What do economists think of Georgism?

European debt crisis

Till van Treeck

Till van Treeck is Professor of Social Economics at the University of Duisburg-Essen. He studied politics and economics in Lille, Münster and Leeds. His work focuses on income distribution from a macroeconomic perspective, economic policy and (socio) economic education.

In order to be able to understand the economic debates surrounding the euro crisis, an understanding of the national accounts must be developed. In the following, basic knowledge of the national accounts is conveyed.

A huge cake is being prepared on the occasion of the 50th anniversary of the EU. (& copy dpa)

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The national accounts are basically nothing more than a statistical analysis of the economic processes that have taken place in an economy over a certain period of time. Although the statistical definitions of the national accounts are valid regardless of individual theoretical schools of thought, neoclassical and Keynesian economists sometimes interpret the interdependencies between different variables from the national accounts very differently. What do you mean with that? In the following, the image of a cake is used, which is supposed to symbolize the result of economic activities in one year. As will be explained in more detail, the "economic pie", ie the economic output of a country, is referred to as gross domestic product (GDP). Economists from different schools of thought can usually easily agree on how the size of the economic pie that was produced in a particular country can be measured in retrospect (e.g. for the last year). They also agree that there are different ways to describe the cake. But there is great disagreement among them about how to ensure that cake production is improved over the next year, how the cake should be distributed among those directly or indirectly involved in its creation, and how exactly it should be used (e.g. immediately eat, sell abroad or freeze and keep for the future).

Nominal and real gross domestic product (GDP)

The pivotal point of the national accounts is the gross domestic product (GDP). The GDP describes the economic output of an economy in the sense of the value of all goods and services produced and sold in a certain period (usually one year).

First of all, real GDP must be distinguished from nominal GDP. This distinction is always important if you want to look at the change in GDP between different points in time, for example if you want to compare the GDP of 2015 with that of 2016. The problem here is: The nominal GDP can be observed directly with some effort: For this purpose, the national statistical authorities (in Germany the Federal Statistical Office) add up the amounts that have been spent on purchases of goods and services. Real GDP, on the other hand, has to be determined via a detour: The growth in nominal GDP (roughly from one year to the next) corresponds approximately to the sum of the growth in real GDP and the rise in the price level (inflation) in the economy under consideration. If only nominal GDP increases from one year to the next, but real GDP remains constant, this means that only the prices of goods and services rise (inflation), but in both years the same amount of goods and services of the same quality are produced or provided. If, on the other hand, real GDP rises, the country in question actually produces more or better goods and services than in the previous year. For example, if nominal GDP rises by three percent from one year to the next, and inflation is only one percent at the same time, real GDP increases by about two percent. For goods that are sold and bought in the same quality in two consecutive years, the calculation of price changes is unproblematic. If a product is improved but is sold at the same price as the previous product, this is statistically recorded as a price decrease.

Figuratively speaking, an increase in real GDP means that the pie is actually getting bigger or better. The effect of inflation (increase in nominal GDP with constant real GDP) can be imagined as if different rulers with ever larger scales, i.e. ever closer lines, were used to measure an unchanged large cake. A ruler that changes in this way shows an ever larger diameter of the cake, but in fact the cake remains exactly the same size. While it would never occur to anyone to measure a cake with different rulers, in economics the yardstick used - the price level - changes almost every year. The method described above therefore attempts to address this problem so that the actual size of the cake (real GDP) can be measured.

GDP can be viewed from three sides: the supply side, the demand side and the distribution side. Metaphorically speaking, the cake is baked (supply or creation), used for various purposes (demand or use) and cut into more or less large pieces (distribution). The neoclassical school of thought places the main focus on the supply side (production), while the Keynesian school of thought emphasizes demand (use) and distribution.

The supply side

In the simplest variant, the supply-side view of GDP, which is also known as the production calculation, states that two factors are decisive for the production of all goods and services in an economy within a certain period of time: labor productivity (= GDP per hour worked) and the number of the hours worked, i.e.:

GDP = labor productivity per hour x hours worked.

A numerical example from António Perez Metelo's contribution to the debate: "Employees in Portugal work an average of 23 percent more hours a year than their colleagues in Germany. But German workers still produce an average of 73 percent more goods or services." How can that be? Quite simply: Productivity is higher in Germany, that is, a greater value of goods and services is produced per hour worked in Germany than in Portugal. This enables German employees to have both more leisure time and higher economic performance. Similarly, a baker with better training, better ingredients, and better kitchen equipment can bake a bigger or better cake in the same number of hours than a baker with less qualifications or technical equipment. In other words: If both bake a cake of the same size and quality, the more productive baker can call it a day earlier.

To more neoclassical From a perspective, the focus is on the creation, i.e. the production of goods and services, which is why the neoclassic is sometimes also referred to as a supply-oriented theory. A possible recommendation would therefore be to create favorable conditions for productivity-increasing technical innovations through company-friendly measures (low taxes and wage (incidental) costs, little bureaucracy and other regulations). In the case of the baker, this could mean that he would be spared excessively high minimum wages, that he would not be burdened with excessive bureaucratic regulations and that his personal performance incentives would not be undermined by excessive taxes. In addition, from this point of view, the state should create supply-side conditions that enable the baker to continuously improve his cake production (e.g. through good schooling of his apprentices and a well-established mechanical engineering and chemical industry that develops better and better baking machines and baking processes and thus the productivity of the Baker's increased).

