Primitivization of the EU Periphery: The Loss of Relevant Knowledge

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Primitivization of the EU Periphery: Erik S. Reinert
The Loss of Relevant Knowledge
1 Introduction ing the slow integration of Spain into the
European Union in the 1980s, thus saving
The European periphery – from Greece to and strengthening Spain’s industrial sector.
Spain and the Baltic States – is hard hit by Neoclassical principles only entered policy-
economic crises in the form of unemploy- making after the Fall of the Berlin Wall in
ment and falling real wages. The immedi- 1989, and – we shall argue – with very nega-
ate reasons for these crises, ‘the straw that tive outcomes: a shock therapy resulting in
broke the nations’ back’ so to say, are not deindustrialization and ultimately depopu-
the same. The countries in crisis may have lation.
had irresponsible budget deficits or irre-
sponsible housing and property booms, but Knowledge Lost: A Brief Aside on
– as this article argues – the present under- the Financial Crisis
lying problems in the European Union can
Although this article concerns the geogra-
partly be attributed to ignoring previously
phy of production, it is relevant to look at
well-understood economic insights and
a similar case of the loss of relevant knowl-
wisdom based on the interplay between ge-
edge which occurred in the financial sector
ography, technology, and economic struc-
leading to the financial crisis. Until after
ture. This ignored knowledge abounds in
World War II financial crises – and the con-
the German-speaking literature, in this
sequent need to control the financial sec-
chapter represented by three economists:
tor – were well understood over the whole
Heinrich von Thünen, Friedrich List, and
political spectrum from left to right: Marx
Joseph Schumpeter, whose collective lives
– in Volume 3 of Das Kapital – clearly under-
span from 1783 to 1950. Although all three
stands financial crises, Lenin sees the end
worked in the periphery of what is nor-
of capitalism when finance capital becomes
mally referred to as The German Historical
dominant over industrial capital. Politically
School of Economics, they all centered their
conservative writers like Schumpeter and
analysis on a qualitative understanding of
Keynes also had a good understanding of
economic phenomena which disappeared
crises, although they differed in their policy
from ruling economic theory, and conse-
recommendations. Schumpeter’s differen-
quently also from the understanding of
tia tion between Güterwelt (the world of
politicians.
goods and services) and Rechenpfennige
It is argued that the European Union was (the accounting units or tokens that inhabit
initially built on principles emanating from the world of the financial sector) shaped
a type of geography-based economic un- Hyman Minsky’s understanding of financial
derstanding with old roots, but that the for- crises (see figure 1). He considered them
malization of economics has led to the fact as results of mismatches in the innovation
that this previous knowledge has been lost capacity of the two spheres of economy, i.e.
both to economists and policy-makers. This the innovative capacity of the financial sec-
loss occurred in two overlapping stages: af- tor far outstrips the ability of the real econ-
ter World War II when German economic omy to use these funds in a profitable way.
theory spanning from The Thirty Years’ War
Norwegian-American economist Thorstein
to World War II1 was thrown out with the
Veblen (1857–1929) differentiated between
proverbial bathing water of the Hitler re-
wealth created through what Veblen him-
gime, and it reached its final blow with the
self called idle curiosity and the instinct of
neoliberal ‘triumphalism’ starting with the
workmanship (newly created wealth), and
Fall of the Berlin Wall.
wealth created from a predatory instinct Prof. Dr. Erik S. Reinert
The type of economic understanding rep- (appropriating wealth that had already Tallinn University of Technology
resented by this qualitative economic tradi- been created by harvesting where others Ragnar Nurkse School of
Innovation and Governance
tion, as opposed to the incoming neoclas- had sown). Veblen’s heroes were the inno-
Akadeemia street 3
sical tradition, continued to be applied in vative entrepreneurs, like Henry Ford, and
12618 Tallinn, Estonia
actual economic policy until and includ- he disapproved of businessmen making E-Mail: [email protected]
26 Erik S. Reinert: Primitivization of the EU Periphery: The Loss of Relevant Knowledge
Figure 1 nations have been voided of the core eco-
Distinguishing the Real Economy from the Accounting Units nomic area of von Thünen’s Isolirte [sic!]
