The welfare state: under the wheels of market-liberal populism

By Ulrich Thielemann

[This article posted on July 1, 2025 is translated from the German on the Internet, https://makroskop.eu/24-2025/wie-der-sozialstaat-unter-die-rader-des-marktlibertaren-populismus-gerat/.]

CDU Secretary General Carsten Linnemann wants a “major citizen’s income reform” that goes “to the heart of the matter” – more precisely, to the foundations of the welfare state.

A study commissioned by the association Sanktionsfrei (Sanction-Free) has revealed, among other things, that 54 percent of parents who receive citizen’s income say they go without food so that their children have enough to eat.

When asked about this during a press conference recorded by Phoenix TV, CDU Secretary General Carsten Linnemann responded by saying that he did not want to comment on individual benefit rates – and therefore also not on the situation of those affected by poverty. Instead, he wanted to emphasize that he was striving for a “major reform of the citizen’s income,” one that, as he had said a few days earlier, would “get to the heart of the matter.”.

Apparently even more than today. As Linnemann had previously stated, it should also be possible to completely abolish citizen’s income. However, this has so far failed due to the Basic Law, or at least the interpretation of Article 20 of the Basic Law by the Federal Constitutional Court, which defines the Federal Republic of Germany as a “social federal state.”

First- and second-order solidarity

This reform is based on a peculiar interpretation of the idea of “solidarity” across society as a whole. On the one hand, solidarity with those “who, for whatever reason, cannot work.” On the other hand, solidarity between those affected by poverty and those currently in employment, whose tax contributions make the citizen’s income system possible in the first place.

Linnemann fails to mention the implied “solidarity” with those who earn capital income, who – with increased capital or, depending on the case, skimming rates – are hardly called upon to finance the welfare state anyway, and are thus spared, and this is deliberately being reduced. This seems to be a matter of course to him. And to name it could raise uncomfortable questions.

This second dimension of solidarity – i.e., that at the bottom with those at the top and in the middle, which at least relativizes, if not completely neutralizes, the first, original dimension of solidarity – means that citizen’s income must be based on the principle that “those who can work must also go to work.” No matter what the conditions. At least under the conditions that the market currently offers.

Linnemann does not say this, of course, but he must mean it. And these conditions are not to be tampered with in any way. Linnemann’s CDU rejects an increase in the minimum wage, for example. And it also rejects a move away from exportism, which implies wage moderation, in favor of strengthening domestic demand, which would require the opposite.

Linnemann believes that he can rely on “millions of Germans” who do not consider the current system of basic social security to be ‘fair’ – because it is (still) too generous or perhaps fundamentally flawed – for his solidarity coup, which is ultimately intended to eliminate genuine solidarity. Admittedly, “a few million Germans” may only be a small minority out of 72 million citizens. But in fact, this is how many of those who “have to go to work” feel – under the conditions they were able to secure.

A 2023 MDR survey found that 62 percent of respondents from Saxony, Saxony-Anhalt, and Thuringia considered a proposed increase in basic income at the time to be too high. Moreover, 73 percent wanted “tougher sanctions.” One respondent said that an increase in basic income (or basic income itself?) was “a slap in the face for those who work for little money.”

Identifiable and unidentifiable authorities

Those who “have to go to work” (Linnemann) under the current conditions because they would otherwise have no income, and (as Linnemann points out) because the welfare state would not provide them with dignified support but would instead treat them in a degrading manner if they lost their source of income, which further increases the pressure, only address “the welfare state” and not the market. For only the latter is a tangible entity: there are politicians, parties, and political commentators who vote for or against the establishment of a dignified welfare state, which, depending on the majority, leads to its expansion or dismantling.

They do not address the conditions that force them to accept their jobs—in some cases for “little money.” Nor do they address the market conditions that have turned those affected into welfare recipients. For in the competitive market, these conditions are ultimately not personally identifiable as “masterless slavery” (Max Weber).

There are the many unknown buyers who are no longer buying or will soon be unable to buy (latent competition). There are the known competitors, or those who appear out of nowhere, previously unknown, from the same industry or from completely different industries (if the industry as a whole is shrinking), to whom customers are migrating. Without knowing who “the competitors” actually are. Their management, their employees, their frequently changing investors? Their suppliers, who deliver inexpensive and high-quality intermediate products, and then these three groups again. All this in a highly complex field of long, difficult-to-overview supply chains?

The lack of authority and addressees in the market nexus, which is created by the “invisible” (Smith) or “hidden hand” (Bhagwati) of competition, means that responsibility (for falling or lost income, or even for the stress of preventing this) is converted into “personal responsibility.” And many people think: “Nobody helps me either. Why are these lazy bums being helped? It’s unfair.” When they feel anger about the prevailing economic conditions, it is “anger without a target.”[1] Or, of course, anger at scapegoats they think they have identified: foreigners, woke people.

It wasn’t always the case that people like Linnemann could get away with his refusal to show solidarity disguised as solidarity. Until recently, I believe, there was still solidarity among those in active employment with those who fell out of the system. This was true of high earners as well as those at the lower end of the wage scale. (This is confirmed by the Politbarometer, which in 2010 recorded a rejection rate of 66 percent for cuts in basic social security benefits, compared to an approval rate of 64 percent in 2023.)

And perhaps there was also a basic understanding that an adequate “reservation wage” provided by social security networks has a positive influence on the wage share and reduces income disparities. And that a falling reservation wage has the opposite effect, because the fear of falling increases and bargaining power decreases. This is generally welcomed by neoclassical economists because it prevents “the risk of unemployment from losing much of its terror.”[2] This must be avoided so that the pressure to increase “efficiency” (for whom?) does not let up.

Education for market obedience

However, the market nexus apparently acts relentlessly as an educational institution, something that market libertarians such as Hayek and his followers have always celebrated. It educates people to be “market-obedient” (Nell-Breuning) and, above all, to interpret the market as an expression of “freedom” and the democratic, egalitarian constitutional state as a force that undermines freedom. In its socio-political dimension, which aims to dampen market pressure—in an inevitably particularistic manner, incidentally—it appears to the new market populists, who see their heroes in the Linnemanns, Musks, Thiels, and Mileis of this world, as nothing more than a discriminatory, i.e., injustice-producing force.

In this way, the new market populism ensures that we will never be able to escape the “steel shell” (Max Weber) of the continued economization of all aspects of life – “until the last hundredweight of fossil fuel has burned up,” as Max Weber put it over a hundred years ago. And so many petty bourgeois, succumbing to the apparently irresistible appeal of market populism, are also contributing to the “shutdown” of the “redistributive-protectionist” “social democracy”[3] that is, after all, primarily intended for them.

———

[1] See Sauer, D., et al. (2018) Rechtspopulismus und Gewerkschaften. Eine arbeitsweltliche Spurensuche (Right-wing populism and trade unions. A search for clues in the world of work), Hamburg, p. 13 f., 89 ff.

[2] Blanchard, O./Illing, G.: Makroökonomie (Macroeconomics), 6th edition, Munich 2014, p. 235.

[3] Streeck, W.: Zwischen Globalismus und Demokratie. Politische Ökonomie im ausgehenden Neoliberalismus (Between Globalism and Democracy: Political Economy in the Decline of Neoliberalism), Frankfurt a.M. 2021, p. 27, 31f., 38-41.

Ulrich Thielemann, economist and business ethicist, is director of MeM – Think Tank for Business Ethics (Berlin), founded in 2010. He has been a private lecturer at the University of St. Gallen since 2010. From 2001 to 2010, he was deputy director of the Institute for Business Ethics at the University of St. Gallen.

Competition as a concept of justice.

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What we can learn from Red Vienna for housing policy

Social housing

By Wolfgang Edelmüller

[This article posted on July 1, 2025 is translated from the German on the Internet, https://makroskop.eu/24-2025/was-wir-vom-roten-wien-fur-die-wohnungspolitik-lernen-konnen/.]

In his arti c le in the last issue, Max Schneider emphasized that housing policy must focus primarily on the supply side. A housing construction program modeled on “Red Vienna” could help. An outline.

