a way that their theory is substantiated. In doing so, they are very selective. I have a hard time saying I believe one or the other. A meaningful distinction between Keynesianism and the neoclassical is that between supply and demand, consumer and business, investment and consumption, state and market. There are always these opposite poles and the answer is almost always: you need both. A theory that only focuses on one dimension usually falls short.

* Don't you think that teaching is more focused on neoclassics and that this is conveyed to students as "the truth"?

Fratzscher: It depends on who is being taught and how is being taught. I would like a teaching that starts with facts and figures and then derives theories from them. Economic theory is like cartography, it is a simplification of reality. Simplifications of reality are often helpful because they help focus on the essence. But it's still a simplification. From this point of view, theories are important because they help to break down complex things to the core points, but I agree with you that a good teaching always has to be balanced. I would like the teaching to take more empirical facts, figures and facts as a starting point and only then to build the theory on them. Then you will be able to address a lot of the criticism that the teaching is too one-sided.

In the conventional models, many simplifying assumptions are made, such as complete rationality, complete information or the goal of maximizing utility. Do you think that these models are still suitable today to cope with an increasingly complex world?

Fratzscher: Robert Lucas's theory of rational expectations from the 1970s has already made an important contribution. My criticism is actually that economics is much further advanced today. We know from behavioral economics that people do not act rationally, and we can make these assumptions more realistic. Too often, we researchers are too slow to integrate the new findings into our thinking. People hold onto their theories for too long and are reluctant to admit that they are sometimes wrong. I think it's not so much because of economics, which is evolving and which has learned a lot. There is a lot of good research that addresses and improves these very assumptions, which are often incorrect in the models. This point of criticism applies generally to economics teaching.

* So research is much more advanced than teaching. So we could change the teaching because we already have a lot of important knowledge?

Fratzscher: Yes, in any case. Adapting the teaching is not easy. If you take a look at the textbooks that are often used for the standard lectures in the Bachelor's degree: Many of them are 15 to 20 years old. They have been updated, but in my opinion they are not really up to date.

* The lack of pluralism in economics goes back to teaching. What do you suppose is the reason that almost all chairs at universities are occupied by neoclassical economists?

Fratzscher: I don't know if they are neoclassical economists. We at Humboldt Uni are already relatively good at this and are less macroeconomic and more microeconomic. I really think the problem is that many of them are very path dependent in their research and very much build on what they have always done. To change completely is not easy. I do believe that we need a paradigm shift by questioning many of the assumptions and models, but that requires a lot of self-criticism and perhaps also the admission that part of your career has been based on research that is no longer really up to date. Researchers are just as reluctant to admit mistakes as anyone else. I am optimistic it is a matter of time. I would also like to see us in Germany look more at the Anglo-Saxon countries and open up to teaching and research from abroad. It strikes me again and again that we in German science often think differently than the global consensus: Be it with monetary policy, be it with fiscal policy, be it with how financial crises arise.

* And how can that be achieved?

Fratzscher: By recruiting more internationally, by having more critical debates about strengths and weaknesses, by moving out of your ivory tower. Researchers who are not only in the ivory tower receive a lot of criticism for this. The work of DIW Berlin is to connect science with reality and to make the translation between science and social policy, economic policy, social policy, i.e. what is relevant for society. That means often compromising and taking a position. That makes you vulnerable, of course. But that is exactly what economics has to do in Germany in particular - enter the public debate more and see: What things do you not understand, where have you been wrong in the past, where can you learn?

You say that more state redistribution will not solve the poverty problem in Germany. What's your approach?

Fratzscher: Inequality is a problem in Germany. It is not the result of a functioning market economy. That is why it cannot be solved with more redistribution. If you say to a 35-year-old Hartz IV recipient: Don't get so upset, you will get Hartz IV, then most Hartz IV recipients will say: I want a chance, I want a good job I want to do something where I can work for myself with my own hands. That is the ideal of the social market economy. Not that the welfare state pacifies people, but that it gives people a chance to participate: in economic life through good work that is also properly paid, in social, social and political life.

What action should be taken instead?