Staat, that the three core theses of Friedrich
The Real Economy Financial Economy
List’s model for the diffusion of free trade
”Güterwelt” ”Rechenpfennige”
have been violated, and that the qualitative
distinction between what we call Schumpe-
terian and Malthusian activities has been
abandoned. Taken together, Thünen, List
”Black Box” and Schumpeter provide a qualitative un-
Production
Money/Capital derstanding of economic development in
of Goods and
Services space and time, a type of understanding
which reigned in Europe until the end of
the 1980s, including the policy which inte-
grated Spain into the European Union. The
economic ideas which subsequently inte-
grated the former Eastern Block countries
had completely lost the insights from von
Source: own illustration Thünen, List, and Schumpeter. Yet, the ut-
most importance of including the insights
money by ‘withdrawing efficiency’ – i.e. by of these three economists shall be dis-
creating obstacles to economic innovations cussed in the following.
and change – and of the vested interest of
the financial sector. 2.1 Von Thünen’s Model
of Concentric Circles
In the United States evolutionary and in-
stitutional economics, both improbably While economists have recently attempted
founded by Thorstein Veblen, played the to reintroduce geography – a process which
same role as the historical schools played has seen Paul Krugman as a major contribu-
in Europe. The financial crisis of the 1970s tor – Heinrich von Thünen (1783–1850) is
(commonly called the Oil Crisis) was solved considered an early protagonist in the field
when Veblen’s student’s student Arthur F. of economic geography. Thünen drew a map
Burns (1904–1987) was at the helm of the of a civilized society with four concentric cir-
Federal Reserve until 1979. Burns solved cles around a core of increasing returns ac-
the crisis by keeping wages and demand tivities – the city (see figure 3). Moving out-
up and creating an inflation which made it wards from the city core, the use of capital
very unprofitable to hold idle cash balances, and advanced skills gradually decreases and
thus forcing speculative capital back into
Figure 2
the real economy. In other words: Burns
Johann Heinrich von Thünen
carried out the opposite of the austerity
policy being carried out today. So, also in
terms of understanding financial crises,
there was a lag between the teaching on ne-
oclassical principles and their application
in real policy.
2 The Ignored Knowledge of
von Thünen, List and Schumpeter
This chapter looks at the insights provided
by three German speaking economists from
the same historical period who explicitly
and implicitly worked with economics in
geographical space: Heinrich von Thünen
(1783–1850), Friedrich List (1789–1846),
and Joseph Schumpeter (1883–1950). It is
Source: Warren J. Samuels Portrait Collection,
(1) argued that a main cause of the problems Rubenstein Rare Book & Manuscript Library, Duke
See also Reinert 2005. of the European periphery is that these University
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Heft 1.2013 27
the use of nature gradually increases. Near Figure 3
Simple Visualisation of Von Thünen’s
the city the most perishable products are
Concentric Circles
produced, such as dairy products, vegetables,
and fruit; grain for bread is produced further
out, and in the periphery there is hunting in
the wilderness. Economists today have re-
discovered Thünen’s approach to economic
geography, but many miss the crucial point
he stresses, namely what stands on the lines
on the first page of the Isolirte Staat: ‚Man
4 3 2
denke sich eine sehr große Stadt in der Mitte
einer fruchtbaren Ebene gelegen.’ The need
for the city activities, for example industry,
may not be ignored.
Since von Thünen was a farmer and mainly
interested in the improvement of agricul-
ture, he does not pay too much attention
to the factories in the city, even though
Source: Wikimedia Commons
they are also mentioned in his book. It was
the common sense of the day that the in- advantage (subject to diminishing returns)
creasing returns of city activities needed increases. As we move outwards in the cir-
tariff protection in order to get the entire cles, the carrying capacity of the land in
system to function; there was no need for terms of population also diminishes.
von Thünen to argue for or against that es-
The importance of the linkages and syner-
tablished practice. Thünen did not argue
gies for agricultural development, seeing
against the accepted knowledge of the time
the benefits accruing to agriculture from
that a state needed manufacturing indus-
the proximity of manufacturing, was per-
try. Underlying what happened in Thünen’s
haps the most important new insight in
outer circles was a development machine
economics during the early 1700s. This was
at the core of the concentric circles – the
also reflected in English literature at that
urban increasing returns industries (manu-
time: ‘Husbandry … is never more effec-
facturing) – which, at least for a time, need-
tually encouraged than by the increase of
ed targeting, nurturing, and protection. In
manufactures,’ says David Hume in his His-
other words, the presence and state of de-
tory of England (1767: 65, Vol. III).