The “free housing market” cannot solve the problem of “affordable housing” – never, anywhere! Only when an effective and efficient counterforce to the supply power of investors in the housing market has been established will a solution be within reach that makes housing affordable for all income groups, especially the lower half of the population.

Market economies: from rulers to tools?

By the editorial team of Makroskop journal

[This editorial posted on May 29, 2025 is translated from the German on the Internet, https://makroskop.eu/19-2025/marktwirtschaften-vom-herrscher-zum-werkzeug/.]

Dear readers

Marx and Engels, Keynes and Polanyi – none of them achieved fame through their influential analyses of the market economy. They also had an explicitly political agenda. In other words, they called for a more or less radical transformation of the market economy.

Our author Meinhard Creydt takes an in-depth look at the ideas of one of these pioneers: Karl Polanyi. Starting from the observation that markets have developed a life of their own independent of society, the Hungarian economic historian advocates “embedding markets in social relations that transcend and supersede them,” writes Creydt. According to Polanyi, markets would thus be transformed from “a master into a servant of our purposes.”

Dean Baker’s transformative idea for the financial sector is in line with Polanyi’s premise. Its purpose: to distribute money to companies and private individuals for real economic activities. For the US economist Baker, the financial sector should merely be an “intermediate product” and should therefore be kept “as small as possible.”

But what alternative forms of organization are conceivable for those companies whose liquidity is improved by the financial sector? Based on a critique of the primacy of the shareholder value approach (profit above all else), business administration professor Daniel Deimling envisions “new entrepreneurs” for whom profit becomes “one goal among others.”

Transformative ideas are therefore not only found in the classics of political economy; they are also present in the present day. And they can be linked together. This is a good thing, because what significance do social analysis and social criticism have without visions for change?

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The transformation of the market economy

Theory

By Meinhard Creydt

[This article posted on May 28, 2025 is translated from the German on the Internet, https://makroskop.eu/19-2025/die-transformation-der-marktwirtschaft/.]

For Karl Polanyi, the idea of a self-regulating market was “a blatant utopia.” He wanted to transform markets from “a ruler into a tool for our purposes.” An assessment.

Many people have all kinds of complaints about the market economy as it actually exists. At the same time, the vast majority of US citizens agree on at least one thing: there is no convincing alternative to the market economy as a model.

However, in recent decades, there have been increasing instances in the market economy that do not quite fit in with the economic liberalism and the prevailing image of it in economics. Some of these instances will be presented below as examples. Is their interaction transforming the market economy in qualitative terms?

Markets as the ideal coordination mechanism for anonymous and fleeting business relationships

According to classical economic doctrine, markets are characterized by the “general opening up of the potential field of interaction to an immense number of different exchange partners.”[1] Markets must be an “open, fluid field of constantly reversible and ad hoc initiated interactions.”[2] The influence of diffuse ties and personal loyalties would lead to a market-distorting network of cronyism.

However, companies are reluctant to change their business partners for small cost advantages. They value being able to rely on reliable business partners. The idea of the market as a producer of goods for unknown demand already has little to do with reality today. Many means of production, but also services for public consumption, require coordination agreements between clients and contractors. In some cases, there are long-term cooperation agreements between companies for joint product development and production planning. Manufacturers and suppliers in the automotive industry are usually part of stable networks. For larger technical installations, there are public tendering procedures.

The economic relationships described by Ernest Mandel also differ from anonymous and fleeting contacts on markets:

“You don’t go to the supermarket to buy hydroelectric turbines for a dam; these are ordered with very precise specifications, down to the smallest detail. Even if this is done through a public tender, it is not the same as ‘allocation via the market’. The different cost estimates do not mean that different products are actually manufactured, from which a selection can then be made.”[3]

The unbearable lightness of the price mechanism

A theorist admired by staunch supporters of the market economy (especially in the FDP and AfD) is Friedrich August von Hayek (1899-1992). He sees a central advantage of the market in the performance of the price mechanism in assigning “every kind of scarce resource” a “numerical index” that “is not derived from any physical property that the individual thing possesses, but which reflects its significance in relation to the whole complex of means-end relationships or in which this is expressed.”[4]

Market participants then only need “to look at these quantitative indices (or ‘values’) containing all the relevant information whenever there is a small change.” The market contains a “system of remote communication that enables individual producers, simply by observing a few indicators, […] to adapt their activities to changes about which they need to know no more than what is reflected in price movements.”[5]

However, product line analyses, environmental and social balance sheets, environmental impact assessments, and technology assessment already exist today. They are part of an information infrastructure that highlights the qualitative effects and prerequisites of economic activities and offerings. Qualitative indicators can be developed on the basis of this information infrastructure. One example of this is MIPS (material intensity per service unit). In reality, therefore, “the flow of information is much richer than if it were conveyed solely through the price system.”[6] In a market economy, suppliers and consumers do not base their decisions solely on prices. Increasing attention to the difficulties of quantifying quality also calls into question the price medium.[7]

The ethical penetration of markets

According to classical economic theory, suppliers and customers in a market economy are guided by prices. They cannot deduce the reasons why certain products are cheap. For example, there are reasons why wages in the textile industry in Southeast Asia can be so low, but these reasons are of no concern to local buyers of clothing. At best, they are aware that wages are low. However, the reasons why this is the case, or why it is not, or not primarily, the responsibility of the population of the countries concerned, usually remain hidden. Local consumers often regard their own situation as their own achievement and conclude from the worse situation in other countries that the people living there are somehow “to blame.”

Karl Polanyi (1896-1964) rightly stated that the pure market economy, with its barriers of indifference between customers and suppliers, forms an “invisible boundary that isolates all individuals in their everyday activities as producers and consumers.” The market represents one of the most important “boundaries of moral development” because “under such conditions, people are not allowed to be good—even if they want to.”[8]

Classical economic ideas about the market economy see it as a self-regulating system that has and should have autonomy from other areas of society. According to sociologist Niko Stehr, maxims such as sustainability, fairness, and solidarity have become more important in consumer behavior in recent decades. Their product choices are increasingly not based solely on pure utility criteria. Of course, one must be able to afford a slightly more expensive product that is less ethically questionable. Stehr sees customers with greater purchasing power as opinion leaders. Even discount supermarkets such as Aldi now offer organic products. The validity of the saying “first comes food, then morality” is declining.

Products whose low prices are due to poor working conditions and wages have increasingly come to public attention in recent decades. However, it is questionable to what extent the increased critical attention to supply chains will remain within the narrow confines once described by Romano Prodi: “We have prevented the worst, but not the bad.” This is what happens when only the most extreme cases of child labor and dilapidated factory buildings (such as the Rana Plaza disaster in Bangladesh in 2013) are eliminated.

Professions

The relationship between workers or service providers who see themselves as professionals and their customers differs from other market relationships in that work content standards are particularly important. Of course, members of such professions want to earn money from their work, but at the same time, many of them want to meet the quality criteria established in their professional group.

There is often ongoing contact between professional providers and “customers.” In this contact, both sides provide feedback to each other. This includes feedback to customers on the extent to which their spontaneous needs demand products or services that fall below the usual standards. After all, a “professional” does not want to sell something to someone that falls short of their own standards. Customers, on the other hand, will not simply switch providers when problems arise and leave them in the dark as to why they are leaving. Instead, they can tell them (“voice”) if they see problems with the product or service and expect that this feedback will be addressed.

The importance of professional ethical standards in the professions and the corresponding regulation of the respective professional field can dampen private interests and reduce selfish behavior at the expense of others. In Hegel’s time, the professional association of a profession (not to be confused with traditional guilds), such as the chamber of physicians or craftsmen, was called a corporation.

