An Easy Introduction to Balance Mechanics and its Inventor

Who was Wolfgang Stützel, the inventor of “balance mechanics”? Hardly known in the anglo-saxon world and largely forgotten in Germany today, he was an economics professor and published his landmark book “balance mechanics” (in German: “Volkswirtschaftliche Saldenmechanik“) in 1958.

In the 1960s and 1970s he was widely known beyond economics because he was a member of the famed German Council of Economic Experts which is still influential today. In his work, he shows that no abstract models and fantasy assumptions about human behavior are necessary to draw rigorous and logically necessary conclusions about the actual economy. Essentially, you only need a profound understanding of something as trivial as accounting. Thus Stützel wrote in his book:

Apart from things that depend on human behavior, […] there are many economic relations […] about which one can make strictly generalisable statements, relations that do not depend on human behavior but which would still be unchanged if people behaved in absolutely strange way.

[In German: [Es gibt] neben Zusammenhängen, die vom menschlichen Verhalten abhängen, […] viele Größenbeziehungen in der Wirtschaft […], über die sich streng Allgemeingültiges aussagen läßt, Zusammenhänge, die nicht vom menschlichen Verhalten abhängen, sondern auch dann unverändert bestehen bleiben würden, wenn die Menschen sich noch so ungewöhnlich verhielten.]

Those relations are very trivial things, like: Someone’s purchases are another one’s sales because nobody can sell something without someone else buying it; or that someone’s debts are someone else’s claims because nobody can have financial claims without someone who holds the corresponding liabilities.

One would have to assume that economists know those “trival arithmetic relationships” and their implications. However, this is mostly not so. Stützel always showed with great relish how his colleagues stubbornly held beliefs which one would never hold if one only knew the basics of accounting and balance mechanics.

Here are some examples: The trivial but always true statement that somebody’s claims are someone else’s debts is often ignored by economists and politicians alike if they claim that today’s government debt would burden future generations. The underlying assumptions of this statement is that in the future there are debts but no corresponding financial claims — a logical impossibility. If there are debts in the future, holders have to pay interest and somebody will earn this interest. People do not only inherit debts but also the corresponding claims.

Or another example: Savers increase their (net) financial claims. But this in only possible if others increase their (net) debts by the same amount. However, if nobody is willing to increase her net debts, nobody will be able to save. While this is trivial, it becomes politically salient if applied to the privatization of pensions. Those willing to increase privatization of pensions by logical necessity also have to be in favor of higher debts.

But who should increase their debts? In many parts of the world (Germany, for instance), companies do not increase their net debts at all but finance their investment out of their current earnings; all over the world the government is held not to increase or even to decrease its debts. But then only foreign countries could increase their debts – i.e. those countries like the European crisis countries that lived through a debt crisis… However, if nobody is willing to increase their debts, there cannot be higher private pension saving (and other saving as well) — and one cannot ask persons to do so anyway.

Austerity in Europe after 2010 can also be understood by the trivial accounting rules and balance mechanics: in order to pay back their debts, governments in the crisis countries had to radically reduce their expenditures. However, since someone’s expenditures are another one’s revenues, this cut in government spending also made life hard for the rest of Europe which had to deal with a drop of exports — its revenues — to the crisis countries.

All this very much sounds like simple Keynesianism — but Stützel shows that it is just the consequence of pure accounting: If everybody is asked to reduce their expenditures, it would be unreasonable to expect an increase in revenues; if everybody is expected to save more and increase financial assets, one can not demand that nobody is allowed to increase debts.

But Stützel himself was no left leaning Keynesian. In the introduction to the works of his teacher Wilhelm Lautenbach, he wrote:

The claim that deficit spending — the creation of money by the state through higher debts — could fulfill all economic needs, has not been made by serious employment theorists. It is an invention of demagogues who have taken money creation from modern credit theory and increasing debts from Keynesianism to make the masses believe illusions and to poison the atmosphere for sober thinking. Perhaps it is just a bugaboo which was invented by the enemies of employment theory in order not to think too much when arguing against employment theory.

 [In German: „Die Behauptung, daß mit der Druckknopftherapie des deficit spending, der staatlichen Geldschöpfung durch Verschuldung, alle wirtschaftlichen Nöte gelindert werden könnten, stammt nicht von ernsthaften Beschäftigungstheoretikern. Sie ist eine Erfindung von Demagogen, die sich aus den modernen Kredittheorien das Geldschöpfen und aus dem Keynesianismus das Schuldenmachen geholt haben, um damit breiten Massen Illusionen vorzugaukeln und die Atmosphäre für nüchterne Überlegungen zu vergiften. Vielleicht ist es auch ein Popanz, den sich manche Gegner der Beschäftigungstheorie zusammengezimmert haben, damit sie in ihrer Argumentation gegen die Beschäftigungstheorie nicht so viel zu denken gezwungen sind.]

But while Stützel saw that much can go wrong if one relied too much on the market, he believed in capitalism and the market economy, was an active member of the economically (neo-)liberal free democratic party (FDP) and part of the neoliberal “Kronberger” circle which propagated an extension of markets in the 1970s and beyond.

Since the early 1970s Stützel was against the financing of the welfare state by contributions levied on wages and explained the increasing unemployment at the time not with the lack of aggregate demand but of too high wage costs. Also, when capital controls were still in place almost everywhere, he was a strong defender of the free movement of capital because he trusted market more than bureaucrats.

On the other hand, in his book “Market price and human dignity” (“Marktpreis und Menschenwürde”) he demanded a lower limit for wages (and favored a labour union that encompassed all workers to enforce this limit). By this he wanted to prevent a “wage paradoxon” according to which each individual, in order to save her job, had to accept wage reductions and a lengthening of working time which would — if applied to everybody — only result in wage reductions for all with at an unchanged overall employment level. He took that thought from Karl Marx. And while he rejected high social contributions on wages, he was not concerned to decrease the welfare state but to finance it by taxes in order not to disturb prices on the labour market.

Thus, Stützel was an economic liberal, even a neoliberal. However, he knew when the market reached its limits and when the pursuit of self interest by each individual could result in collective disaster.

This text is a translation (with slight changes) of an article originally published in  German on the Blog “Herdentrieb” of the German weekly “Die Zeit”.

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