velopment of the core city would also deter-
mine the standard of living in the rest of the Thünen’s model pictures all the stages of
country, in these outer circles. development inside one nation-state, one
labour market, one school and university
Thünen drew a version of the traditional
system, and one social security system. The
stage theories (Stufentheorien) in econom-
synergies that David Hume points to are
ics – what in later German literature came
partly the result of an equal access to basic
to be called Wirtschaftsstile – onto a map
institutions and government services accru-
where the most ‘modern’ sector, manufac-
ing to the ‘hunters’ in the outermost circle
turing, formed the city core, and the most
as well as to the city dwellers. The local city
‘backward’ sector, hunting and gathering,
market does to national agriculture what an
formed the periphery furthest from the
international market can never do. Prox-
city. Moving outward away from the city,
imity to a city in the same labour market,
the use of nature as a factor of production
rather than abroad, assures employment for
increases and the use of capital decreases.
the second and third son on the farm. The
Only the city will have authentic increasing
wage pressure from the city activities makes
returns, free from nature’s flimsy cyclicality
labour more expensive in the countryside,
and supply of resources (land, minerals) of
allowing for technological change that
different qualities.
would never be profitable with low wage
As one moves from the city towards the pe- rates. The proximity to the city gives access
riphery, man-made comparative advantage to advanced technology and expertise that
(subject to increasing returns) gradually a rural-only nation would never achieve. All
diminishes and nature-made comparative in all von Thünen’s model provides a useful
28 Erik S. Reinert: Primitivization of the EU Periphery: The Loss of Relevant Knowledge
picture for development as a synergy be- tivities are qualitatively different, subject to
tween town and countryside. more capital and less nature (economic pro-
gress), or, conversely, with less capital and
The free trade shock to which the former So-
more nature (economic retrogression). Von
viet Block countries were subject following
Thünen established a framework that ena-
1989 thoroughly upset von Thünen’s model,
bles the study of economic primitivization
killing off a manufacturing sector which
which occurs when his concentric circles
had been created in all countries. The most
are being hollowed out with the loss of the
advanced sectors in the least advanced
core city activities.
countries died out, not only the European
part, but the whole former Soviet Block and
2.2 Friedrich List’s Economic Principles
its division of labour based on the COM-
ECON trade area was severely deindustri- Even though Friedrich List (1789–1846) is
alized. More skill- and capital-intensive ac- largely ignored in today’s economics text-
tivities at the core of the once Isolirte Staat books, his economic principles not only in-
died out, and were replaced by activities dustrialized Continental Europe in the 19th
which take place in the outermost circle, century, but he was also a very early vision-
offering much nature and little capital and ary of a united Europe, and inspired Euro-
skills. Hand-peeling of shrimps in Holland pean integration from the early 1950s until
was moved to locations with cheaper labour and including the successful integration of
like Poland. The Baltic countries closed Spain and Portugal into the EU in 1986. The
down their heavy industry and got a formi- European Union followed the Listian policy
dable comparative advantage in activities of opening up for free trade between sym-
like picking wild mushrooms. Today, even metrical partners all with a healthy industri-
outside the EU – in Norway and Switzer- al fabric. A slow pace of integration, slowly
land – there are hardly any Eierschwämme2 building down tariff barriers, was done with
picked locally any longer. These products, the preservation and strengthening of the
typically from the most nature-intensive industrial symmetry in mind. So, for a cer-
and least capital-intensive outermost circle tain period of time, the academic division
in von Thünen’s system, now all come from of labour in Europe was clear: Friedrich List
Eastern Europe. This represents a primitivi- ruled the field of practical policy, while neo-
zation of the economies of those countries. classical economics ruled in the econom-
ics textbooks. Slowly, starting with the free
The European periphery has been subject
trade shock after the Fall of the Berlin Wall,
to what I have called the Vanek-Reinert Ef-
and continuing with the integration of ten
fect: When two nations at widely different
new EU countries in 2004, List’s principles
technological levels integrate, the first casu-
were abandoned in favour of the same text-
alty is the most advanced economic activity
book economics that dominate the Wash-
in the least advanced nation. I argue that
ington Consensus.
this effect represents one of the mecha-
nisms of primitivization that accompany Figure 4
free trade shocks and premature globaliza- Friedrich List
tion. This effect in turn contributes to fall-
ing employment for skilled people, to fall-
ing wages and factor price polarization, and
consequently to migration of skilled labour.