“Without being a member of a legitimate corporation (and only a community is legitimate as a corporation), the individual has no professional honor and is reduced by his isolation to the selfish pursuit of his trade […]. He will thus seek to achieve recognition through external displays of his success in his trade, displays which are unlimited because he does not live according to his status.”[9]

According to Adam Smith, all market actors achieve a higher overall result if each individual actor thinks only of his or her own private interest and does not orientate himself or herself towards the common good. This view is part of the canon of belief in the market economy. It is contradicted by the so-called fallacy of composition. The generalization of such actions, which are effective in individual cases when viewed in isolation, can have problematic effects. If everyone moves to the suburbs and builds a detached single-family home there, this leads to urban sprawl and a grotesque imbalance between heating costs and living space. Contrary to Adam Smith’s hope, the orientation of action toward general professional and ethical standards or even toward a society of good life[10] is about “rooting the particular in the general.”.[11]

Supply and demand

Another essential feature of liberal economic and macroeconomic theory of the market economy is that the market goods traded within it are bought and sold at prices determined exclusively by supply and demand. Based on this idea, social welfare regulations and the setting of a minimum wage must be considered alien to the market economy. The same applies to the linking of public contracts to certain social policy standards. For example, Hamburg’s public procurement law makes the award of public contracts dependent on whether the contracted companies adhere to collective agreements and tariff loyalty.

This represents at least a slight change from a fundamental flaw in the pure market economy. It has no “sensory organ” (Polanyi 2005, 84) to specify the moral and political goals or social standards of a society. Production is guided exclusively by the decisions of market actors as market actors and not as conscious political beings (Polanyi 2005, 83, 85).[12]

Markets are sensitive to the needs that individuals have as isolated individuals (Opel or VW?). Markets do not allow for collective demand that calls for overcoming the dominance of motorized private transport. Public goods, whose use is non-rivalrous and from which no one can be excluded, form another foreign body within the market economy. “Left to their own devices,” isolated individuals “will always tend to demand individual goods rather than collective services or facilities. […] There is therefore no spontaneous vote for the priorities and values of the ‘consumer society’ […]; there is only the powerlessness to define and advocate an alternative.”[13]

Markets are insensitive to the needs that individuals have when, as members of a society, they are guided by ideas about what public goods should look like—for example, a well-equipped public transport system for local and long-distance travel. Buyers’ decisions vary between individual offers. They cannot demand alternative overall conditions. “Choice in small matters does not guarantee choice in large matters.”[14]

Polanyi analyzes the division caused by the market economy between the particular interests of individuals as private owners (of money, capital, or their labor) and their needs as human beings who want a community of a certain quality. He sees this division as a fundamental obstacle to individual freedom: To act freely means “to act in the awareness of the fact that we are responsible for our share in the mutual relations of human beings—outside of which there is no social reality—and that we have to bear this responsibility. Freedom here no longer means, as in the typical ideology of the citizen, being free from duty and responsibility, but being free through duty and responsibility.”

Freedom, Polanyi continues, is in this sense “not a form of detachment from society as such, but the basic form of social connectedness, not the point at which solidarity with others ends, but the point at which we take upon ourselves the unavoidable responsibility of social existence.”[15]

Within the market economy, “the individual acts and weaves the illusion of his freedom.”[16] He imagines himself to be ‘free’ insofar as he feels independent of society. He feels “independent only because he is unaware of his dependencies.” Freedom remains self-deception as long as it is based on “ignorance” or “disregard” of responsibilities towards others.[17]

In accordance with this understanding of freedom, Polanyi advocates a regulation of the economy that is neither market-based nor state-socialist. For reasons of space, we cannot discuss here whether markets lose the advantages attributed to them when qualitative requirements or social “embeddedness” are imposed. We would at least like to refer to “industry and country studies” that “conclude that networks or associations play a more advantageous role in coordinating economic activities than the market (or the state).”.[18]

How the accumulation of non-market elements within the market economy is interpreted

A first faction sees non-market elements as the result of attacks on the market economy that stem from ignorance about how it works. Market self-regulation is actually flawless, but in reality it does not work adequately because enemies of the market economy and people who misunderstand it constantly interfere with it or fail to recognize its importance.

Polanyi, on the other hand, “argued that the idea of a self-regulating market is a blatant utopia […]. Such an institution could not survive for long periods of time without destroying the human and natural substance of society.”[19] According to Polanyi, the pure market economy constantly provokes counter-movements. They advocate the protection of either the workforce or reasonably prosperous living conditions for the population and fight against capital to achieve this.

Historical examples show how capitalist enterprises, as beneficiaries of the market economy, were only prevented from ruining the conditions of their own existence by massive counterpressure. In the early 19th century, the military complained that recruits were becoming increasingly shorter. All kinds of struggles against the entrepreneurial class were necessary to prevent it from endangering the necessary labor force of the next generation through excessive child labor in pursuit of its short-term profit interests. Restrictions on working hours, state supervision of hygienic conditions in factories, and similar measures did not harm the progress of the market economy, but rather benefited it. Here, too, the following statement applies: under capitalist conditions, the owners of the commodity labor must reproduce themselves both with capital and against it.

A second view assumes that the non-market elements within the market economy remain below a threshold beyond which they would call the market economy as a whole into question. The quantity of these elements is, so to speak, too small to turn into a quality that is dangerous for the market economy. Alfred Müller-Armack already criticized “the practice of questioning the market economy character of economic policy by pointing out that it is not chemically pure. Experience has shown, however, that the market economy can tolerate a good deal of non-market measures without losing its essence; for example, the special regulations governing agriculture or transport have by no means disrupted the functioning of the market economy. As long as the basic process of the economy remains uniform, i.e., market-based, it is possible to tolerate other principles as well.”[20]

A third faction accepts the convergence and mutual reinforcement of non-market forces and hopes that this will lead to the increasing primacy of ethical maxims over market forces. Social systems can move away from the original gravitational field that holds them together and come under the pull of another field. Some see this process as automatic. Others regard the non-market elements outlined above as starting points within the market economy. The hope is that these will provide a basis for social movements that fight to establish the dominance of a different order over economic processes.

In the society advocated by Polanyi, the aim is to embed markets in social relations that transcend and supersede them. According to Polanyi, if this fundamental qualitative transformation does not succeed, ambitious social policies cannot coexist with the market economy. One of the two sides must prevail, otherwise they will paralyze each other.[21]

Markets do exist in the society that Polanyi considers desirable. However, he advocates an economy in which the prices of labor, land, and capital are not determined behind people’s backs by market mechanisms or the anonymous relationship between supply and demand, but through social consideration, consultation, and decision-making. For all other goods, markets retain the function of indicating shortages and customer demand. In this respect, markets cease to be the “ultimate decision-making authority” for society. They become “from a ruler to a tool for our purposes.”[22]

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[1] Geser, Hans 1983: Structural Forms and Functional Performance of Social Systems: A Sociological Paradigm. Opladen, 112

[2] Ibid., 113

[3] Mandel, Ernest n.d.: In Defense of the Socialist Planned Economy. n.p., 83 p. (German translation from New Left Review No. 150, 161, 169), 15

[4] Hayek, Friedrich August 1976: Individualism and Economic Order. Salzburg, 113

[5] Ibid., 115

[6] Pirker, Reinhard 2004: Markets as a Form of Social Regulation. Marburg, 81

[7] See Creydt, Meinhard 2024: Quality and Quantity. How can one-dimensional methods of calculation be replaced by multidimensional evaluation standards? In: Telepolis, April 13, 2024.

[8] Ibid., 268

[9] Hegel, Georg Wilhelm Friedrich: Works. Edited by Eva Moldenhauer, Karl Markus Michel. Frankfurt M. 1970, 395

[10] See Creydt, Meinhard 2017: The Poverty of Capitalist Wealth and the Good Life. Munich

[11] Hegel 7, 458f.

[12] Valderrama, Paula 2020: Democracy versus Market. Politics and Economics in Friedrich Hayek and Karl Polanyi. Marburg, 133

[13] Gorz, André 1967: On the Strategy of the Working Class in Neocapitalism. Frankfurt M., 119f.

[14] Elson, Diane 1990: Market Socialism or Socialization of the Market. In: Prokla, No. 78. Berlin, 75

[15] Polanyi, Karl 2005: The Great Transformation. Articles and Essays. Vol. 3, ed. by Michele Cangiani, Claus Thomasberger. Marburg, 147

[16] Ibid., 148

[17] Ibid., 272

[18] Pirker 2004, 36

[19] Polanyi, Karl 1978: The Great Transformation. Frankfurt M., 19f.

[20] Müller-Armack, Alfred 1974: Genealogy of the Social Market Economy. Bern, Stuttgart, 123

[21] cf. Polanyi 1978, 270, 314, 329

[22] Polanyi 2005, 128f.

