Munich Personal RePEc Archive

Cause and cure of the crisis

Colignatus, Thomas (2014): Cause and cure of the crisis.

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Abstract

The welfare state was created after 1950 with counterproductive mechanisms and this caused high inflation and high unemployment and stagnating growth by 1970, called stagflation. Since 1970 governments redressed the welfare state but did not succeed in finding workable mechanisms. They rather fought stagflation with the ideology of the day, shifting from vulgar Keynesianism first to monetarism and then to neoliberalism, and now ‘muddling through’. The deregulation of financial markets seemed to solve stagflation but only repressed it and resulted into the crisis since 2007. The return of regulation also causes the return of stagflation: what was repressed before now is into the open again. Re-regulation is required indeed but the fundamental cure lies in focussing on workable mechanisms for the welfare state. Return to the 19th century laissez-faire will generally be rejected. If economic management had made better use of the available information then these policy errors could have prevented. A mixed economy requires a constitutional Economic Supreme Court to monitor the quality of information for policy making.

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