Cadmus

European Transition into a Socio-ecological Market Economy

Abstract
The European Union has introduced the Europe 2020 Strategy and Horizon 2020, which contain several elements for a transition into a Socio-ecological Market Economy. But their implementations are mainly hampered by the unduly large financial sector and the political striving for high economic growth. A turn into low growth equilibrium needs a reduction of total capital inputs, which are composed of financial, man-made and natural capital. Whereas the reduction of financial capital needs a strong, but actually lacking political will, the reduction of man-made and natural capital depends on a real capital saving innovation system, which should partly be financed by a transfer of financial capital to the real productive sector. Beyond a strong reduction of financial capital and depending on existing ecological, social and economic problems, the innovation system should save man-made and natural capital accordingly. In all cases these innovations need higher qualification by means of a human-centered educational system. Higher educational investments, i.e. augmented “human capital,” are decisive for a transition into a Socio-ecological Market Economy for two reasons: First, higher qualification will augment the wage-profit relation and second, capital saving innovations will reduce productive capital inputs without reducing the profit rate on the reduced real capital stock. Increasing “human capital” intensity will accelerate the transition into low growth equilibrium with a higher consumption-investment relation, which creates more domestic final demand and needs lower export surpluses. Starting from existing high productive and financial capital intensity, during the transition saving surpluses in Europe will decline only step by step; they should not be allocated in financial markets, but for a considerably more human-centered education and real investments in Europe and the Third World.

1. Economic Crisis and Socio-ecological Market Economy
The European economic crisis has suddenly interrupted a fairly good economic development, wiped out nearly all economic progresses made since the last decade and caused a setback of several advances towards a Socio-ecological Market Economy (SEME).1 After the introduction of the Currency Union, Europe was firmly determined to establish a socially and ecologically sustainable economy and implemented – although the Lisbon Strategy was rather deceiving – a variety of corresponding measures, which made it the global forerunner in developing an SEME.2 Following the crisis, the European Union introduced the Europe 2020 Strategy and its collateral programme Horizon 2020 for re-activating and strengthening initiatives for longer term sustainability. In different respects Europe 2020 is regarded as a strategy to overcome simultaneously the economic crisis and accelerate Europe’s transition into an SEME, which would also assure global economic competitiveness. By this, the European Union intends programmatically to create a “new economy”, by which it can and should regain and enlarge its role as a global player.3 But the European approach to a transition refers only marginally to the importance of higher “human capital” and contains no coherent concepts for reducing the financial sector and a strategy for a turn into low-growth equilibrium, which are constitutive for an SEME.

In contrast, we will argue that European economic welfare can be assured by low economic growth, if prevailing high total capital intensity will be reduced in favour of considerably higher “human capital” investments, by which qualification and innovation can assure a smaller financial sector and a real capital saving productive system. It will be shown that the creation of high “human capital” and not ever augmenting financial and real capital accumulation can bring about economic, social and ecological sustainability. During the transition high saving surpluses should not be invested in the financial sector and not transferred as financial aids to economically less developed European countries, but for education and real productive investments in those countries and partly for real productive investments in emerging countries instead of further strengthening prevailing financial globalization.

2. Capital Intensity and Low Economic Growth
The European economic policyintends to augment economic growth by higher labour productivity derived from higher total capital intensity.4 It follows the classical idea that more capital equipment for a working place augments labour productivity by this economic welfare. It does only marginally consider that economic welfare can be increased by higher “human capital” investments and less financial and real capital investments. In a purely economic perspective, it neglects the profit squeezing effect of permanently augmenting capital intensity. The visible consequence of this profit squeeze in the real sector is the growth of financial investments, which in turn accelerates crowding-out of real productive investments. Low productive investments augment unemployment and public deficits, which can only be marginally reduced by export surpluses. The largely unproductive financial investments are a burden for the productive sector, because “financialisation” augments the money value of real capital. Consequently, the real sector reduces wages to compensate for the increasing cost of financial and real capital. Growing total capital intensity in Europe and the demanded returns on real and financial capital reduce wages and domestic final demand. A further reduction of wages would aggravate European economic development. The remedies are not lower wages, smaller public budgets and higher export surpluses, but the reduction of total cost for capital inputs.