Meinhard Creydt is a psychologist and holds a doctorate in sociology. He lives and works in Berlin. His most recent publications are the books “46 Questions on the Post-Capitalist Future” and “How Capitalism Can Become Unnecessary.”

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The election of Pope Leo confirms Francis’ radical reforms

The silent revolution

By Martin Gak

[This article posted on May 29, 2025 is translated from the German on the Internet, https://makroskop.eu/19-2025/die-wahl-papst-leos-bestatigt-franziskus-radikale-reformen/.]

Pope Francis was considered by many to be a reformer without impact – a misconception fueled by a lack of understanding of the complex architecture of the Vatican. The election of his successor Leo shows that his changes were more profound than his critics suspected.

The election of Pope Leo in just two days proves wrong all those who accused his predecessor Francis of inaction. The fact that the conclave made its choice so quickly and unanimously is no coincidence, but rather the result of political and institutional change: Francis has fundamentally reformed the power structures of the Church.

One of the most significant changes is the abolition of papal secrecy – a legal and doctrinal upheaval that is intended to break through the culture of opacity in the Curia (“the totality of […] authorities and institutions that assist the Pope in the exercise of his supreme pastoral office” – German Bishops’ Conference). Equally revolutionary was the overhaul of the Vatican’s financial systems, with stricter banking supervision and an unprecedented level of disclosure. The appointment of women to key positions in the Curia was also historic – a step that had been unthinkable until then.

But the most momentous change was probably the systematic renewal of the College of Cardinals – a targeted reorganization that can only be described as a purge. Of the 133 cardinals eligible to vote, 108 had been appointed by Francis himself. This also explains why he was able to largely ignore the attacks from traditionalist circles in the US, Australia, and Africa: he had already stripped them of their political power.

A formative friendship: the spiritual bridge between Francis and Leo

Before reaching the highest office in the Catholic Church, Jorge Mario Bergoglio and Robert Prevost – the secular names of the last and current popes – were bound by a friendship that went far beyond mere cooperation. Their relationship was marked by years of pastoral commitment and a shared dedication to reform – a bond based on personal trust and theological agreement.

Particularly in the Latin American context, where both spent their formative years, they developed a shared vision: a Church radically committed to justice, integration, and pastoral care. Bergoglio saw Prevost not as a vociferous revolutionary, but as a quiet yet unyielding reformer—a man who could navigate the institution with discretion and integrity without sacrificing its soul.

This deep connection paved the way for Prevost’s rise under Francis, who appointed him to key positions – most notably as head of the worldwide episcopate (bishopric). Their affinity was never merely ideological, but deeply personal, nourished by years of dialogue and working together.

Now that Prevost has ascended to the throne of St. Peter as Pope Leo XIV, it is clear that the continuity between the two pontificates is no coincidence or mere power play, but the logical consequence of a shared ecclesiastical vision that was often ahead of its time in Rome.

Pope Leo: A symbolic and political counterpoint

The election of Prevost – now Pope Leo – embodies this change like no other symbol. Born in the US, Leo later immigrated to Peru, where he became a naturalized citizen. His biography stands in sharp contrast to the anti-immigration policies of the Trump White House and its ideological allies.

He received his pastoral training in Latin America – the same theological and institutional school that shaped Francis. As an Augustinian, he is spiritually connected to the Jesuits and rooted in the tradition of liberation theology: a movement that is radically committed to justice, inclusion, and the poor.

His career is also a silent declaration of resistance to the ideology of the US right. His clear positions on Trump, the MAGA movement, and their migration policy are not only well known but programmatic—and make him a living antithesis of the Church.

Synodality as a way forward

Pope Leo has clearly signaled that he will not only preserve Francis’ legacy, but also deepen it. In his programmatic opening speech, he emphasized:

“Together, we must explore how we can be a truly missionary Church—a Church that builds bridges, seeks dialogue, and welcomes with open arms, like this square here. Everyone—truly everyone—should experience our charity, our presence, our dialogue, and our love.”

Particularly significant was his commitment to synodality—a term unfamiliar to outsiders but central to Francis’ reform program. It is about nothing less than the transformation of the Church: away from a rigid hierarchy toward a participatory model that takes voices from below seriously. This vision represents a fundamental break with the exclusive, authority-based worldview of conservative circles, especially within US Catholicism. Under Leo, synodality will be emphasized even more strongly – which is likely to inevitably exacerbate tensions with MAGA-aligned Catholics.

Francis has repositioned the Church as a global actor for social justice. Now it is up to Pope Leo to use the tools he has been given not only to administer, but also to write Church history.

Martin Gak is a journalist, philosopher, and Vatican correspondent for Deutsche Welle, where he reports on religion, politics, and ethics at the intersection of global affairs.

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Globalization without America?

By the editorial team of the Makroskop journal

[This editorial posted on April 24, 2025 is translated from the German on the Internet, https://makroskop.eu/14-2025/globalisierung-ohne-amerika/.]

Dear readers

No, it was not a belated April Fool’s joke when Donald Trump announced the “most extreme trade measures in modern history” (quote from Thomas Fazi) with his sweeping tariff measures on April 2. In February and March, the US government had already imposed tariffs of 25 percent on steel, aluminum, and car imports.

In addition, Trump said that tariffs of at least 10 percent would apply to all goods from countries outside North America, and as much as 20 percent for the EU. A week later, on April 9, came the provisional U-turn: the US president suspended the previously announced country-specific “reciprocal” tariffs for 90 days to allow bilateral deals with trading partners. Meanwhile, tariffs on Chinese goods have risen to 145 percent. That’s the current situation. Everything is subject to change, of course.

With the erratic US president, it is difficult to predict whether this will remain the case. This is not what planning security looks like for companies. The global economy is in danger of losing momentum. The IMF has assessed the impact of Trump’s tariff policy and lowered its economic forecasts for most countries. “The global economy is at a critical juncture,” says the new World Economic Outlook. The outlook is also bleak for the eurozone and the German economy in particular, which remains mired in stagnation.

But even the US is unlikely to benefit from the tariff chaos it has brought upon itself. The stated goal of bringing production back to the United States and “restoring American prosperity” is evaporating into the question posed by US entrepreneur Molson Hart in this issue: whether this tariff policy means the “end of globalization” or just the end of America’s participation in globalization.

Nevertheless, as much as the free trade so beloved in Brussels is not the be-all and end-all, tariffs are not inherently evil – provided they are well thought out, legally sound, and well communicated. Companies looking to invest can hardly afford economic policy that zigzags from one direction to another. Nevertheless, the desire to protect one’s own industry and bring sectors back to domestic soil is a legitimate government goal, especially in light of the upheavals caused by globalization. This view is shared by Hart and MAKROSKOP authors Ann Pettifor and Thomas Fazi.

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Arms race: A military bastard Keynesianism?

By the editorial team of the Makroskop journal

[This article posted on April 3, 2025 is translated from the German on the Internet, https://makroskop.eu/13-2025/aufrustung-ein-militarischer-bastard-keynesianismus/.]

Dear readers

Whether in the media, from politicians, or in everyday conversation, hardly any other political decision has been discussed as much in the last three years as the “turning point” speech by outgoing Chancellor Olaf Scholz. However, the subsequent special defense fund seems strangely small compared to the special infrastructure fund that parliament approved in the previous legislative period.

At the time, it amounted to €100 billion—five times as much in nominal terms today, albeit slightly less in real terms due to inflation. And even more importantly, by exempting defense and security spending of more than one percent of GDP from the debt brake in the future, parliament is giving itself a free pass for rearmament.

Given the plan to finance the increase in military spending with far-reaching debt, the question arises as to how much of this bears Keynes’s hallmark. Was it not Keynes who emphasized the economic stimulus effect of government debt? So do the rearmament loans promise an “olive-green economic miracle,” to use the words of ifW chairman Moritz Schularick?

Our authors are skeptical, given the history of rearmament programs in the US and Nazi Germany. In this issue, economist Michael Roberts argues that a core element of Keynesian programs was lost in the US’s war Keynesianism: private consumption. While the government encouraged the population to curb consumption through war bonds, rationed goods, and tax increases, and made the bulk of the investment in armaments, companies increased their profits—and reduced their investments.

