The Other Canon of German Development Economics

Book Review - The Visionary Realism of German Economics From the Thirty Years' War to the Cold War by Erik Reinert (2019)

This extraordinary work of scholarship by the Norwegian economist Erik Reinert provides an essential missing puzzle piece for many readers in the Anglophone world. It gives us a kind of hidden history. In the 19th century Friedrich List showed us how major powers may advance free trade for their own purposes after they have already achieved industrial dominance and here Reinert shows us that all nations before and since then that have moved from poverty to wealth have done so through economic policies based on some of the principles of another canon, one that remains less taught, less celebrated, sometimes unknown and even untranslated, “as a mandatory passage point” in their development.

German economics was born out of great suffering, death and poverty. The Thirty Years’ War had destroyed the country and split it into many small states, leaving it an “economic wasteland” and so from its inception, Reinert says, German economics differed fundamentally from the English in its globalizing phase, in that it was economics from the perspective of “a backward nation attempting to catch up with its wealthier neighbours.”

During 500 years of political support for increasing returns industries, it is an irrefutable historical fact that never has a nation taken the step from poverty to wealth without passing through a temporary stage of protecting such increasing return activities.

Reinert later applies these ideas to free trade globalization in the 1990s and to the expansion of the EU that locked its peripheral nations into a relationship of underdevelopment and made sovereignty impossible.

When two nations at widely different technological levels integrate, the first casualty is the most advanced economic activity in the least advanced nation. I argue that this effect represents one of the mechanisms of primitivization that accompany free trade shocks and premature globalization. This effect in turn contributes to falling employment for skilled people, to falling wages and factor price polarization, and consequently to migration of skilled labour.

By contrast, the English cosmopolitan school of thought coming from Ricardo’s international trade theory provided a moral and technical defense of its global dominance after it had already developed, which is why List accused them of “kicking away the ladder” to other nations to do as they had done and follow their real development path. Thus the German school of thought provided the road map for colonial and “laggard” nations to advance their interests and to escape the trap. After the Thirty Years War, in a state of chaos “similar to what we would call a failing state today”, he says, their “pragmatism called for an orderly environment, with the state as a necessary facilitator.” In the German school we find the basis for the welfare state, attempts to address “the social question” and for national industrial policy. Reinert details its Continental and Renaissance origins but cites the German school because this is where it was most studied, formulated and systematized.

Reiniert begins with philosophical underpinnings:

At its most fundamental level, the contrast between English and German economics lies in the view of the human mind. To John Locke, man’s mind is a blank slate… To Leibniz, man has an active mind that constantly compares experiences with established schemata, a mind both noble and creative. Of Adam Smith’s ideas, the one most repudiated by German economists was that man is essentially an animal that has learned to barter…. In the German tradition, including Marx and Schumpeter, the view is that man is an animal who has learned to invent. Nietzsche later added the point that man is the only animal that can keep promises, and therefore creates laws and institutions… what differentiates English from German economics — barter and ‘metaphysical speculation’, on the one hand, and production and institutions, on the other.

While Ricardo “did not separate the financial sector from the real economy” the German emphasized infant industrial development and came “essentially from the point of view of production rather than trade.” It was holistic in its consideration of “factors such as geography and history, technology and technical change, government and governance, and social problems and their remedies.”

The two different canons are based on fundamentally different Weltanschauungen. The lines of the two canons can be traced back to the period when the term economics was first used, to Ancient Greece... While today’s standard economics is based on a mechanistic and barter-centered tradition, Renaissance economics —The Other Canon— is dynamic, activistic-idealistic, and production centered.

Its permanent features according to Reinert included technology and new knowledge, a qualitative “activist-idealist approach” to “man and his needs” as central, a focus on production over trade that believes economic harmony is manmade, not natural. Since the Renaissance, he writes, one very important task of the state had been “to create well-functioning markets by providing a legal framework, standards, credit, physical infrastructure and – if necessary – to function temporarily as an entrepreneur of last resort.”

Reinert paints a picture of economist-adventurers who led lives of extraordinary risk, often being exiled, disgraced and bankrupted. The task of attempting to advise rulers to support their ideas meant putting themselves in a situation where, as Reinert puts it, political correctness was a question of life or death.

In the 17th century Veit Ludwig von Seckendorff “conceived of a holistic science of public administration fit to reconstruct the more than 300 independent German principalities recognized by the Peace of Westphalia” founding the basis for the system of Cameralism in response to the total economic and social breakdown, the science of state building and administration, an “integration of administration, policy and economic theory”. Its ethos was in building up the skills and knowledge of the people, building up education and “learned societies” emphasizing duty and the corpus politicum in contrast to the perspective of individualism. He summarizes Seckendorff’s vision in eleven principles:

1. Industrialization of domestic raw materials.

2. Stop export of raw materials and re-import of finished product. Local industrialization.

3. Gewerbefreiheit and the elimination of guilds.

4. Introduction of new economic activities, i.e. increasing the division of labour.

5. Careful tax and tariff policy.

6. Protection of local production.

7. Loosening the binding of the artisans to the towns.

8. Renting out government land with increasing population pressure.

9. Putting the school system in line with the economic policy.

10. Building out a welfare policy.

11. A very ‘modern’ policy of adult education.

Johann Heinrich Gottlob von Justi, mercantilist, cameralist and “economist-adventurer” systematized the “science of policy”, and “laid the necessary groundwork for the creation of European nation-states and for the Industrial Revolution”. These figures, Reinert says, “should be required reading in the many small and medium sized nations who are presently only falling further behind” through globalization.

