In the spring of 1933, the German economist Wilhelm Röpke found two SS agents at his door. He later recalled that these particular members of Adolf Hitler’s paramilitary elite were men “of thorough ‘bruiser’ type.” An outspoken classical liberal, Röpke had been declared an “enemy of the peo-ple” and dismissed from his teaching post at Marburg University for giv-ing anti-Nazi speeches. Other professors, similarly dismissed as part of the Nazis’ program to dominate the universities with antiliberal ideology, had promised to switch sides or keep quiet in order to get their old jobs back.
Röpke had refused. Hitler’s government had now turned to overt intimi-dation. When the SS agents explained to Röpke that he should be on the Nazis’ side, he rebuked them with “scorn and indignation.” As soon as they departed, he realized that he needed to leave the country immediately.1
THe NAzIS cOMe TO pOWeR
Adolf Hitler, leader of the National Socialist German Workers (Nazi) party, had assumed the German chancellorship in January 1933. Hitler initially headed a coalition government, but soon consolidated power in his own hands. A biographer reports that Hitler was “wholly ignorant”
of economics.2 Hitler’s choice of economic policies appears to have been guided by no principle other than to enhance his government’s power. The same can be said of the Italian Fascist leader Benito Mussolini.
In an article written soon after he fled Germany for Istanbul, Röpke grouped German National Socialism together with Italian fascism under
1 Wilhelm Röpke, The Solution of the German Problem (New York: G. p. putnam’s Sons, 1947), pp. 59–60.
2 Ian Kershaw, Hitler, 1889–1936: Hubris (New York: Norton, 2000), p. 448.
the general heading of fascist economics. Attempting to find a consistent logical thread among fascist policies, Röpke wrote in evident exasperation:
[I]t is a task of tremendous difficulty to define clearly the essentials of Fascist economics . . . one might be tempted to give up the task as hopeless and to dis-miss it as economic Dadaism. . . . [I]t is just this lack of rational cohesion which perhaps more than anything else, is characteristic of Fascism. . . . Fascism sails along with a minimum of intellectual freight – and is proud of it.3
Dadaism was an art movement whose proponents claimed to reject all artis-tic principles. Unlike the Nazis, the Dadaists had a sense of humor.4
Despite the incoherence of exactly what it stood for, National Socialism clearly rejected classical liberalism and its precept of a free market economy.
Röpke noted that among the anticapitalist doctrines of the day there was communism, and then there was the “military anticapitalism” of Italy and Germany, “the anticapitalism that has the Fascist flavor, in other words, that anticapitalism that corresponds to illiberalism in the political field.” Röpke dismissed as partisan “distortions and misrepresentations” the Marxist and democratic-socialist line that National Socialism was a reactionary defense of an “unmitigated capitalism.”5 In a 1933 memo F. A. Hayek similarly insisted: “National Socialism is a genuine socialist movement, whose lead-ing ideas are the final fruit of the antiliberal tendencies which have been steadily gaining ground in Germany since the later part of the Bismarckian era.”6 Hayek thus viewed Nazism as an offspring of the state-socialist doc-trines promoted by the German historical school of economists.
Unlike communism, Röpke observed, fascism “wants no revolution-ary changes of the economic and social structure of society.” economic
3 Wilhelm Röpke, “Fascist economics,” Economica (New Series) 2 (February 1935), p. 86.
4 The French Dadaist Marcel Duchamp, for example, notoriously produced a work (L.H.O.O.Q., 1919) in which he had scribbled a goatee and moustache on the Mona Lisa.
Duchamp’s whimsical art objects included two with financial themes: a hand-lettered check for $115 to his dentist purportedly drawn on “The Teeth’s Loan & Trust company consolidated” of New York (Tzanck Check, 1919) and a numbered set of lithographed and collaged coupon bonds featuring a photo – by the Dadaist collaborator Man Ray – of Duchamp’s head covered in lather, and affixed with a legal document stamp. The bonds purported to be issued by a company to finance the artist’s roulette-gambling system (Monte Carlo Bond, 1924). Incidentally, Bond #1 sold at auction in 2010 for a little more than $1 million. For discussion see Olav Velthuis, “Duchamp’s Financial Documents:
exchange as a Source of Value,” Tout-Fait: The Marcel Duchamp Studies Online Journal 1/2 (May 2000), available online at http://www.toutfait.com/issues/issue_2/Articles/velthuis.
html.