For example, Southern Italy was subject to
this effect with the unification of Italy dur-
ing the late nineteenth century: industry
died out and migration resulted. A more
current example can be observed in Latvia:
more than 20 % of the population has left
Latvia since the country joined the EU in
(2) 2004.3
Chantarelles, a type of mush-
room. While neoclassical economics have no tools
(3) to comprehend and describe this phenom-
This was the provisional result
enon, it can easily be explained in von
of the last Latvian population
census. Thünen’s framework where economic ac- Source: Wikimedia Commons
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Heft 1.2013 29
A worrying aspect of this is that even the Table 1
Contrast of Listian and Neoclassical Principles
countries that are hailed as success stories
of the recent European integration have Listian Principle Opposing Neoclassical Principle
serious problems of social cohesion: appar- The preconditions for wealth, democracy All economic activities are qualitatively alike, so
and political freedom are all the same: a it does not matter what you produce. Ideology
ently successful urban administrative cen-
diversified manufacturing sector subject to based on ‘comparative advantage’ allowing
tres contrast starkly with rural poverty. With increasing returns (which would historically nations to specialize in economic activities that
mean manufacturing, but also includes a require little knowledge, operate under perfect
my Estonian colleague Prof. Rainer Kattel,
knowledge-intensive service sector). competition and diminishing returns, and/or
I attempted to create a rough index for re- lack any scale economies and technological
change. In other words: making it possible for
gional inequality. Based on the monthly
a nation to specialize in being poor.
rent of a city apartment of 100m2 in the na- A nation first industrializes and is then gradu- Free trade is a goal per se, even before the
tional capital, we measured the distance to ally integrated economically into nations at required stage of industrialization is achieved.
the same level of development.
the area where, with the same amount of
Economic welfare is a result of synergy. ‘There is no such thing as society’, Margaret
money, you can purchase a whole house. In Investments in infrastructure, education and Thatcher (1987).
science are an integral part of this type of
Norway this monthly rental to full owner-
policy.
ship index lies at around 2.000 kilometers,
Source: own comparison
from Oslo to Vardø at the Arctic Sea in the
extreme North. In Estonia, this distance is
being superseded by new distinctions – be-
down to less than 100 kilometres from Tal-
tween those countries embracing technolo-
linn. In spite of its success in high-tech in-
gy and globalization, and those that remain
novations Estonia is one of the nations in
behind’ (1998: 130f.). As I see it, the Euro-
Europe with the worst income distribution
pean Union strategy is too simplistically
and where the demographic development
based on this view: an abstract and empiri-
suggests that the population will be halved
cally ungrounded view that technology and
by 2050. Unfortunately, instead of facing up
innovation are enough to solve most prob-
to these problems, Europe’s present mood
lems, regardless of context.
is to gloss over reality and present Estonia
as an unmitigated European success story. At the global level, the most populated na-
tions on the planet – China and India – had
Table 1 shows the contrasting juxtaposi-
followed for more than 50 years a Listian
tion of three of List’s key principles with
economic policy protecting industry. They
standard textbook economics. The present
benefited from globalization, while many
neoclassical economic principles must be
small nations in Latin America, in Africa,
abandoned in favour of the old Listian prin-
and in Asia were deindustrialized. Yet, Rug-
ciples. Just as with von Thünen’s insights
giero further talks about ‘the potential for
described above, these Listian principles
eradicating global poverty in the early part
cannot be captured by the tools of the rul-
of the next century – a utopian notion even
ing economic paradigm. Understanding
a few decades ago, but a real possibility to-
List requires understanding qualitative dif-
day’ (ibid.).
ferences between economic activities, di-
versity, innovations, synergies and histori-
2.3 Schumpeter’s Concept of Innovation
cal sequencing of processes. These are all
and Creative Destruction
blind spots in standard economics, espe-
cially in their interacting and cumulative to- Joseph Schumpeter (1883–1950) was born
tality. The failure to understand the wisdom one hundred years after von Thünen (1783)
of the Listian principles which previously and also passed away one hundred years af-
upgraded the common interests of Europe ter von Thünen did (1850). Adding Schum-
has produced an economic and social race peter to our discussion creates a 200 year
to the bottom. lasting sequence of visions that are inter-
nally consistent and complementary vi-
The vision of WTO’s first director Renato
sions to the problems of Europe today. They
Ruggiero on the operation of the world mar-
stand in sharp contrast to neoclassical
ket may stand as a prototype for the new
economics – individually and as a group of
view that also penetrated European Union
theories.
