German Orthodoxy Starting to See the Need for New Economic Thinking

While German economic policy makers continue to cling to neoclassical economic approaches, an increasing number of prominent economic figures are starting to accept the failure of orthodox theories to address the current crisis and are expressing the need to rethink fundamental economic concepts.

Case in point: Thomas Straubhaar. Straubhaar is director of the Hamburg Institute of International Economics and before the euro crisis was an influential, outspoken proponent of neoclassical economic theories and policies. But recently, he has come to question those beliefs, a change of heart that made him subject to personal attacks by fellow neoclassical economists offended by his open criticism of the economic orthodoxy.

So there Straubhaar was on June 19 at the Mercator Project Centre in Berlin, a key figure at a Global Climate Forum workshop about the need for new economic thinking in Germany and Europe. Speaking in a public interview with Thomas Fricke, chief economist at the Financial Times Deutschland, Straubhaar said, “We need more than a single new paradigm.”

Straubhaar acknowledged that in hindsight the deregulation that has occurred since the Reagan years did not bring about an effective governing structure for the financial markets. Instead, for the most part market failures have been the rule, not the exception.

“We have learned that rules which we thought were good for the micro-level aren’t necessarily good in the aggregated macro-level,” Straubhaar said. This applies in particular to the financial sector, which had been hailed as the most free and efficient market by the orthodoxy.

“The crisis has revealed the existence of systemically relevant institutions”, Straubhaar said, and the effect and repercussions of their collapse was completely underestimated.

These repercussions have lead Straubhaar to question the economics discipline itself. He expressed the need to widen the range of methods and tools available to economists. To Straubhaar, economics has become monolithic, both in research and in university-level teaching.

Still, despite all of the criticism he has unleashed on the neoclassical approach, Straubhaar doesn’t see the need to abandon it. “I am still a neoclassical economist,” he said. Thus, he will continue working with the same premise that (perfect) markets are efficient and that the role of the state should be limited. He will, however, display more humility going forward.

And with regard to the euro crisis, Straubhaar admits that he supports Angela Merkel’s strategy of “muddling through.” In economic theory, oftentimes the corner solutions (such as euro bonds) are not efficient. So to Straubhaar, a step-by-step evaluation of all available options seems a viable strategy.

Is this a step in the right direction for Germany, Europe, and the world? Time will tell. But Straubhaar should be applauded for his courage in being willing to challenge the status quo.

Click here For more information on the day-long workshop