5 Ibid., pp. 94, 86, 88.
6 F. A. Hayek, “Nazi-Socialism,” in The Road to Serfdom: Text and Documents, The Definitive Edition, ed. Bruce caldwell (chicago: University of chicago press, 2007), pp. 245–8.
policy in fascist Italy and Nazi Germany amounted to ad hoc “inter-ventionism plus collectivist phraseology,” which “leads, in practice, to a heavily monopolistic-interventionistic society adorned by terminologi-cal and phraseologiterminologi-cal ornaments, with an extensive government control of prices and capital investments and large ‘socialisation of losses.’”7 The journalist Walter Lippmann in 1936 similarly noted that “the fascist ver-sion of the collectivist principle” had never been spelled out in scholarly detail, having been “hastily improvised since the World War” by political schemers.8 Although Mussolini’s and Hitler’s interventions followed no coherent economic philosophy, we will see that they did follow an in-built interventionist policy dynamic. That dynamic shaped fascist and Nazi eco-nomic policies into systems of comprehensive state control over the com-manding heights.
THe INTeRVeNTIONIST DYNAMIc IN NAzI ecONOMIc pOLIcY
Two years before Hitler took power the German government had imposed exchange controls, restricting permission to trade domestic for foreign currency, in order to avoid officially devaluing the Reichsmark.
Hitler too refused to devalue. Foreign exchange rationing led to government controls on trade. The controls expanded in scope under Hjalmar Schacht, Hitler’s economics minister for 1934–7. The Nazi regime’s “New plan” of 1934 brought government control of all import and export transactions, together with industrial cartelization and public works projects.9 Schacht was removed from office when, in response to disappointing results, he recommended reversing the policy course. He was replaced by Herman Göring, who oversaw the introduction of a central Four-Year plan for the economy. Schacht was later imprisoned by the Reich for his involvement in a plot to assassinate Hitler.
The Third Reich’s centralized agricultural policy and import quotas led to shortfalls in food production and sharp price increases. Hitler made these self-inflicted problems a pretext for invading europe, declaring in a memo: “We are overpopulated and cannot feed ourselves from our own resources. . . . The final solution lies in extending the living space of our
7 Röpke, “Fascist economics,” p. 91.
8 Walter Lippmann, The Good Society [1936] (New York: Grosset & Dunlap, 1943), p. 57.
9 Hans Willgerodt, “planning in West Germany: The Social Market economy,” in A.
Lawrence chickering, ed., The Politics of Planning: A Review and Critique of Centralized Economic Planning (San Francisco: Institute for contemporary Studies, 1976), p. 61.
people and/or the sources of its raw materials and foodstuffs.”10 Launching a war enabled Hitler to retain popular support and power despite the dam-age that his economic policies were doing to the German economy.
In a 1948 postmortem analysis of the Nazi economy, the German econ-omist Walter eucken emphasized full-employment policy (rather than exchange controls) as the engine driving the steady increase in the degree of central government control over the German economy. He wrote:
After 1936 the German economy came more and more under central direc-tion and administradirec-tion. This was not the result of a conscious effort of policy to create a new form of economic organisation. It was rather a result produced accidentally. It was the full-employment policy which started the movement, and it was the implementation of this policy which led step by step towards a centrally administered economy (“zentralverwaltungswirtschaft”).11
eucken explained that Hitler’s full-employment policy called for large public works projects. The most famous of these was the construction of the autobahns. To finance spending on the projects, the German govern-ment printed more paper marks, diluting their value. prices began rising throughout the economy.12 To put a lid on the price inflation, the govern-ment intervened further into the economy, imposing a general price freeze in 1936. The price controls resulted in widespread shortages of consumer goods: buyers with abundant marks could not find sellers willing to sell at prices frozen artificially low. As a result:
prices ceased to give expression to the scarcity of goods and services on the markets. This state of affairs gave rise to the creation of a central administra-tive apparatus to direct the economy, to supervise foreign trade, to allocate the most important raw materials such as coal, iron, and cement, to weigh up priorities, distribute licenses and so on.13
The German government dared not repeal the price freeze because that would mean an upward jump in prices, likely leading to worker unrest and
10 “Hitler’s Memorandum on the Four-Year plan,” in Robert Stackleberg and Sally A. Winkle, eds., The Nazi Germany Sourcebook: An Anthology of Texts (London: Routledge, 2002), pp.
197–8.
11 Walter eucken, “On the Theory of the centrally Administered economy: An Analysis of the German experiment: part I,” trans. T. W. Hutchison, Economica (New Series) 15 (May 1948), p. 79. We will further discuss eucken and Röpke, and the role their ideas played in postwar German economic policy, in chapter 9.
12 On German monetary policy during this period see Robert L. Hetzel, “German Monetary History in the First Half of the Twentieth century,” Federal Reserve Bank of Richmond Economic Quarterly 88 (Winter 2002), pp. 1–35.