thinking. This global vision was centered
around ‘the borderless economy’s potential Schumpeter is increasingly known today for
to equalize relations between countries and his perspective of creative destruction, the
regions’. ‘At the global level’, Ruggiero says, idea that economic progress is achieved
‘old divisions between North and South are through incessant innovations which make
30 Erik S. Reinert: Primitivization of the EU Periphery: The Loss of Relevant Knowledge
Figure 5 fect competition of creative destruction; in-
Joseph Schumpeter
novations which create higher profits, high-
er wages, higher tax incomes, and higher
living standards. Malthusian activities are
those which are void of these characteris-
tics, therefore not providing increased wel-
fare but poverty and population pressure.
The present European understanding of in-
novation tends to apply the term inside a
neoclassical framework with an underlying
assumption that all economic activities are
qualitatively alike. An example shall explain
why this approach is wrong: assume the
employees of a Berlin hospital are placed
in two different countries; the surgeons
and other highly qualified personnel are
put in one country and the people washing
the hospital floors are put in another. If we
Source: Warren J. Samuels Portrait Collection, open up for free trade we will find that the
Rubenstein Rare Book & Manuscript Library, Duke country where the surgeons live will have
University
much higher wages and a much higher
older technologies obsolete and unprofit- standard of living than the country where
able. However, the perspective in Europe the people who wash the floors live. The
today has shifted to a neoclassical view experiment would result in factor-price po-
where all economic activities are assumed larization rather than factor-price equaliza-
to be qualitatively alike. If we instead su- tion.
perimpose Schumpeter’s world view on a
Modern European Union policy would pre-
theory based on Heinrich von Thünen and
scribe innovation as the solution to the na-
Friedrich List, we get an entirely different
tion of floor washing. Apply more capital
picture and entirely different policy recom-
per employee and employ only people who
mendations.
have Ph.Ds in washing floors could be a
Economic activities are not alike; however, start. The problem is that people who wash
neoclassical economic theory implicitly floors are poorer precisely because there is
claims exactly the opposite. Table 2 explains no way one can profitably add much more
by which mechanisms some economic ac- capital to that activity, and that for the ex-
tivities create more wealth (the Schumpet- act same reason there are just no Ph.Ds in
erian activities listed on the left side), while washing floors. The same applies to clean-
others make nations stay in poverty (the ing shrimps or picking Eierschwämme.
Malthusian-type economic activities listed These are – at the moment – technological
to the right). Schumpeterian activities are dead-ends, corresponding to the outer-
those which produce the dynamic imper- most circle of von Thünen’s concentric cir-
cles, corresponding to the kind of economic
activities which Friedrich List understood
Table 2
Contrast of Schumpeterian and Malthusian Economic Activities must be complemented with high-tech in-
dustrial activities in order to make a coun-
Characteristics of Schumpeterian activities Characteristics of Malthusian activities
(= ‘good’ export activities) (= ‘bad’ export activities if no try rich, and void of the criteria that inhabit
Schumpeterian sector present)
Schumpeterian economic activities as out-
Increasing returns Diminishing returns lined above. The factor-price dilemma cre-
Dynamic imperfect competition ‘Perfect competition’
ated cannot be understood in the present
(‘rent-seeking’) (commodity competition)
Stable prices Extreme price fluctuations mental framework of the European Union,
Generally skilled labour Generally unskilled labour but may be understood in the frameworks
Creates a middle class Creates a ‘feudalist’ class structure of von Thünen, List, and Schumpeter.
Irreversible wages (‘stickiness’ of wages) Reversible wages
Technical change leads to higher wages for the Technical change tends to lower price for the
producer (‘Fordist wage regime’) consumer
Creates large synergies (linkages, clusters) Creates few synergies
Source: Reinert 2007
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Heft 1.2013 31
3 Europe’s Failed Response: the technology policy of the EU essentially
The Lisbon Strategy as a List of was a laundry list of good intentions, which
Good Intentions – because the analysis was framed in a neo-
classical framework – failed to cope with
What brought Europe into the present con- the real dynamics of world capitalism:
fusion and disorder is a mainstream eco-
‘The Lisbon Strategy appears to have
nomic theory that abdicated from studying
been superimposed on the neoclassi-
key aspects of capitalist dynamics, includ-
cal economic framework dominating in
ing the dynamics of technology and finan-
the 1990s, where the market is a great
cial crises. The failure to understand dy-
equalizer and creator of economic or-
namics led to a ‘tyranny of good intentions’
der and harmony. In many parts of the
that frequently produced disasters. Instead
global periphery it is increasingly clear
of developing Africa through industriali-
that globalization creates more poverty,
zation – as had been the Post World War II
not less. It is reasonably clear that such
project – well-intentioned aid brought the
trends – exemplified by East Germany –
continent from traditional colonialism into
may be found within the EU. As I see it,
an equally humiliating ‘welfare colonialism’.