Our author Hartmut Reiners also argues against associating Keynes with the war economy, citing the economic policies of the Nazis as an example. Like Roberts, Reiners emphasizes the importance of consumer restraint. In his case, this refers to the restraint in consumption that the German fascists propagated with the prospect of appropriating looted goods from the conquered territories.

In addition, Reiners emphasizes that job creation measures – for which the Nazis are sometimes credited with Keynesianism – were much less important than is often suggested. While the Hitler fascists cut funding for employment programs, they mainly put people to work through forced labor. The impact on wages and working conditions was correspondingly modest.

So what remains of Keynes? Historically, at least, one could say: an instrumental relationship.

And today? While the black-red government implicitly embraces Keynes’ insights on credit financing of public spending, essential ideas on employment and the welfare state are being pushed into the background. It is no coincidence that the black-red coalition is currently discussing budget cuts that will primarily affect basic income. So is a military bastard Keynesianism looming once again?

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China’s controlled market economy. Background to a boom

By the editorial team of the Makroskop journal

[This book review posted on April 1, 2025 is translated from the German on the Internet, https://makroskop.eu/13-2025/chinas-gelenkte-marktwirtschaft-hintergrunde-eines-booms/.]

Rainer Land’s book on the Chinese economic miracle – now available in our webshop.

For Western societies, the rise of China poses a formidable challenge. But how did this boom come about, transforming a socialist country into one of the world’s largest economic powers within three decades? German economist Rainer Land analyzes China’s development from a planned economy to a controlled market economy and shows why this model has been so successful.

The author begins by examining the economic and theoretical background. Based on the “theory of economic development” of Austrian economist Joseph Schumpeter, he develops the concept of a guided market economy as currently observed in China. It is based on innovation-driven development in cooperation between companies, the financial system, and state and social actors. This requires a constantly renewed basic consensus in society that encompasses all key social groups. The process includes credit control, infrastructure policy, and innovation strategies.

On this basis, Land analyzes the stages of China’s development from a socialist planned economy (1949 to 1978) to a market economy (1978 to the mid-2000s) and on to a guided market economy. In 2007, a change of course was initiated and the development paradigm was shifted from extensive catch-up development to innovations oriented toward the domestic market.

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Democratic innovation: the way out of the crisis

By Peter Müller

[This article posted on April 1, 2025 is translated from the German on the Internet, https://makroskop.eu/13-2025/demokratische-innovation-der-weg-aus-der-krise/.]

Peter Müller is a coach who advises works councils in their work. He has now launched an initiative to help entrepreneurs and employees alike find a way out of the crisis.

Under the slogans “Invest instead of cutting back!” and “We need investment in future-proof jobs, new technologies, and renewable energies,” more than 80,000 employees will demonstrate on March 15 at five large demonstrations organized by IG Metall to save their jobs. Despite this powerful public statement, many employees quietly fear that this approach will not work. Where should investments be made when many warehouses are already full and machines are standing idle? Many feel frustrated and helpless and hope that they will somehow be spared. Some have already given up.

Entrepreneurs can’t do it

Entrepreneurs also face major challenges: globalization, technological change, ecological adjustments, demographic developments, and, last but not least, the lack of cheap Russian gas are putting pressure on their traditional business models. In many cases, they are responding with cost-cutting measures.

But if they fail to adapt to changing market requirements, the resulting “cheapest is best” competition will lead to a downward spiral of poor working conditions that benefits no one. After all, entrepreneurs elsewhere can make their employees work longer hours, grant even less vacation time, pay even lower wages, and create even worse working conditions. We cannot save our way to the top. And those who save on their employees create demotivation; the workforce becomes exhausted, and commitment and productivity decline.

In short, cost-cutting is the strategy of losers. But employers seem to lack ideas for innovative products and processes across the board.

The power of group intelligence

Lone leadership decisions don’t get us anywhere. The only solution is to activate the group intelligence of the workforce. Numerous studies, including the groundbreaking study by Prof. Anita Woolley (2010) and the book “The Wisdom of Crowds” by James Surowiecki, prove this. From a scientific point of view, this is due to several factors:

Problem-solving diversity means that teams with as diverse a composition as possible contribute different perspectives, experiences, and ways of thinking. This results in more innovative and well-thought-out solutions than decisions made solely by management with a limited perspective.

Adaptive decision-making mechanisms allow for greater flexibility, as teams are not bound by rigid hierarchies and can adapt more quickly to new information and changes.

The reduction of cognitive biases helps group decisions to compensate for the errors of individual members by questioning each other and thus preventing management from making biased decisions.

Learning from mistakes: examples from the business world

Some companies have successfully relied on group intelligence in the past, albeit only to a limited extent:

Microsoft’s innovation bottleneck was caused by a lack of diversity in teams, which led to a “Windows-centric” mindset. Trends such as smartphones and cloud computing were missed. It was only through interdisciplinary teams and openness to open-source technologies that the company was able to regain its innovative strength.

The reason for Nokia’s decline lay in rigid hierarchies with slow decision-making processes that prevented a rapid response to the smartphone boom. While Nokia clung to outdated operating systems, the market had long since shifted to touchscreens and app ecosystems. Nokia launched programs for interdisciplinary collaboration. By pooling knowledge from different departments, the potential of the network and 5G sectors was recognized early on and successfully advanced.

General Motors was on the brink of collapse. Even before the crisis, its engineers and technicians had developed innovative vehicle technologies, but these were not consistently implemented due to management decisions. Despite rising environmental regulations and oil prices, GM stuck to large gasoline-powered SUVs, while Toyota gained market share with hybrid models such as the Prius. Employees played a central role in developing new production concepts that were geared to changing customer requirements. It was only with a realignment toward electric and autonomous vehicles that the company was able to catch up again.

Many other companies were already beginning to embrace group intelligence, including Google, Airbus, Procter & Gamble, Abacus umantis, Threadless, Zappos, LEGO, and Wikipedia.

Personal experiences

The author of this article experienced the power of group intelligence as a works council member and works council chairman at a major bank. During an economic crisis, we gathered extremely wide-ranging product and service ideas from the workforce. These included offering comprehensive consulting services for setting up a universal banking system in war-torn Iraq, providing standard software for universal banking systems for various banks and major banks, and establishing ourselves as a consortium leader for financing the government’s transition to renewable energies. The chairman of the supervisory board handed these over to the board of management with a mandate to act, which created so much pressure that the bank pushed ahead with its innovation efforts for years.

Another experience: In the same company, I took part in a group dynamics seminar with 17 managers, including five women. It was led by three professors from the University of Klagenfurt. In a globally renowned exercise, we were first asked to solve a fictional challenge individually and then as a team. The comparison showed that the consensus solution exceeded the average of the individual decisions, but two people found better solutions. When asked who had the best solutions, most people named two men – but in fact it was two women. The professors reported that group intelligence always proves to be superior. The conclusion: instead of selecting individual people who are supposedly competent, whom you will never find anyway, teams should decide by consensus.

Democratic innovation

Employees therefore have good arguments for taking action themselves in this situation of innovation blockage and lack of ideas and approaching employers with an offer that is secured by collective agreements. It could read something like this:

We employees will help you, the employer, by contributing all our knowledge, commitment, skills, and ideas throughout the company.
To do this, we need a clear head for new ideas, in a period free from fear, with no redundancies for at least five years. Because people who feel threatened and fear for their jobs and their future cannot be creative – quite the opposite.

On this basis, it is important to develop a culture of innovation with a few essential elements. In order to effectively embed group intelligence in companies, it should be defined as an official corporate goal and underpinned by clear measurement criteria. A key aspect of this is collaboration in interdisciplinary teams that regularly bring together people from different departments and hierarchical levels to drive innovation.

Employees must also be given the appropriate resources and time to work creatively and solve problems efficiently. The use of proven creativity techniques, such as the 6-3-5 method, progressive abstraction, bionics, or the “six thinking hats,” further supports this process. A shared leadership approach ensures that decision-making authority is distributed across teams, enabling a more flexible and effective way of working. A transparent corporate culture with open communication, a culture of learning from mistakes, and active co-determination plays an essential role in this.