13 Ibid.
demands for higher wages, and raising the prices the government paid for military supplies. Thus “the tight hold on prices at their previous level, and the repression of inflation by pegging prices, became a dogmatically held principle of economic policy.”14
To deal with the shortages of consumer goods the German government imposed a rationing system. To deal with shortages of producer goods, it began declaring which industries were to receive priority, and allocat-ing raw materials accordallocat-ing to the priority system. To cope with the lack of incentive to produce at controlled prices, it began issuing decrees tell-ing firms what quantities they must produce. This was the interventionist dynamic by which the Third Reich became a thoroughly state-controlled economy.15 eucken noted that the trend intensified as the Reich sought to draft evermore resources into arms production:
With the growing danger of war . . . it was necessary to concentrate produc-tive resources on armaments and to force up the rate of investment. . . . more and more branches of production, and even the distribution of labour sup-plies and consumers’ goods, came under the orders of the central planning authorities.16
In this way a central planning system arose under which, in contrast to the Soviet Union, “farms and factories alike continued to belong mainly to private individuals and companies” in name. But the nominal owners’ effec-tive control over their property was severely limited by “widespread requisi-tioning of industrial stocks, which were only released for definite purposes consistent with the central plan.”17
eucken drew the lesson from the German experience that Oskar Lange’s notion of market socialism (see chapter 2) was internally inconsistent: its principle of allocation by prices, to be determined through competitive-like bidding, clashed with its principle of central control. In planning as Germany practiced it, the central authority first decided (for example) how much leather would be go into making shoes and how much into making industrial machine belts. Letting shoemakers and industrial-belt-makers
14 Ibid., p. 92.
15 For a theoretical discussion of the interventionist dynamic see John Hagel III and Walter e. Grinder, “From Laissez-Faire to zwangswirtschaft: The Dynamics of Interventionism,”
in peter Kurrild-Klitgaard, ed., Advances in Austrian Economics, vol. 8, The Dynamics of Intervention: Regulation and Redistribution in the Mixed Economy (Bingley, UK: emerald Group, 2004), pp. 59–86.
16 Ibid., p. 79.
17 Ibid., p. 80. For a firsthand perspective on Nazi economic controls, see Günter Reimann, The Vampire Economy: Doing Business under Fascism (New York: Vanguard press, 1939).
bid against one another for leather might result in fewer machine belts than the plan called for. That could not be allowed because it would disrupt other industries that were counting on having a certain number of belt-driven machines. eucken concluded:
[T]herefore, the central administration cannot leave the direction, in any important respects, of such means of production, to be decided through pricing, but must reserve the direction for itself, which was what happened in Germany. . . . To believe in the possibility of grafting prices on to the mechanism of control in a centrally administered economy is to believe in a squaring of the circle. . . . If control is left to the price mechanism, the central administration abdicates economically, while if the central administration takes over control, prices lose their directing function.18
The principle of consumer sovereignty – that consumer demands should determine the mix of goods produced – also failed to survive planning in practice. planners made their own allocation job easier by reducing the variety of goods produced, overriding consumer preferences. Thus “[t]he influence of consumers disappear[ed].”19
WeRNeR SOMBART AND THe GeRMAN HISTORIcAL ScHOOLS We discussed in chapter 4 the “older” German historical school of eco-nomics led by Wilhelm Roscher and Karl Knies, the “younger” histori-cal school led by Gustav Schmoller, and their influence on the American institutionalist economists of the progressive era and the New Deal. The
“Youngest” German historical school was led by Werner Sombart (1863–
1941) of the University of Berlin, who had studied under Schmoller. In his six-volume work Der moderne Kapitalismus (1902), Sombart offered a Marxian-influenced critical history of modern capitalism in the style of the younger historical school. In The Jews and Modern Capitalism (1911) he linked the rise of capitalism to a “Jewish aptitude” for enterprise, providing a counterpoint to the sociologist Max Weber’s idea that a “protestant spirit”
had been responsible.
Sombart’s work most directly relevant to Nazi economic policy was Deutscher Sozialismus [German Socialism] (1934). The english translation was more coyly titled A New Social Philosophy.20 It was so prowar and so
18 Ibid., p. 94; Walter eucken, “On the Theory of the centrally Administered economy: An Analysis of the German experiment: part II,” trans. T. W. Hutchison, Economica (New Series) 15 (August 1948), p. 190.
19 Ibid., p. 183.
20 Werner Sombart, A New Social Philosophy, trans. Karl F. Geiser (princeton, NJ: princeton University press, 1937).
pro-Nazi that the Nazi party distributed it as a textbook. Röpke summa-rized its message as a demand for “the militarisation of the whole society.”
