Together with the Department of Economics at the European University at St. Petersburg, the online newspaper “Bumaga” has launched a project devoted to important economic issues that are useful to understand for even nonprofessionals. Leading department professors discuss areas of economics that directly affect the lives of people anywhere in the world.
The project opens with an interview with professor Clemens Puppe. The European University professor talks about what is the ‘economics of happiness’, how the market can dupe the layman, and why a serious attitude toward employees may be more important than a high salary.
--You studied mathematics and philosophy, and your dissertation was on decision making in conditions of uncertainty. Now you study how the market and a person are related to one another, and how we can measure well being. Please tell us more about the area of your research.
--In economics, as we know, there are a few concepts. The most common of them proposes to use economists in order to make forecasts, assess business opportunities, levels of inflation, unemployment, and so on. Economists refer only to the facts, avoiding value judgments. This is the so-called concept of positive economics.
Normative economics, which I’m interested in, raises different questions: what acquires value, and why; how to measure it; and—most importantly—how to most effectively allocate resources within society.
The question arises: is it better for banks to endure bankruptcy according to the laws of the market, or should the government intervene and assume part of the responsibilities and risks itself?
Many believe that the history of the science culminated with the appearance of economic theories of welfare (the works of Vilfredo Pareto and Arthur Pigou), when you prove that the market is functioning properly in certain circumstances. In reality the most interesting thing here is just beginning: how, from an economic perspective, can we make people happy? Do we want them to feel better in general? Do we want everyone to be happy, or is it better that it’s not everyone, but to a much greater degree? Thanks to these questions a separate direction emerged in the science—the economics of happiness.
--Could it be said that research in this area isn’t exactly economics in the pure sense?
--Precisely. I don’t want to think that economics exists only to make our lives simpler on the level of everyday life, that people have something to eat and to entertain themselves.
Economists, among other things, need to engage more with strategic questions: what level of life we want to achieve, what should regulate the market, and to which processes society should be linked. Should only the laws of the market define the value of things and commodities, or should society intervene to regulate these processes?
--Can you give a specific example of where and how society can intervene in economic regulation?
--Some researchers maintain that the 2008 crisis, the consequences of which we’re still feeling, confirms that the market doesn’t manage itself. The question arises: is it better for banks to endure bankruptcy according to the laws of the market, or should the government intervene and assume part of the responsibilities and risks itself? In such a situation, who will pay for rescuing the bank? Should taxpayers be responsible?
For example, the bank Lehman Brothers was on the verge of collapse, and then the U.S. government failed to intervene. In a similar situation German banks were rescued by the government with money from taxes. These cases show that society must recognize existing economic risks and be well informed—ultimately it’s the people’s money that’s at stake.
--Does this approach work the same way in any socio-economic or political situation?
--It’s customary to think that for developing or transitional economies (like the BRICS countries) questions of normative economics are not so important. The debugging of market mechanisms takes priority, while issues of normative economics are of secondary importance. But I’m sure that this is a misconception. Look at India or Bangladesh, which are only now starting to think about workers’ rights.
--Aside from these obvious examples, when is a person further faced with the problem of insufficiently transparent relations between the market and society?
--Information, as a rule, is not equally distributed. Banks, for example, know much more about the risks associated with credit agreements. When you take out a loan to buy a house, you sign a contract with lots of conditions. That is, formally you’re aware of all possible nuances, but you have no real idea about the current situation of the market. The bank has it though. If I sell you a certain product knowing that it’s tarnished, I behave dishonestly. Hence there must be some methods for protecting people. The question is: what do the fair conditions of a deal really look like?
In the global market something like this happens: big companies lower the cost of production by bringing it to counties with a cheaper labor force. As a result, income rises not where the product is produced, but where the company is based. This leads to an obvious social effect, like immigration. People tend to leave for countries that are more economically developed. As a result the imbalance in the distribution of resources is only increasing.
--How does this problem relate to the popular trend of social responsibility among large companies?
--From the point of view of a client or a consumer, a socially responsible company certainly seems more attractive. However, several important details remain out of sight. Products manufactured under the Fair Trade label are more expensive than their counterparts, which leads to a loss of customers who switch to cheaper versions. Thus, less responsible companies will get customers all the same. No one can forbid people from buying what costs less; this is just an example of market regulation.