Finally, comprehensive co-determination by trade unions and the works council is also important, as they accompany the entire process together with the employer, from clarifying the goals to monitoring implementation and the results achieved.

A sample project plan for introduction into the company, which can be adapted to the respective circumstances, can be provided by the author immediately.

Challenges and resistance

Despite the obvious advantages of co-determination, massive resistance from company management is to be expected. Many fear a loss of power and are highly skeptical of collective decision-making processes. They worry that employees will want to have a say in everything in the future. This would open the floodgates to further demands.

Employees must therefore assert their right to participate in decision-making so clearly, convincingly, and emphatically that employers have practically no choice but to involve them actively and comprehensively in decision-making processes.

The perfect complement to IG Metall’s “Co-determination Initiative”

IG Metall’s “Co-determination Initiative” sees co-determination in companies as a decisive factor in making companies more efficient, innovative, and future-proof. This is not only a question of fairness, but also a strategic necessity in a constantly changing world of work.

The “Co-determination Initiative” therefore calls for binding co-determination rights for employees and an active role in corporate decisions, including a legally enshrined weekly “democracy time” for employee participation in the workplace. The approach described here and referred to as “democratic innovation” perfectly complements this initiative. To this end, it is necessary to coordinate with the “Initiative Mitbestimmung” to enable integration and meaningful complementarity. This should be followed by a sustained nationwide pressure campaign promoting the demand for “democratic innovation” based on the strategy “Group intelligence – our way out of the crisis.”

Nationwide “Democratic Innovation” campaign

A central component of this campaign would be to win over the workforce to the concept of “democratic innovation” as part of the “Co-determination Initiative” and convince them that it is one, perhaps the only, promising way out of the crisis.

However, this also means that employees must be given greater confidence in their own abilities,

namely in the conviction that they themselves can develop the best ideas for the future of their company instead of relying on their employers.

This self-confidence is entirely justified. After all, many employees are able to identify market changes, technological trends, and customer needs at an early stage due to their daily contact with the outside world. Thanks to their ongoing experience with processes and machines, they have a deep understanding of the company’s operations and challenges. Their strength lies in their unique combination of expertise, practical experience, and intuition.

In addition, teams often work more efficiently and flexibly than cumbersome central hierarchies, where decisions are often based on embellished management reports rather than realistic assessments that lead to better and more sustainable results. The basic principle is that the more minds are involved, the more ideas are generated.

Emphasis on employers

Works council members and union representatives who, in a second step, want to work together with employees in their companies to promote “democratic innovation” should follow these five key principles:

First, it is crucial to involve employees directly, as this is the only way to find realistic solutions.

Second, they must be able to feel secure in the group by being offered a proven approach that enables them to represent their position clearly and unambiguously to the employer – even in the employer’s presence. Tried-and-tested methods ensure the highest possible level of protection.

Third, you should start with the lowest common denominator so you don’t overwhelm employees and can gradually introduce them to bigger challenges. A simple first step that everyone or almost everyone supports builds trust and shows them that they’re strong together – which is essential for further measures.

Fourthly, it is important to communicate successes by highlighting improvements that have already been achieved and past joint actions. This makes the strength of the workforce visible and motivates them to take further action.

Finally, available action plans should be used as templates to facilitate participation through a systematic and structured approach.

These sample action plans can be adapted to the respective conditions and provide reliable guidance for further action.

Conclusion: “Democratic innovation” is not a luxury, but the decisive key to overcoming the crisis, not only in the area of responsibility of IG Metall. There is no serious alternative. If there is, now would be the time to present it.

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The hidden mechanisms of the banking world

Monetary theory and monetary policy

By Mi c hael Paetz

[This article posted on April 1, 2025 is translated from the German on the Internet, https://makroskop.eu/13-2025/die-verborgenen-zusammenhange-der-banken/.]

The banking sector is characterized by a number of little-known peculiarities. This makes it all the more important to shed light on the matter, because effective regulation requires a deeper understanding of monetary theory and monetary policy.

Why can banks go bankrupt even though they create money “out of thin air”? The short answer to this recurring question is that, from the perspective of commercial banks, our deposits are not assets but liabilities.

Monetary assets – which include not only demand deposits at banks but also securities, outstanding invoices and similar items – have a dual nature: for some, they are assets, for others, they are debt instruments. Our credit balance represents a liability for the bank.

The dual nature of money

When a bank grants a loan, the credit balance is created by means of an accounting entry, which is why it is also referred to as book money. In addition, the bank receives a loan receivable from the borrower, who promises to repay the loan including interest. The loan also represents a receivable for the bank and a liability for the borrower. Shown in T-accounts, the accounting entry looks as follows:

Figure 1

Neither the bank nor the borrower becomes richer as a result of the loan, as the claims and liabilities of both parties increase by the same amount. Only when the borrower pays the interest does the bank make a profit.

Our credit balance represents a claim against the bank that is due at any time, as we can always convert our deposits into legal tender. When we make a transfer, we transfer this claim to cash to another person.

The book money of banks corresponds to digital promissory notes of the banking sector, while cash represents physical promissory notes of the central bank. For this reason, notes and coins are listed as liabilities on the central bank’s balance sheet. We handle the majority of our payment transactions by transferring claims to promissory notes of the central bank.

Government versus private money

The monetary system is therefore two-tiered and consists of (government) central bank money and private commercial bank money. In addition to physical promissory notes in the form of cash, the central bank can also issue digital promissory notes, for example by granting loans to commercial banks. Digital central bank money is also referred to as reserves and, as with lending by commercial banks, is created by means of an accounting entry:

Figure 2

Banks settle their mutual liabilities with balances at the central bank, just as we settle our digital payments with balances at commercial banks. Private non-banks cannot currently hold digital central bank money, as only banks and the government have accounts with the central bank.

What is liquidity?

Non-banks are also able to issue liabilities. For example, large corporations issue bonds or shares, while investment funds sell units. In this sense, it can be said that, in principle, anyone can create money.

As post-Keynesian economist Hyman Minsky pointed out, the real problem is that not every liability is recognized as an asset to the same extent. The acceptance of a debt instrument depends largely on its liquidity. An asset is considered fully liquid if it can be traded at its face value at any time. This applies, for example, to central bank money: a hundred-euro note is always traded at 100 euros, as are central bank reserves.

In contrast, the prices of securities fluctuate. A bond may have to be sold below its face value if the owner needs cash at short notice and cannot find a buyer willing to pay the full face value. Securities are therefore less liquid, as it is unclear how quickly a security can be sold and at what price it will be traded.

In order to sell their debt instruments successfully, companies and governments must therefore offer an interest rate. The interest rate represents the price that the seller must pay to induce the buyer to surrender liquidity.

Bank money is generally considered to be completely liquid because it can be exchanged for central bank money at face value at any time. In the event of a bank insolvency, however, customer deposits are only insured up to a value of 100,000 euros. In special situations, therefore, even bank money may not be traded at face value.

Insolvency

The most important tasks of the banking sector are to provide non-banks with means of payment and to facilitate cashless payment transactions. However, banks cannot provide themselves with liquidity by creating money. For a bank, it is not the demand deposits of its customers that constitute liquidity – these are liabilities of the banking sector – but rather the deposits held at the central bank. This means that even a bank can become insolvent if it does not have enough central bank money to meet its payment obligations to other banks or to satisfy its customers’ demand for cash.

To ensure the smooth functioning of payment transactions, central banks act as lenders of last resort, offering banks the possibility of borrowing money at any time to avoid insolvency. However, central bank loans are secured. Commercial banks must therefore provide collateral, usually in the form of securities, in order to obtain such a loan. If banks do not have sufficient collateral, both in terms of quality and quantity, they cannot borrow and may be at risk of defaulting on their obligations.

Insolvency of non-banks

A fundamental distinction must be made between insolvency and illiquidity. The latter relates to the assets side of a balance sheet, as, in simple terms, there are insufficient funds available to settle all outstanding bills. Insolvency, on the other hand, refers to the liabilities side, specifically to equity, i.e., net assets. This is calculated as the difference between assets (cash and non-cash assets) and liabilities. It serves to balance assets and liabilities and is therefore usually shown on the right-hand side of the balance sheet—unless net assets are negative.