the further debate ought to be based on
The good intention of including Greece in
an analysis of what went wrong in the
the Euro project ended in an unmitigated
past, and it should move away from the
disaster produced by the parallel forces of
neoclassical tradition of discussing pol-
deindustrialization and a financial setup
icy void of its context. A policy may be
that prevented much-needed exchange-
excellent in one set of circumstances, but
rate flexibility.
counterproductive in another. I argue for
The failure to understand what once were bringing back the Continental European
basic economic principles of accepted economic tradition that created Rhine
common sense made it possible for Euro- Capitalism: a society where the market
pean politicians to create a ‘united Europe’ is a tool rather than a goal in itself, and
on a foundation that could not withstand where economics is defined as the study
normal economic gravity. The intentions, of the economy as a real object in a spe-
although noble, produced the opposite re- cific context, not defined in terms of the
sult of what was intended: economic and adoption of core assumptions and tech-
social disharmony rather than harmony. niques.’ (Reinert 2006)
The good intention of including the periph-
Both in terms of financial and of techno-
eral EU countries – like Greece – into the
logical dynamics the European Union has
common currency, has turned out to be an
lived in a fairytale world of simplistic neo-
economic nightmare to the Greeks. In both
classical economics. Many problems have
situations noble intentions in a simplistic
been evident for a long time, and the spe-
neo-classical economic framework created
cific European Union issues have been
disasters. Europe is now stuck with a dys-
covered in detail in two joint papers by an
functional economic theory that fails to
Estonian colleague and myself (Kattel/Rein-
provide the tools that used to make change
ert 2004, 2007). There are strong parallels
happen, presently tearing its economic and
between these failures in the policies of fi-
social fabric apart. Whereas crises previ-
nance and of technology. Quoting from my
ously could be solved through devaluations
chapter, written for the European Union’s
in the affected nations, this solution is now
own research unit, both discussions appear
blocked. Europe has unknowingly accepted
as ‘a long list of good intentions which – it
the US model which solves problems by
seems implicitly to be assumed – necessar-
moving people rather than by adjusting
ily will lead to success’. In both aspects – in
currencies.
the financial crisis and in terms of its dete-
The same unfortunate combination of no- riorating ability to employ its population in
ble intentions and lack of understanding of well-paid jobs (also referred to as competi-
real-world economic dynamics also haunts tiveness) – Europe has hit a wall. In parallel,
European technology policy. Having been the decades of focus on ‘limits to growth’
engaged in a project for the EU Institute for have for many Europeans mutated into a
Prospective Technological Studies (IPTS), belief in ‘limits to innovation’, at times al-
my conclusion in the IPTS report was that most evoking a yearning for some kind of
32 Erik S. Reinert: Primitivization of the EU Periphery: The Loss of Relevant Knowledge
technological retrogression. However, what 4 Conclusion
we measure as GDP and growth is relative-
ly arbitrary. If the clean energy that in the In the European periphery the advancing
future will substitute oil initially is more financial crisis superimposed austerity and
expensive than its dirty predecessor, clean- frozen exchange rates on an already ad-
ing up the planet will necessarily appear as vanced process of deindustrialization. In
economic growth. these regions – from Greece to the Baltic
States – real wages are falling, both in real
As Lionel Robbins wrote more than 50 years
terms and as a percentage of GDP. Seen
ago, the basic features of the neoclassical
from Heinrich von Thünen’s theoretical
paradigm produce a Harmonielehre, a theo-
scheme we can describe what is happen-
ry where economic harmony is already built
ing in terms of hollowing out his scheme of
into the assumptions on which the theory
concentric circles, killing off the industrial
rests. Today, this paradigm hinders rather
activities of the city which is the nucleus
than helps our understanding of the rea-
of his system. In terms of Friedrich List’s
sons behind poverty. As Thomas Kuhn says:
insights, we have neglected the precon-
‘A paradigm can, for that matter, even in- ditions for successful sequencing of eco-
sulate the community from those social- nomic integration. As to Schumpeter, we
ly important problems that are not re- have removed Schumpeterian activities
ducible to the puzzle form, because they from the peripheral countries. The Listian
cannot be stated in terms of the concep- and Schumpeterian processes of increas-
tual and instrumental tools the paradigm ing wealth have been put in reverse, now
supplies.’ (1962: 37) increasing poverty instead of increasing
wealth. The sequencing in Greece and Lat-
Any long-term solution both for Europe and
via is the same one we recognize from the
for the poor nations of the world will have
globalized periphery: first deindustrializa-
to rest on a theory of uneven development –
tion, then deagriculturization (e.g. death of
a theory which addresses these blind spots
agriculture), and finally depopulation.
