A Masterpiece of Disinformation

“A Masterwork of Disinformation”

Economist Fredmund Malik on the American economic wonder of the nineties as a gigantic bluff, the tricks of statisticians, the false model of the US and the new coldness in German businesses

[This interview is translated from the German in: Der Spiegel 36/2002. Fredmund Malik has taught economics at the University of St. Gallen, Switzerland since 1978 and advises numerous businesses.]

Spiegel: America is overrun by accounting scandals that shake the trust of investors. Market prices are at the bottom. Is the US economy still a model?

Malik: America is certainly not a model any more and wasn’t a model in recent years. The economic wonder in the United States was merely a media event, a masterwork of disinformation. This wonder never took place in economic reality.

Spiegel: However the US still posts high growth rates and enormous increases in productivity.

Malik: Most of these numbers are misleading. Americans systematically cosmeticize.

Spiegel: Do you think the statistics were falsified like the balance sheets of the Enron and Worldcom corporations?

Malik: Since the middle of the nineties, America has used a new statistical procedure, so-called Hedonic Price Indexing. This indexing assumes that the quality of goods improves when they become cheaper. The numbers were corrected upwards to confirm this achievement. For example, computer investments in the US rose from 1995 to 2000 from $23 to $87 billion. Through the hedonic effect, this became $240 billion, a purely statistical increase, not a real increase.

Spiegel: Statisticians regard the hedonist procedure as more realistic. The German Federal statistical office also recently applied this procedure.

Malik: I hope the office will change for the better. This calculation may be good statistics but is miserable economics. Calculating this way is almost like counting cars in Germany multiplied by their horsepower, not by their selling prices. The numbers that animated the boom in the US are in no way comparable with German figures. These numbers were massively inflated. This was an enormous bluff.

Spiegel: How strongly has the American economy actually grown?

Malik: There was growth in the financial area as a consequence of a speculation bubble and in the computer sector where speculation was not as important as the media suggest. When these effects are factored out, a real economic zero growth results for the nineties.
Spiegel: Why hasn’t this occurred to any prestigious US economists?

Malik: Apart from exceptions, interest-neutral critical scrutiny of the economy is not America’s strength. The real enemies of capitalism are its loudest supporters. Many economists were even paid by the Wall Street firms. They gave wings to a stock market boom that was not based on value-creation or profit but on greed, debts, the fear of missing the chance of a lifetime and systematic mis-information as now revealed by the high altitude flights of balance sheets of businesses like Enron or Worldcom.

Spiegel: This sounds almost like a conspiracy.

Malik: No conspiracy was necessary. The spirit of the times was enough: the belief in constantly rising profits, growing productivity and practically eternal growth. This was a reinforcing process leading first to enormous high-altitude flights and then to the crash. This development is comparable to the development in the twenties. At that time the “New Era” was announced instead of a “New Economy”.

Spiegel: How could such a misinterpretation occur?

Malik: The reason is a neoliberalism that has nothing to do with a real liberalism. Thinking liberally doesn’t mean unconditionally trusting the market that supposedly orders all things to the best and is always wiser. The market actually always runs behind. The market doesn’t tell us how we must act, only how we should have acted at that time. The market doesn’t prevent any errors; it punishes them.

Spiegel: Now you sound like a capitalism critic.

Malik: Famous liberal thinkers like Friedrich von Hayek knew that the market was very imperfect but all other solutions were much worse. The freedom of every individual to use his or her knowledge and abilities for personal goals and purposes is decisive.

Spiegel: How can we understand the deficiencies of the market?

Malik: The market needs precise well-thought-out rules. Even liberal economists like the Nobel prize winner Milton Friedman know that a legal order and an administration of justice are necessary for the market to function. Whoever propagates the concept of shareholder value and sets the shareholder interest above everything doesn’t act in the sense of liberalism. A business doesn’t have the objective of making the shareholders rich.

Spiegel: What is its goal?

Malik: A business must satisfy customers, not shareholders.