The following balance sheet shows the relationships schematically:

Figure 3, source: Paetz, Michael (2025), “Money Theory and Monetary Policy: Fundamentals of Conventional and Unconventional Measures,” Schäffer Poeschel, Chapter 1.

Put simply, a private non-bank is considered insolvent if its equity is negative, i.e., the value of its assets is less than the value of its liabilities. In this case, we speak of over-indebtedness.

It is possible to be over-indebted even though there are sufficient funds available to meet all current obligations.

Conversely, insolvency can also exist without over-indebtedness if the value of the assets exceeds the liabilities but the cash is insufficient to meet the obligations.

However, insolvency proceedings can also be initiated if insolvency is acute or foreseeable. Insolvency and insolvency are therefore closely linked. If there is no over-indebtedness, it is possible to sell or borrow against assets to avert insolvency. In this case, liquid assets are advantageous as they can be sold quickly and, ideally, close to their nominal value.

Banking regulation

As banks play a crucial role in the financial system, they are subject to special regulations. The Basel Committee on Banking Supervision (BCBS), which was established in 1974 by the central bank governors of the G10 countries, regularly develops regulations to strengthen financial stability. Although the recommendations are not binding for the 28 member countries, it can be assumed that all participants will implement the recommended measures in national law.

From the outset, capital adequacy requirements have been at the heart of the Basel Accords. A detailed discussion of capital adequacy requirements, including the calculation of regulatory capital and the required amount in relation to risk-weighted assets to prevent insolvency, would go beyond the scope of this article. In simple terms, however, a bank is considered insolvent if its regulatory capital falls below the minimum level required by law.

Since equity capital reflects the difference between assets and liabilities, positive equity capital can be used in the event of insolvency to pay creditors from the proceeds of the sale of assets.

In addition, a minimum requirement for capital in relation to risk-weighted assets limits the risk of losses, as banks cannot grant further risky loans in the short term if this would mean that they no longer meet the minimum capital requirement. This imposes at least temporary limits on banks’ lending.

Bank insolvencies

A bank may become insolvent if, for example, too many borrowers become unable to pay their debts. In this case, the corresponding receivables must be written off. As this leads to a loss in the value of the receivables, the bank’s equity capital is also reduced accordingly:

Figure 4

In order to prevent losses due to defaults, every loan granted by a bank is preceded by an extensive check of the borrower’s creditworthiness.

However, insolvency can also be triggered by insolvency if a bank does not have sufficient central bank deposits to meet its payment obligations to other banks. In such a case, it could try to obtain a loan from other banks or the central bank.

However, it usually requires collateral of adequate quality and amount. If it is unable to obtain a loan, it has no choice but to sell assets. However, if it has to sell these below book value, losses are realized, which in turn reduce equity.

Increasing equity through money creation?

Ultimately, bank insolvency does not appear to differ significantly from the insolvency of a non-bank: if the legally required capital ratio is not met or payment obligations cannot be fulfilled, the credit institution is insolvent.

However, as corporations, banks have the option of increasing their equity by issuing new shares.

Although these appear on the liabilities side of the balance sheet, they are classified as equity because they represent a share right for the purchasers. The net assets of a corporation are therefore calculated as the difference between equity and share rights.

Since shares are purchased with book money from banks, a bank can indirectly increase its equity with money it has created itself. Richard Werner explicitly describes two cases in which Credit Suisse and Barclays Bank were able to increase their equity capital in 2008 through their own loans.[1] Credit Suisse lent 10 billion Swiss francs to a consortium from Qatar, which was then used to acquire newly issued preferred shares. Ironically, the newly issued preferred shares were even accepted as collateral for the loan.

The process is outlined in the following balance sheets:

Figure 5

In this way, Credit Suisse managed to increase its equity capital with money it created itself and thus avoided having to accept government aid, which would probably have been subject to conditions.

Are capital adequacy requirements useless?

This kind of arrangement shows that restrictions on lending can be circumvented by capital adequacy requirements. What’s more, this method of increasing capital is unlikely to make banks more resilient to crises. If the bank has to file for bankruptcy, the consortium will lose money on the shares it bought, which could mean it can’t service the loan anymore.

The “equity” behind the newly issued preferred shares cannot then be used to pay creditors, as the bank must write off its loan claims against the consortium. Furthermore, in the event of insolvency, the treasury shares pledged as collateral for the loan can no longer be sold to compensate for the lost claims.

In most countries, loans expressly intended for the purchase of own shares are subject to at least an approval requirement, if not prohibited altogether. In Switzerland, however, the financial supervisory authority approved Credit Suisse’s actions in 2008.

A similar case occurred at Barclays Bank in the UK, where a consortium from Qatar was even reimbursed for the interest that would have had to be paid on the loan by means of an upfront fee. In this case, however, the supervisory authority was not informed. Werner reports that this approach was described by analysts as common practice.

Ultimately, shares are always acquired with book money from the banking sector, even if this is not the bank’s own created scriptural money that increases its equity capital. Through their lending, banks always create the purchasing power necessary to realize an increase in equity capital. Two banks with two borrowers could easily increase each other’s equity by each bank granting a loan to purchase the shares of the other bank. It is difficult to imagine that regulatory authorities could prevent such transactions.

How to regulate?

Bank insolvencies generally arise for the same reasons as insolvencies of non-banks: either the assets are insufficient, so that the equity falls below the legal requirements, or insolvency cannot be prevented. Banks are not in a position to increase their assets through self-created deposits, as these deposits represent liabilities from the bank’s perspective.

Nevertheless, it is possible to increase equity indirectly, for example by granting loans to potential share buyers. Even if this process is cumbersome and equity requirements therefore appear justified in principle, it could make sense to adapt the existing regulatory provisions. Given that banks can often significantly reduce the amount of capital they need through their own risk models, there are legitimate doubts as to whether current banking regulations are sufficient to prevent overly risky lending.

Makroskop author Peter Glaser describes it as “proven futile” to regulate a “money-creating institution” through capital requirements. Martin Hellwig, former director of the Max Planck Institute for Research on Collective Goods, calls for at least the abolition of the use of proprietary risk models and an increase in capital requirements.

Another problem is that banks often transfer loans to specially created special purpose entities that are subject to lower capital requirements and finance themselves by issuing asset-backed securities (known as securitizations). This reduces the incentive to carefully check creditworthiness because banks do not keep loans on their own balance sheets. A detailed discussion of this “regulatory arbitrage” through securitization and the associated risks can be found, for example, in my textbook.

Direct measures such as credit controls are proving more effective in restricting bank lending and directing money to socially desirable areas. Such controls are still used in many Asian countries to manage credit growth and provide targeted support to specific economic sectors. Nevertheless, the majority of economists reject direct controls on the amount of credit banks can lend.

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[1] See Werner, R. A. (2013). “Commentary,” Environment and Planning A: Economy and Space, 45, 2789 – 2796, and Werner, R. A. (2014). “How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking,” International Review of Financial Analysis, 36, 71–77.

Michael Paetz holds a doctorate in economics and is a lecturer in the Department of Economics at the University of Hamburg. Together with the Hamburg Open Online University, he launched the explanatory blog “Was-ist-Geld.de” (What is money?). On his YouTube channel of the same name (@was-ist-geld), you can find numerous lecture videos on the topic of monetary theory and policy. In April 2025, he will publish a textbook with Schäffer Poeschel.

Money Theory and Monetary Policy – Fundamentals of Conventional and Unconventional Measures.

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The global economy in the MAGA maelstrom

By the editorial team of the Makroskop journal

[This editorial posted on December 19, 2024 is translated from the German on the Internet, https://makroskop.eu/44-2024/die-weltwirtschaft-im-maga-strudel/.]

Dear readers

Donald Trump is the unknown variable in the global economy. What is he really planning – and what do his plans mean for global trade and European industry? What would Trump’s threat of 100% tariffs mean for the dollar and US public finances?

Trump’s warnings to the BRICS countries – above all China – that he will impose 100% taxes on imports from any country that does not commit to maintaining the dollar as a reserve currency are intended to strengthen the power and status of the US currency. However, on the one hand, this is a threat against a development that is almost certain not to happen. The US dollar has not been as strong as it is today since 1985.