With regard to the crisis in the euro area, for example, Alexander Kritos calls for a convincing innovation strategy for Greece in his contribution to the debate, and Michael Hüther criticizes the fact that France is "economically weak". If there is unemployment and therefore the number of hours worked is lower than desired by the company and employees, this is off more neoclassical Often times the wages are too high or the labor market is regulated too much. Accordingly, structural reforms are called for in the labor and product markets, as in Holger Schmieding's contribution to the debate.

The demand side

The demand side of GDP, which is also known as the expenditure calculation, is:

GDP = consumption (private and state) + investments (private and state) + exports - imports.

This means that the goods and services that are produced in a country in a period of time must also be bought, i.e. demanded. Demand can either come from within Germany (private and government spending on consumption and investment, so-called domestic demand) or from abroad (exports minus imports, so-called net exports or external contributions). Private consumption includes goods and services of daily use (e.g. furniture, mobile phones, cinema shows, vacation trips, etc.) that are bought by private households, also known as consumers. Private investments are mainly made by private companies in order to improve their production possibilities (e.g. production machines, warehouses, software). When private households purchase condominiums and houses, these expenditures are also referred to as (housing) investments. By definition, private companies cannot consume. The state, on the other hand, can consume, although the delimitation here may appear to be arbitrary (for example, salaries for teachers in state schools count as consumption and expenditure on school buildings as investments).

Why is the consumption-side GDP the same as the output-side GDP? When a good or service is sold in a market it usually involves two people or institutions - one selling and one buying. The amount of money that flows is identical for buyer and seller. For the calculation of the GDP it is therefore irrelevant whether the expenditure of the buyer (demand side) or the income of the seller (supply side) is considered.

How can we explain that for the calculation of GDP on the consumption side, exports are added to domestic demand, while imports have to be subtracted? As a reminder, GDP is an indication of the economic output of the entire economy that we are looking at. Goods and services that are sold abroad (exports) are manufactured in the domestic economy, but not used there (for example, cars made in Germany that are bought in France). This foreign demand therefore increases domestic GDP. On the other hand, goods that are bought in Germany and used for consumption or investment, but are produced in another economy, do not count towards German economic output. If a person living in Germany buys clothes from Asia or goes on vacation in Spain, the person consumes, but the German GDP does not increase as a result. The imports therefore enter the formula with a negative sign.

Keynesian Oriented economists emphasize the possibility of a general weakness in demand. Figuratively speaking, this means that a baker would be technically able to bake a bigger or better cake, but he cannot find buyers for it. This can be due to the fact that the people who would in principle come into question as buyers of the cake are insecure and want to save money for bad times or have too little purchasing power. With their reluctance to buy, they ultimately destroy - according to the Keynesian diagnosis - the job and thus the income of the baker or his employees. In relation to the entire economy, this means that the cake is smaller than it could be due to insufficient demand, although the supply conditions (productivity and people willing to work) would in principle allow the production of a larger or better cake.

Keynesian Economists therefore often start their economic policy analyzes on the demand side. For example, in his contribution to the debate, Heiner Flassbeck criticizes Germany's dependence on permanently high export surpluses, which are interpreted as an expression of insufficient domestic demand and, according to this point of view, contribute to overseas over-indebtedness. The Keynesian criticism of the austerity policy, as outlined by Andrew Watt in his contribution to the debate, also starts on the demand side: From a Keynesian point of view, it is to be feared that the reduction in government spending and the increase in taxes in the course of the euro crisis will increase overall demand decreases and with it the GDP declines. For a given labor productivity, the number of hours worked in the country concerned must then also decrease, and there is a threat of a demand-driven rise in unemployment. From a Keynesian point of view, weak demand should be responded to with higher government spending so that employment in a country remains high or does not depend too heavily on new foreign borrowing.

The distribution side

If nobody produces (supply) or buys (demand) goods and services, no income can be created and distributed. The distribution side of GDP says that GDP is equal to the sum of wage income and profit income:

GDP = wages + profits.

The share of wages in GDP is also known as the wage share, the share of profits as the profit share.

Why is the GDP on the distribution side as large as the GDP on the production side and the consumption side? When goods and services are bought or sold, the same amount of income is generated in the selling companies. These are distributed there between the wages of the employees and the profits of the capital owners (before the state levies taxes and social security contributions and pays transfer payments such as unemployment benefits or pensions to private households and subsidies to companies).

Some keynesian Oriented economists argue that the distribution of income has an impact on aggregate demand. Jens Berger asks in his contribution to the debate: "Who should actually buy the products in the future that are being produced with ever lower wages in the euro area when nobody can afford them anymore?" This view forms a contrast to the neoclassical position outlined above, according to which wages that are too high and unions that are too powerful worsen the supply conditions for companies. From a Keynesian point of view, an increase in wages can strengthen overall economic demand (see wages as a cost factor and as a source of demand).

Out more neoclassical On the other hand, an excessive redistribution policy can burden companies with high wage costs or taxes to such an extent that the expansion or improvement of production (the baking of a bigger and better cake) is prevented.

Didactic applications on the topic

For empirical illustration I: Nominal and real GDP

On the empirical illustration II: Origin, use and distribution of GDP (Germany 2015)