Spiegel: The shareholders are the owners of the corporation. Why shouldn’t the board of directors act in their interest?
Malik: Only a business with satisfied customers will have satisfied shareholders. The logic is not true conversely. The problem is that two kinds of ownership can be distinguished. The entrepreneurial owner is actually the core of a stock corporation. However today corporations have to deal with short-term investors interested in shares, not in the corporations. They can sell their shares with a telephone call or a mouse click. No entrepreneur can detach himself from his enterprise this way.

Spiegel: Should the rights of shareholders be restricted?

Malik: Firstly, completely unregulated stock market operations are a falsely understood liberalism. Making money or moving money is not the same as producing an entrepreneurial result. US firms have not produced any genuine profits, merely cash values on the stock exchange. With shareholder value, managers have completely lost sight of the true function of business leadership.

Spiegel: Do managers have another choice? Managers are continuously driven by the fund administrators to increase the profits of their businesses.

Malik: I believe the terror of financial analysts is beginning to lose its effect. I am firmly convinced that a Rockefeller or a Morgan would not enter the stock market under present conditions. They would not be told every day how they should manage their firms by rather inexperienced commentators on breakfast TV.

Spiegel: If the American model has had its day, what should be the trust of German entrepreneurs?

Malik: In their own strength. I consider the German economy as clearly more efficient that the American. It is relatively easy to lead a large business in America with a huge home market of 275 million people. America never depended on export. To manage a world company from Germany represents a very different demand on leadership.

Spiegel: Is Germany the model?

Malik: Virtues that Germany always had play an important role today. The German economy understands itself more from customer uses and quality than most other economies. Look at the German auto-industry. Ten years ago the German auto-industry was in a desolate state. Today it is a world leader. Remarkably no Americanization of management has taken place in this branch.

Spiegel: With the exception of Daimler-Chrysler.

Malik: Right. Still very successful businesses like BMW or Porsche are owner-controlled, by families in these cases. They are not as strongly exposed to the pressure of the stock markets. They can plan in the longer term. Claiming that every business needs the stock exchange to raise money is also a fairy-tale.

Spiegel: If this German way represents the better alternative, how is it that the German economy is in last place in Europe in terms of growth?

Malik: Consider the special strains on Germany in the last decades: Europe’s integration and the reunification. The German economy has behind itself a permanent fitness training under special burdens.

Spiegel: How were more than 15 million jobs created in America in ten years while the number stagnated in Germany? Was this only a statistical trick?

Malik: I don’t doubt these figures. Many low-wage jobs are hidden in these numbers. Please don’t misunderstand me. The German unquestionably has problems. But what country has no problems? Amazingly high-ranking managers rave about the US economy with admiration and almost transfiguration and simultaneously knock Germany. This economy is efficient and can solve problems better than any other.

Spiegel: But can the German economy renew itself? Germany may be a world leader in the traditional areas, in the automobile industry or mechanical engineering. But what about the new industries? The US clearly dominates worldwide in information technology.

Malik: Mechanical engineering should not be classified under the “Old Economy”. Many businesses are very technology-oriented. I admit Germany could be a little more innovative.

Spiegel: What also characterizes the US economy is its dynamic, its readiness for risk and courage for visions. Doesn’t Germany lack this dynamic?

Malik: Up to the beginning of the nineties, vision was often mistaken for delusion or hallucination. The term vision only gave dreamers the possibility of making themselves important. Developing a native entrepreneurial strategy was more important. What we need is a new sobriety.

Spiegel: There is the theory according to which phases of exaggeration also have their grace. 150 years ago vast money was amassed. An outstanding infrastructure existed. The spread of the Internet today would never have advanced so quickly if this technology hype hadn’t occurred.

Malik: That may be. However that would mean the person learned nothing. We may not forget that the economic collapse followed the railroad boom and that the stock market boom of the late twenties also ended in debacle.

Spiegel: Do you see a similar danger for the US now?

Malik: All the conditions are fulfilled that the development of the thirties may be repeated in a similar form. Presumably it will be worse.
Spiegel: Why are you so skeptical?

Malik: In America, the savings of two generations are at risk. In the last two years, half of the US gross national product, five trillion dollars, has been destroyed. Still old-age pensioners or senior citizens hope that their portfolios will be filled again. What will happen when they notice that the reserves are gone? There will be renunciation everywhere. After the last great economic crisis, Americans were spared social conflicts. I fear this time it will not be so mild.