If social responsibility is understood not only as marketing, then the company must incur considerably higher costs. The role of society is to formulate a minimum standard that all manufacturers must adhere to on a mandatory basis.
--How is this possible under conditions of global trade and the global market?
--The problem is that adopting standards in one country is meaningless. In a world with global trade, there must be universal global standards. Similar rules operate within the EU, but this is not enough. We need to introduce uniform requirements across the globe. This will help avoid a situation in which one country exploits another.
--So it turns out that companies around the world, regardless of the level of development and living conditions, will be equal to each other. This seems like a utopian idea.
--It is, of course, a strategic development plan in the very long-term. I would say that yes, it is a utopia, but one that provides a very specific direction for development. Now we can at least try not to drift away too much from one another. What’s happening now between Russia and Europe is very sad and doesn’t benefit anyone.
If the economy is global, it means that the values that exist in society throughout the world should also be similar. I’m not saying that the whole world should readjust and have a single opinion on every issue, but we should at least try to agree on what’s important and valuable and necessary.
The working conditions in a textile factory in Bangladesh are absolutely impossible for Germany, where not a single firm would allow people to work under those standards. Here public regulation begins: not allowing companies to use the low standards of other countries to boost their profits. If you really want a global market, then either raise standards or tolerate additional fees and taxes. Free market advocates, of course, will say that it’s unacceptable to levy additional payments on companies.
--What influenced your decision to come work in Russia? Here, as you may have noticed, no one’s really working on normative issues.
--I’ve always been interested in Russia as a whole—especially from a cultural point of view. I was also drawn to the country’s great scientific legacy: mathematics, physics, and a multitude of other fields where Russian scholars have made a significant contribution. I wanted to ‘exchange’ what I know with students. I was hoping for their deep knowledge of the mathematical foundations of economics, and I was not wrong: we definitely have something to learn from each other.
I never once came across a “Maybach” in Germany, despite the fact that it’s actually a German car. But here—please.
I’m familiar with works by Russian economists from the Russian Academy of Sciences and the Higher School of Economics, but before the European University I had no experience teaching in Russia. What I’ve seen I can only compare with universities in Europe. In this sense the level of training for students here is very high—they are attentive and motivated. On the other hand, however, there is a significant difference that, in addition to the academic environment, well characterizes the Russian approach to economics as a whole. In Russia people аre much less versed in the normative side of economics. Of course, it’s necessary to be able to predict oil prices, but it can sometimes be more useful to properly use available resources.
--What, in your opinion, does people’s low level of involvement in the process of economic regulation in Russia lead to?
--It’s difficult for me to judge. I’m here all the time, but what I see can hardly be considered sufficiently representative. I can say that the most expensive cars that I’ve ever seen in my life I’ve seen in Moscow and St. Petersburg. I never once came across a “Maybach” in Germany, despite the fact that it’s actually a German car. And here—please. I suspect that if you get away from these two wealthy cities, the situation would be different. And here I’ll return again to the question of economic imbalance: within Russia there was a similar situation like Germany had with Bangladesh. People who don’t live in big cities have limited resources because all the wealth is concentrated in only a few points.
--If it comes down to the level of the company, then what’s more important: ensuring a maximum salary level or otherwise involving employees in the affairs of the firm?
--The salaries of all employees within a company are different according to their position and level of professionalism. That is, in terms of the amount of money paid, we can’t claim that it’s a direct embodiment of the employee’s value.
One thing my research showed was that a simple demonstration of attention and a serious attitude toward people is sometimes more important than the level of actual payment. This was confirmed by our experiment. We invited students to do some pretty boring work: they catalogued books for three hours. To some we promised 7 euros—not much, but more than nothing. To another group we said that in the end they would receive thermoses—small gifts as a thanks for their work. An important detail: on the thermoses there was a price tag with the same 7 euros. In the end it turned out that the students from the second group did a better job. Of course there are undoubtedly a few details, but as a whole our study shows that an essential implication is how people are treated.
Anna Kosinskaia