of economics which obfuscate our collec-
tive view. Such a theory once existed at a What to do? The first age of globalization
level complete enough to create successful ended with a return to tariff protection. The
economic policy for 500 years – from Henry Rise and Fall of the Free Trade Movement
VII’s policy in England in 1485 to the inte- was the appropriate book title published
gration of Spain and Portugal into the Eu- by Cambridge economist William Cunning-
ropean Union in 1986 – but is now virtually ham in 1905. Today it is clear that while the
extinct in any faculty of economics. world took for granted that the factor price
equalization produced by free trade would
Tensions within the European Community
mean an upward adjustment of real wages
are results of the same economic forces
for all, there are in reality strong pressures
that create poverty in the world periphery.
towards a downward factor-price equaliza-
People in the old member states in the Eu-
tion combined with increased unemploy-
ropean Union feel betrayed because their
ment. This produces a wake-up call both for
welfare is being eroded, while people in the
the global economy and for the European
new member states feel betrayed because
economy.
welfare is not arriving as fast as expected.
This completely new and unanticipated ‘Because the private interest of each indi-
situation causes people to ask the same way vidual, when it coincides with the public
they ask about globalization: what went interests, is always the safest guarantor of
wrong? The answer lies in the loss of the public happiness’, says Pietro Verri (1771:
insights from von Thünen, List and Schum- 42). Adam Smith’s (1723–1790) followers –
peter. in fact more than Smith himself – changed
this into a system where private interests,
by definition and in any context, not only
coincided with the public interest, but
alone were sufficient to create public hap-
piness. In the triumphalism following the
Fall of the Berlin Wall it looked as if Smith
Informationen zur Raumentwicklung
Heft 1.2013 33
had been right, now it is increasingly clear conditions of German industry of his
that we have to modify this view. time. His laissez-faire was a laissez-faire
plus watchfulness, his private-enterprise
The conclusions of a 2005 meeting of the
eco nomy a machine that was logically
European Council correctly and impor-
automated but exposed to breakdowns
tantly stated: ‘Europe needs a solid indus-
and hitches which his government was
trial fabric throughout its territory’. This
ready to mend. For instance, he accepted
insight was recently ‘rediscovered’ and re-
as a matter of course that the introduc-
stated by the EU in the fall of 2012. To this
tion of labour-saving machinery would
industrial vision must also be added the
cause unemployment: but this was no
importance of the knowledge-intensive ser-
argument against the mechanization
vice sector which exhibits the same Schum-
of production because, also as a matter
peterian qualities traditionally associated
of course, his government would find
with industry. However, solely applying a
equally good employment for the unem-
Schumpeterian ‘icing on a solid cake of
ployed. This, however, is not inconsist-
mainstream theory’ is an example for the
ency, but sense. And to us who are apt to
insufficient use of the combined theories of
agree with him much more than we do
von Thünen, List, and Schumpeter. In the
with A. Smith, his (Justi’s) vision of eco-
meantime Asia, particularly China, has in-
nomic policy might look like laissez-faire
corporated the old European type of indus-
with the nonsense left out.’ (1954: 172)
trial policy.