From a macroeconomic perspective, total capital inputs are the sum of financial capital, man-made capital and natural capital and real productive capital is the sum of man-made and natural capital. Therefore, a reduction of financial capital would contribute to lower capital intensity and reducing man-made and natural capital would give room to higher wages and final demand without reducing the profit rate on the reduced stock of productive capital. Consequently, a lower stock of productive capital would increase economic sustainability, which is mainly defined by a sufficient profit rate. It also augments social sustainability to the extent that lower real capital inputs increase employment. And finally, lower natural capital inputs increase ecological sustainability. Reducing total capital inputs instead of reducing wages augments simultaneously economic, social and ecological sustainability.

A European transition into an SEME is confronted with the growing dominance of the financial sector. European high saving surpluses are a consequence of the uneven income distribution. Together with up-stream savings they have created a speculative financial system with high interest rates, which increases the profit squeeze in the productive sector. On a first view, low real economic growth in Europe seems to be in favour of the above sketched sustainability, because it reduces the consumption of man-made and natural capital. But European economic growth is far from the equilibrium, visible in high unemployment and the increase of purely financial wealth. Saving surpluses and easy money from central banks accelerated financial wealth inflation with minor productive effects in the past. Total economic wealth in Europe consists mainly of high financial wealth and low consumption. Under these conditions, not the real, but the nominal value of the productive system increases and reduces wages and employment. As a result the European economy has a low “consumption productivity of total capital inputs” as well as a declining employment efficiency of the productive system. Evidently, the remedies are not less consumption and employment, but a smaller financial sector and a reduction of productive capital inputs. As productive capital inputs determine real economic growth, a reduction of man-made and natural capital paves the way to low growth equilibrium.

The transition into an SEME is bound to a step by step reduction of real investments and a higher consumption-investment relation. During a transition the volume of total output declines and the relative volume of consumption will increase if the consumption-investment relation increases more than the output-investment relation. In any case, the higher consumption-investment relation needs a change of income distribution towards wages, which depends on higher employment and/or higher wages per hour. If labour is remunerated according to its productivity and the latter does not primarily depend on the reduced capital intensity, but on higher qualification, wages will augment without a parallel increase in capital inputs. This implies that labour productivity will decline because the volume of output will be reduced by lower capital investments. And capital productivity can – depending on the output-investment relation – be increased by a politically targeted capital saving innovation system. Higher qualification augments the volume of work executed per hour and reduces labour productivity for a given volume of output. And capital saving innovation augments capital productivity for a given physical volume of output. This is in conformity with the result that a transition into an SEME is bound to a higher growth rate of capital productivity than labour productivity.5

The Europe 2020 Strategy has introduced the flagships Digital Agenda, Resource Efficient Europe and several microeconomic capital saving initiatives, but has not questioned the macroeconomic strategy to augment economic growth by higher capital intensity. By this, capital saving effects are overruled by striving for higher financial and real capital accumulation and the role of “human capital” is down-sized to facilitate more real investments for higher economic growth. Moreover, the Europe 2020 Strategy has not strengthened the regional dimension beyond existing Structural and Cohesion Funds. Economic disparities between Member States have increased since the financial crisis and reducing disparities cannot be expected from high growth in the European region. The region needs not only more productive investments in economically less developed Member States, but above all higher qualification and innovation. Purely financial help packages can – as experiences in the last decade demonstrate – neither have significant employment effects, nor create a more homogeneous European economy.

Erich Hoedl: Vice-President, European Academy of Sciences and Arts
1. Europe 2020 (Brussels: European Commission, 2011), 5.
2. A European Union strategy for sustainable development (Luxemburg: European Commission, 2002).
3. Europe 2020, 8.
4. European Competitiveness Report 2003 (Brussels: European Commission, 2003), 8.
5. Erich Hoedl, “Socio-ecological market economy in Europe,” in R. Bleischwitz, P.J.J. Welfens, Z. Zhang, (eds.), Sustainable Growth and Resource Productivity (Sheffield: Greenleaf, 2009), 149.


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