The “Magic Square” has its historical roots in the 1967 Stability Act. As a reaction to the first post-war recession, the “Magic Square” reflects an economic concept with economic policy goals.
Table of Contents
Definition / explanation
The adjective “magical” may be a bit misleading in this context. It would be more appropriate to use the term utopian square, so that all four goals mentioned can never be achieved at the same time because they are partly in contradiction to one another.
The “magic square” is also characterized by a certain volatility, since the individual goals can be weighted differently according to the economic situation.
Video: explanation of the magic square
The four economic policy goals
Monetary stability – Die Geldwertstabilität versteht sich als konstante Purchasing power des Geldes und des damit verbundenen stabilen Preisniveaus im Kontext von supply and demand as well as the speed of circulation of money.
The monetary value or the price level linked to it is considered stable if the changes in value are within a range of zero to a maximum of two percent. If you are below this, it is called deflation. If you rise above two percent, there is talk of inflation.
Economic growth - Growth means that more goods are produced and services are offered compared to the previous year. Economic growth is reflected in the increase in gross domestic product (GDP) and ideally amounts to between three and four percent compared to the same period of the previous year.
If it reaches three percent, for example, this means that the value of all goods has increased by the corresponding percentage compared to the previous year.
full employment - The term full employment expresses a low unemployment rate. In order to meet the criterion of full employment, the number of employable people without work must not exceed three percent.
External balance - In general, this includes the objective of free and balanced world trade and stable currency systems. This is to be realized at the national level through an equal ratio of export and import.
Problems of goals
As already mentioned, the individual economic policy goals sometimes contradict each other, i.e. the fulfillment of one of the goals can have negative effects on the other goals.
Current example: The lowered or low interest rate level ensures that companies can obtain capital cheaply and thus the economy experiences a boom, but at the same time the risk of a decline in monetary stability due to possible inflation increases.
It is therefore always necessary to weigh up economic policy in order to achieve the goals within the “magic square” in a generally acceptable way and to prevent excessive negative effects for one of the goals.
Extensions / variants
It can make ecological sense to expand the number of targets, so that the square becomes a polygon. In this context, the magic pentagon, hexagon, heptagon, octagon or neunagon is also spoken of:
- balanced public budgets
- fair distribution of income
- Preservation of an environment worth living in
- humane working conditions
- Securing resources
However, this in turn harbors an increased potential for conflict.