On the other hand, this plan would be in stark contrast to Trump’s stated goal of making the US economy more competitive in international trade, as Dean Baker and Jörg Bibow explain in this issue. A higher-valued dollar increases the US trade deficit rather than reducing it. To make matters worse, such high tariffs on Chinese imports are likely to hurt the US more than China.

The simultaneous promise of contradictory economic policy goals is almost a trademark of Trump. The same applies to US fiscal policy: as during his first presidency, the MAGA man wants to cut taxes and reduce federal debt at the same time. This is fiscal squaring of the circle, which the financial markets could eventually tire of. For now, the honeymoon euphoria still reigns – but as we all know, even that comes to an end.

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For a new economics: A manifesto

By the editorial team of the Makroskop journal

[This editorial posted on June 3, 2025 is translated from the German on the Internet, https://makroskop.eu/44-2024/fur-eine-neue-okonomik-ein-manifest/.]

Bury neoclassical economics! You can conveniently purchase Australian economist Steve Keen’s manifesto via our web shop.

The economic sciences suffer from an incurable “neoclassical disease,” according to Australian economist Steve Keen: false and unrealistic basic assumptions on the one hand, and an unsuitable methodology on the other. This disease prevents them from providing the scientific basis for the economic policy measures that humanity urgently needs to meet current and future challenges.

Despite their repeated failures, most evident in the wake of the global financial crisis of 2008 and their misjudgment of the economic consequences of global climate change, mainstream economists are neither willing nor able to abandon their equilibrium models. Instead, they try in vain to make them realistic by adding ever more complicated additions and calculations. The credo is that a market left to its own devices always tends toward a good equilibrium.

According to Keen, the neoclassical economic theory that prevails today is more like a religion than a science. In the natural sciences, a theory that cannot fully explain reality is abandoned and replaced by a new paradigm. In order to be functional and scientific, economics also urgently needs a paradigm shift.

The new economics that the author explains in this book must:

be fundamentally monetary, in contrast to the moneyless exchange model that underlies neoclassical economics;
recognize that the economy is a complex system and not a system of equilibrium;

be consistent with fundamental physics, especially the laws of thermodynamics;

be based on empirical realism rather than on the fantasy of “as if” assumptions

be based on the techniques of system dynamics and related non-equilibrium-oriented analytical approaches.

Keen’s manifesto is aimed at young students of economics as well as interested laypeople.

His “New Economics” is written in an understandable way and provides detailed references for further reading.

The author

Steve Keen, born in Sydney in 1953, is a post-Keynesian economist. As one of the few economists who predicted the global financial crisis of 2008, he received the Revere Award from Real World Economics Review magazine. Keen’s main research interests are the complex systems approach to macroeconomics and the economics of climate change.

The welfare state: under the wheels of market-liberal populism

CDU Secretary General Carsten Linnemann wants a “major citizen’s income reform” that goes “to the heart of the matter” – more precisely, to the foundations of the welfare state.

First- and second-order solidarity

Identifiable and unidentifiable authorities

Education for market obedience

[1] See Sauer, D., et al. (2018) Rechtspopulismus und Gewerkschaften. Eine arbeitsweltliche Spurensuche (Right-wing populism and trade unions. A search for clues in the world of work), Hamburg, p. 13 f., 89 ff.

[2] Blanchard, O./Illing, G.: Makroökonomie (Macroeconomics), 6th edition, Munich 2014, p. 235.

[3] Streeck, W.: Zwischen Globalismus und Demokratie. Politische Ökonomie im ausgehenden Neoliberalismus (Between Globalism and Democracy: Political Economy in the Decline of Neoliberalism), Frankfurt a.M. 2021, p. 27, 31f., 38-41.

What we can learn from Red Vienna for housing policy

In his article in the last issue, Max Schneider emphasized that housing policy must focus primarily on the supply side. A housing construction program modeled on “Red Vienna” could help. An outline.

Market economies: from rulers to tools?

The transformation of the market economy

For Karl Polanyi, the idea of a self-regulating market was “a blatant utopia.” He wanted to transform markets from “a ruler into a tool for our purposes.” An assessment.

Markets as the ideal coordination mechanism for anonymous and fleeting business relationships

The unbearable lightness of the price mechanism

The ethical penetration of markets

Professions

Supply and demand

How the accumulation of non-market elements within the market economy is interpreted

[1] Geser, Hans 1983: Structural Forms and Functional Performance of Social Systems: A Sociological Paradigm. Opladen, 112

[2] Ibid., 113

[3] Mandel, Ernest n.d.: In Defense of the Socialist Planned Economy. n.p., 83 p. (German translation from New Left Review No. 150, 161, 169), 15

[4] Hayek, Friedrich August 1976: Individualism and Economic Order. Salzburg, 113

[5] Ibid., 115

[6] Pirker, Reinhard 2004: Markets as a Form of Social Regulation. Marburg, 81

[7] See Creydt, Meinhard 2024: Quality and Quantity. How can one-dimensional methods of calculation be replaced by multidimensional evaluation standards? In: Telepolis, April 13, 2024.

[8] Ibid., 268

[9] Hegel, Georg Wilhelm Friedrich: Works. Edited by Eva Moldenhauer, Karl Markus Michel. Frankfurt M. 1970, 395

[10] See Creydt, Meinhard 2017: The Poverty of Capitalist Wealth and the Good Life. Munich

[11] Hegel 7, 458f.

[12] Valderrama, Paula 2020: Democracy versus Market. Politics and Economics in Friedrich Hayek and Karl Polanyi. Marburg, 133

[13] Gorz, André 1967: On the Strategy of the Working Class in Neocapitalism. Frankfurt M., 119f.

[14] Elson, Diane 1990: Market Socialism or Socialization of the Market. In: Prokla, No. 78. Berlin, 75

[15] Polanyi, Karl 2005: The Great Transformation. Articles and Essays. Vol. 3, ed. by Michele Cangiani, Claus Thomasberger. Marburg, 147

[16] Ibid., 148

[17] Ibid., 272

[18] Pirker 2004, 36

[19] Polanyi, Karl 1978: The Great Transformation. Frankfurt M., 19f.

[20] Müller-Armack, Alfred 1974: Genealogy of the Social Market Economy. Bern, Stuttgart, 123

[21] cf. Polanyi 1978, 270, 314, 329

[22] Polanyi 2005, 128f.

The election of Pope Leo confirms Francis’ radical reforms

Pope Francis was considered by many to be a reformer without impact – a misconception fueled by a lack of understanding of the complex architecture of the Vatican. The election of his successor Leo shows that his changes were more profound than his critics suspected.

A formative friendship: the spiritual bridge between Francis and Leo

Pope Leo: A symbolic and political counterpoint

Synodality as a way forward

Globalization without America?

Arms race: A military bastard Keynesianism?

China’s controlled market economy. Background to a boom

Rainer Land’s book on the Chinese economic miracle – now available in our webshop.

Democratic innovation: the way out of the crisis

Peter Müller is a coach who advises works councils in their work. He has now launched an initiative to help entrepreneurs and employees alike find a way out of the crisis.

Entrepreneurs can’t do it

The power of group intelligence

Learning from mistakes: examples from the business world

Personal experiences

Democratic innovation

Challenges and resistance

The perfect complement to IG Metall’s “Co-determination Initiative”

Nationwide “Democratic Innovation” campaign

Emphasis on employers

The hidden mechanisms of the banking world

The banking sector is characterized by a number of little-known peculiarities. This makes it all the more important to shed light on the matter, because effective regulation requires a deeper understanding of monetary theory and monetary policy.

The dual nature of money

Government versus private money

What is liquidity?

Insolvency

Insolvency of non-banks

Banking regulation

Bank insolvencies

Increasing equity through money creation?

Are capital adequacy requirements useless?

How to regulate?

The global economy in the MAGA maelstrom

For a new economics: A manifesto

Bury neoclassical economics! You can conveniently purchase Australian economist Steve Keen’s manifesto via our web shop.

The author

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In his arti c le in the last issue, Max Schneider emphasized that housing policy must focus primarily on the supply side. A housing construction program modeled on “Red Vienna” could help. An outline.