There is a cyclical element in economics:
In 1841 Friedrich List gave Continental Eu-
in the 1840s the economic wisdom of Verri,
rope a theory on how to achieve a balanced
Justi and their contemporaries had been re-
growth and how to industrialize against
placed by Ricardian economics where the
the fierce competitiveness of England. List
market was seen as producing harmony.
stated that symmetrical integration of in-
Contrary to the predictions of Ricardian
dustrialized nations where each industrial
economics, what was then called the social
structure survives is beneficial to all parties,
question shattered Europe and led to revo-
a typical win-win situation. Today, Europe
lutions in all large European countries with
has created a situation which rather ap-
the exception of England and Russia. How-
pears as a lose-lose situation to many of its ever, Marx’ spectre of communism sparked
inhabitants, both in the old and new mem- economic reform, where the Verein für So-
ber states. As I see it, these are problems zi alpolitik, literally the Association for So-
that will require the resurrection of some of cial Policy, produced economic and social
the recently abolished tools from the policy institutions that created the European wel-
toolbox, together with the factually based fare state. Gustav Schmoller took the lead-
continental economic theories that created ership of the Verein from the start in 1872.
them. Chancellor Bismarck’s support of this line
of economic research was key to its success.
Joseph Schumpeter’s contrast of the work
of Adam Smith and German economist Following the 1848 upheavals, timely fact-
Johann Heinrich Gottlob von Justi (1717– based, context-specific and problem-ori-
1771) provides a description of economics ented economics – rather than Ricardo’s
which can be suggested for the European assumption-based, context-free and highly
Union: abstract theories – chased away the ‘specter
of communism’ and laid the foundations
’He (Justi) saw the practical argument
for democratic social market economies. As
for laissez-faire not less clearly than did
Keynes wisely said, the real issue was not
A. Smith. (…) Only he saw much more
one between collectivism and laissez-faire,
clearly than did the latter all the obsta-
but between targeted state action and a so-
cles that stood in the way of its working
cialism which was out of date and contrary
according to design. Also, he was much
to human nature (cf. Skidelsky 1995: 152).
more concerned than A. Smith with the
practical problems of government ac- In this long term perspective today’s po-
tion in the short-run vicissitudes of his litical situation in Europe carries with it a
time and country, and with particu- strong sense of déjà vu. Again Europe has
lar difficulties in which private initia- fallen victim to the simplicities of Ricard-
tive fails or would have failed under the ian economics, a theory that – as English
34 Erik S. Reinert: Primitivization of the EU Periphery: The Loss of Relevant Knowledge
economic historians readily used to admit someone sweeping the streets of Paris or
– was created in order to let England keep Frankfurt. Tensions are too big and the
its world industrial monopoly and convince number of people and vested interests in-
the rest of the world to accept their roles of volved is too high for the market alone to
suppliers of raw materials. Europe has start- create a happy end. In fact what is missing
ed to believe in what once was the propa- is old-fashioned Staatsklugheit, or expe-
ganda version of its own economic theory, rience-based wisdom among the political
while China has understood the games of elites.
von Thünen, List, and Schumpeter.
The present situation of Europe requires
It appears we may be doomed to repeat more than the Lisbon Strategy’s list of good
conflicts that we had previously managed intentions focusing around innovations, it
to solve. One important reason for this needs to bring back economic thinking and
retrogression is that the triumphalism fol- economic tools that had been abandoned
lowing the Fall of the Berlin Wall made us in the 1990s. This includes bringing back
collectively forget the wise targeted state the earlier focus on employment that domi-
actions that modified the pure market nated the period after World War II. It also
economy. If communism failed, so Europe means a qualitatively much more profound
seems to have reasoned in the 1990s, the and differentiated analysis of technology
market had to be perfect. Based on this the and innovations and their economic conse-
2004 enlargement was agreed. quences on both wages and employment, at
Compared to the rest of the world, many company, community, and national level. A
things are not really that bad. If we com- framework of equilibrium theory is neither
pare European productivity data to those of adequate nor effective to study the phe-
the United States and correct for the hours nomena that create the economic differ-
worked, we find that European productiv- ences which now haunt Europe. We are in-
ity is in fact doing well. The biggest – and stead in a situation dominated by processes
rapidly growing – problem is self-inflicted, of cumulative causation. The now practi-
namely the downward pressure on real cally defunct continental European tradi-
wages and the welfare system in ‘old Europe’ tion of economics is much better suited to
coupled with extremely low real wages and tackle such a task. Above all, the discussion
huge un- and underemployment in the new of the Lisbon Strategy must be lifted out of
member states. These problems are two the generic and context-free into a context
sides of the same coin. A widely proclaimed where present problems – caused both by
success story of the new member states, Es- the shock therapies of the 1990s and the
tonia’s electronic industry, produces hourly challenges from Asia – are recognized as be-
wages of about one Euro, which equates ing the real challenges to European Union
to approximately 10 % of the earnings of policy.