In his evolution from a self-described “convinced Marxian” to a National Socialist, Sombart personified Hayek’s description of Nazism as an offshoot of earlier German socialist doctrines. To Röpke, the policy recommenda-tions of Sombart’s book exemplified the incoherence of fascist economics:
The climax of confusion is reached when the very men who are indefatigable in attacking – rightly or wrongly – the rationalistic and mechanistic charac-ter of industrialism and urbanism of our times are wallowing in schemes for economic planning, organisation and regimentation. This one of the numer-ous reasons which make, e.g., Werner Sombart’s Deutscher Sozialismus so unreadable.21
pLANNING DOcTRINeS IN BRITAIN AND AMeRIcA
The Second World War pitted the Axis powers – the variously fascist economies of Germany, Italy, and Japan – against the more market-directed societies of the Allies together with the communist Soviet Union. In the decades before the War the market economies had been moving ever far-ther from laissez-faire. Hayek characterized the British economic system in 1935 as a halfway house:
[T]he system under which we live choked up with attempts at partial plan-ning and restrictionism is almost as far from any system of capitalism which could be rationally advocated as it is different from any consistent system of planning. . . . We are certainly as far from capitalism in its pure form as we are from any system of central planning. The world of to-day is just inter-ventionist chaos.22
Several British and American writers observed the irony that during the war their economies were heading in the direction of their enemies’
economies.
even before the Second World War, a growing number of intellectuals in the United Kingdom and the United States were promoting the idea of greater government control over the economy. Leading figures on the UK
“Left” advocated various forms of socialism and central planning, while even the UK “Right” was offering a position somewhere between the free market and socialism. Harold Macmillan, the conservative Mp and future
21 Röpke, “Fascist economics,” p. 99.
22 Hayek, “The Nature and History of the problem,” in Hayek, ed., Collectivist Economic Planning, pp. 23–4.
prime Minister, proposed major expansions of the government’s economic roles in his 1938 book The Middle Way.23
Many intellectuals on the Left saw the Soviet Union as a model for the future. Keynes in the 1920s had sneered at the Soviets’ Marxist theories.
Now, in a 1933 essay, he regarded the Soviet Union as an interesting exper-iment in national self-sufficiency, though he worried that its doctrinaire and overly hasty methods of transformation were breeding incompetence and inefficiency.24 The British Fabian socialist writers Sidney and Beatrice Webb, having visited the Soviet Union, published Soviet Communism: A New Civilization? in 1935. In the following year Keynes gave a talk on BBc radio in which he accepted at face value the Webbs’s glowing report on Soviet practice. Said Keynes:
[T]he new system is now sufficiently crystallized to be reviewed. The result is impressive. The Russian innovators have passed, not only from the revo-lutionary stage, but also from the doctrinaire stage. . . . They are engaged in the vast administrative task of making a completely new set of social and economic institutions work smoothly and successfully over a territory so extensive that it covers one-sixth of the land surface of the world. Methods are still changing rapidly in response to experience. The largest scale empir-icism and experimentalism which has ever been attempted by disinterested administrators is in operation. Meanwhile the Webbs have enabled us to see the direction in which things appear to be moving and how far they have got.
It is an enthralling work . . . . It leaves me with a strong desire and hope that we in this country may discover how to combine an unlimited readiness to experiment with changes in political and economic methods and institutions, whilst preserving traditionalism and a sort of careful conservatism . . . 25 Keynes worried that mass unemployment had bred totalitarian ideas on the european continent, and that the same could happen in the United Kingdom unless the government intervened directly to reduce unemploy-ment. The LSe sociologist Karl Mannheim went one step farther in his book Man and Society in an Age of Reconstruction (1940), arguing that the UK would remain a free society only if it would adopt central planning to alleviate unemployment. Mannheim advanced a seeming paradox: “At the highest stage freedom can only exist when it is secured by planning.”
In Mannheim’s understanding, freedom “cannot consist in restricting the powers of the planner, but in a conception of planning which guarantees the existence of the essential forms of freedom through the plan itself.”26
23 (London: Macmillan, 1938). See Bruce caldwell, Hayek’s Challenge, pp. 232–8.
24 John Maynard Keynes, “National Self-Sufficiency,” Yale Review 22 (June 1933), pp. 755–69.
25 John Maynard Keynes, Collected Writings, vol. 28, Social, Political, and Literary Writings,
25 John Maynard Keynes, Collected Writings, vol. 28, Social, Political, and Literary Writings,