Economy: let’s start again with savings and quality of consumption

The Italian Prime Minister Mario Monti, in an interview to the German newspaper "Die Welt”, on January 11, said: "I love Germany. Especially because of its enormous achievements and social market economy. As an extraordinary model, Germany has developed and exported it to Europe in three steps: the Treaties of Rome in 1957, then Maastricht and Lisbon. Germany is the country that has given more to Europe - a model of functioning and well balanced society"

Beyond the ratings on the work of the Government led by Professor Monti, I want to focus on a particular aspect of this economic "market order model" by relating it to the current economic and financial crisis.

Let’s start saying that there are three specific aspects of the social market economy model.

As first, competition policies are taken as an integral part of a social policy and an essential element of the common good. The very first task of a policy is to promote and defend it from enemies of any kind, species, and ideal, through the creation of a legal system, whose institutions be strong and credible.

Secondly, the fathers of this economic model assumed political and economic institutions as a function of a cultural perspective and anthropological vision driving that sort of institutional order. Finally, the social market economy theorists assumed the price mechanism as an indispensable compass of the economic system and the distinction between an economic system, based on competition, and one founded on bureaucratic dirigism.

Once said with particular reference to the financial crisis erupted in the United States between 2007 and 2008, first of all, you should note that we are facing a structural crisis and, as such, it will take long to be absorbed. Furthermore, it is likely that the reason it might continue over time is to be found in the cultural context in which it is acquired. It is strongly necessary to recall that in the social market economy perspective, economic processes are increasingly depending on cultural contexts, influenced by and in turn affected.

As stated in the spiritual testament of Röpke, there is always something that goes "beyond supply and demand."

According to this perspective, it seems to me we are living in a double misunderstanding. On one hand, we appeal to a long-term perspective, so that policy choices are not dictated by the necessities of political gain. On the other hand, we reason as if the long term were the sum of several short periods. In additione, we tear the clothes for the fall in consumption, as if it were the engine of the market and the process that underlies it. A more careful thought would help to discover a bizarre reality: the engine of this system we call capitalism, market economics, business economy, or, more simply, free economy, is saving, and the savings invested in business projects with high added value, which are such when they cross a high labour productivity. A not merely quantitative analysis on the economic growth tells us that it is the quality of consumption, not consumption as such, to indicate the figure of growth.

Money artificially cheap distorts the market of money itself and cancels the function performed by the price system, working as compass of the economic system. Such distortion is reflected, firstly, on ever-decreasing proportion of income spent for savings in favour of consumption and, secondly, ends up by impacting on investment that will take the misinformation resulting from the artificially high share of consumption. For the purpose of keeping interest rates artificially low, the deficit of savings will be offset by expansionary monetary policies. In the end, a great illusion has been spreading by the false information coming from the violence made on the markets of goods and services.

All this means that the exit from a structural crisis requires restructuring our economies, starting from individual choices. There is no macroeconomics that is not reducible to individual actions and to the ability of the sovereign choice of individuals with regard to consumption, savings and investment. The today decline in consumption might reflect, for example, the situation in which the new structure of demand isn’t even crossing and supplying properly restored. This won’t be resolved in short terms and with some economic policies to stimulate consumption. It requires first of all different behaviours, and strictly, a different culture, not demonizing, raping and humbling market.

The theorists of the social market economy have taught that the market, is not Satan nor a mere algorithm. Markets are their institutions, are what we have been able to build responsibly, humbly and with the tools provided to us by our reason, which are limited and fallible.

Well, the institutions are like fortresses: they resist if they have strong garrisons. Weak and lack credibility garrisons will turn weak and lack credibility institutions and resolve in weak and easily vulnerable markets.

Finally, markets speak the language of prices, and prices, in the free market oriented line, spontaneously drive towards consumption, guiding economic processes towards highly value-added investments. That selects opportunities and rewards those offering greater economic benefits and returns, without the need for policy to intervene to heal ailing companies and banks on the brink of bankruptcy. Raping and humiliate markets means corrupting their language, make them say what they would never said if well-ordered by healthy, strong and accountable institutions.

Eventually, there is consumption and consumption. High technological innovation goods and services, for the manufacture of which it requires high investments in human capital that results in schools and universities of excellence, as well as in dynamic and innovative research centres, could mark a very positive result from the spill crisis. As saving is the engine of market economies, the quality of consumption (and not consumption tout court) tells the direction an economy is having, and in conclusion, if we are raising our head or sadly committing suicide.

Flavio Felice is President of the Tocqueville-Acton Centre of Studies and Adjunct Fellow at the American Enterprise Institute in Washington D.C.

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