Fratzscher: Above all, I see the key in creating more equal opportunities. There are different instruments. I would call the life chances legacy very prominent: the idea that every young person, after completing their first major educational qualification, gets an account with around twenty thousand euros and can freely decide how and when it is used. Not to go on vacation, but for further training, for qualification. If you want to go into business for yourself, if you want to take a risk, for caring for family members or for social purposes. In other words, for things that are of value to society. This is a concrete example that is very close to my heart, because it gives people personal responsibility to make decisions for themselves and to shape their own lives. Of course, the state has to redistribute, but redistribution cannot compensate for a lack of equal opportunities.

So investment is the key to eradicating poverty. Are you also preferable to conventional development cooperation?

Fratzscher: Only a small fraction of the money actually goes where it is really needed, namely with the people. Technical cooperation, investment and free trade are helpful, even if many people perceive it as bad. Opening the markets for agricultural products in Europe to emerging economies would help them tremendously. Because where they have a comparative advantage, namely in labor-intensive processes in agriculture, they could achieve more, could earn more money, could become more modern. So investments and involvement in international economies, that would certainly be priorities.

Why are investments so neglected in German politics despite low interest rates and substantial budget surpluses?

Fratzscher: The problem is complex. For one thing, half of all public investments are made by local authorities. 30 percent of the municipalities in Germany are over-indebted, so they do not have the financial means to invest. In addition, many municipalities and states have also cut staff. Although the federal government has made almost seven billion euros available to the municipalities, these funds are rarely called because the capacities are lacking. The second problem is that wrong priorities have been set, also at the federal level. The priorities were to increase social spending, the grand coalition pension reform is an example. That is ten billion euros a year for the pension at 63, maternal pension. That's nice for the people who benefit from it. Most of the time, however, these are not the people who need help the most. This also means that these ten billion will then not be available for investments in schools, education or digital infrastructure.

* Is it legitimate to borrow to invest in productive areas like education that will pay off in the long run?

Fratzscher: Debt is not a bad thing per se. The question is always: what are you going into debt for? When a state, a federal state, a municipality goes into debt in order to invest in the people in order to create a good education system, then we also know from an economic point of view that there is a large fiscal return. In other words, for every euro you invest in education, more than one euro comes back in the long term. When people become more productive, find more and better work, then of course they also pay more taxes, i.e. the state even gets more back. Germany always has this obsession with saving and debt. Saving is not always right, and debts are not always wrong. The question is, what is the money spent on? At the same time it has to be said that in the current very good economic situation, where the surpluses are huge (the state has over 30 billion euros in surpluses per year) there is actually enough money, so new debts are not necessary.

What is possible in the area of ​​economic policy to give the European idea the urgently needed boost?

Fratzscher: First of all, there is an urgent need to reform Europe. Europe and the euro are not working as they should. Some reforms have been made, but not enough. I see the need to find a balance: on the one hand, subsidiarity. That means giving people back more responsibility whenever possible at the regional level so that municipalities have more opportunities to decide about their education and where they want to spend their money. At the same time, more centralization needs to be done in important areas. Foreign policy and security policy are two typical areas where it makes no sense at all for each country to have its own military spending and its own foreign policy. The same applies to some areas in economic policy, e.g. the financial system: there is actually no longer a national financial system and only national banks. It's all European or global now. That is why you need an association of banks and a capital markets union. These are two important elements in reducing risk. There is also a need for better coordination of macroeconomic policies. It is always very important to us Germans that the common rules are adhered to. You should create good common rules that make sense, but we're still a long way from that at the moment. On the whole, I firmly believe that Europe has brought Germany huge benefits and that we don't have to change everything either. We don't need a United States of Europe, we don't need a political union. In some areas we need more coordination together with more subsidiarity, and then I am actually optimistic that Europe is on the right track.

Do you think this goal is realistic, given that many European countries have different positions in important areas?

Fratzscher: I am hopeful because the conditions could not be better than now. There is a new French President who has spoken out very clearly for Europe, who has presented a vision for Europe. I would now wish that there would soon be a new federal government that is capable of acting and that presents its own vision. I am hopeful that something will happen soon. I think everyone has recognized that the European crisis has not yet been overcome, there is an urgent need for more reforms and I hope that the new federal government will take this really seriously.

 

The interview was conducted by Manon Schuegraf for the unsolicited.

The editor-in-chief of Unsolicited. You can get to know us better at www.unauf.de/kontakt/ueber-uns.