Philipp Wilhelm von Hörnigk’s principles of economic policy for an impoverished nation included agricultural experimentation, the recommendation that commodities which cannot be used in their natural state should be worked up within the country, goods should be sold abroad in manufactured form with no importation of goods that can be produced at home.

Jacob Bielfeld was an advisor to Frederick the Great of Prussia and contributed to the question of the causes of national decline long before the famous works on the subject. The factors he studied included: migration, war, excessive demands from neighboring states, Imperial over-extension, economic and resource dependency, division of empires or balkanization, inequity, excessive religion, despotic oppression and excess of liberty, decline of production, arrogance/pride/ideleness (along the same lines as Veblen’s later Theory of the Leisure Class), senseless laws, epidemics, abuse of strong liquors, relaxation of military discipline, frivolous (non-productive) expenditure, internal division, assassinations among others.

He cites Friedrich List in his time as the “one lonely voice speaking out against the economic policy of liberalism and peripheral deindustrialization.” List, the champion of early railways and infant industry protectionist, influenced the Irish revolutionaries, worked with French and American thinkers of like mind and was both a man of action and a man of ideas as he worked tirelessly, was exiled and bankrupted himself to see his ideas put into practice. These same ideas that influenced List influenced the next major world successes in industrial development, America and Japan, who “built their theories and policies on the German model”.

During the nineteenth century, both US and Japanese economists were trained in German economics: US economists through their graduate studies at German universities, and Japanese economists through their training under not only German economics professors in Japan but also a large number of German-trained US professors teaching in Japan.

As Roman Szporluk has detailed, List also influenced the path of Russia via Sergei Witte.

In a chapter that traces the idea of the stages of history the US and German economists, notably List, differ from the English Smith once again in believing that the correct understanding had to be based on production rather than commerce. In another chapter co-authored with his son, they analyze the idea of creative destruction in Nietzsche.

While the history of all these great figures is largely ignored or buried, the two German economists widely known in the West are Schumpeter and Marx.

List, Marx and Schumpeter — share an essentially very similar dynamic view of economic development… The German tradition produces theories of uneven growth; Anglo-Saxon neoclassical economics tends to produce theories of even growth.

Reinert details how these two figures drew on the greatness of the German scholars but both engage in the theoretical “schizophrenia” of drawing from the German tradition while admiring or re-integrating the English. Marx, for example, built his ideas on the achievements and insights of the German school but added Ricardo’s labour theory of value. Thus Ricardo, he argues, gave birth to the 20th century political right and left. Today most in the Anglophone world still think of this spectrum not so much in the original French revolutionary terms but as Smith versus Marx.

He details another phase in German economic ideas, the development of the Verein für Sozialpolitik, a group of economists trying to solve the social questions of labour and inequality, under the leadership of Gustav Schmoller. Although the Verein für Sozialpolitik was later dissolved by the Nazis, after WWII German ideas fell out of favour in the English speaking world to say the least. Reinert ends with the “swan song” of Werner Sombart, a friend of Max Weber, a scholar of the Verein für Sozialpolitik and considered one of the great thinkers of his time, who became sympathetic to fascism.

And so, Reinert says, we in the West “threw the baby out with the bathwater” in erasing hundreds of years of scholarship. German economics went from “world center stage” to “oblivion” and with these ideas out of the way, after the Cold War, America as the new global superpower advanced the same ideas and strategies England had in the 19th century but to Latin America, then de-industrializing to Asia.

Reinert describes also how the Morgenthau Plan followed by the Marshall plan vindicated the ideas central to the German school in that it used de-industrialisation as a form of total disempowerment and then re-industrialisation based on the understanding that the population carrying capacity of a nation is based on its industrial capacity, and that millions would starve to death without this capacity. He then adds:

the Morgenthau Plan was resurrected de facto by the Washington Consensus, starting in the 1980s and, even more strongly, after the end of the Cold War in 1991. This new de facto plan came with the label of ‘structural adjustment’, which often had the effect of deindustrializing third world nations

He makes a final case for inclusion of the German thinkers who he argues gave the world a tried and tested model of transcending poverty.

‘He who heals is right’ goes an old saying in medicine… a plea for returning to the type of analysis that has successfully ‘healed’ poverty and created wealth from 15th century England to Korea in the 1970s. In this tradition, economic development is activity-specific, tied to certain economic activities exhibiting high-productivity growth and increasing returns in a synergetic system formed by the presence of a large division of labour

He continues,

faced with the resurrected theories of Justi and his contemporaries, the economics profession of the 1990’s collectively decided not to trust governments to do what governments had done as a normal course of affairs continuously, and largely very successfully, from 1485 until the reconstruction of post World War II Europe lasting until the 1960’s. It is difficult to see this as anything but pure ideology masked as ‘science’.

And in the end…

the theories prescribed by Adam Smith and, in particular, David Ricardo hit the West like a boomerang in the form of de-industrialization and financial crises. Asia, particularly China, has learned what used to be our strengths, while we ourselves have unlearned them. Now large parts of the West risk facing a post-industrial neo-feudalism, where 1 per cent own most of the capital and a large part of the 99 per cent increasingly work informally and under falling real wages. It is time we resurrect more realistic economic theories – the historical and institutional schools – on both sides of the Atlantic.

Hearing the drum beat for war with China getting louder in America lately it might be the case that the German tradition holds the key to too much success to tolerate. Will the de-industrialized powers re-learn or will they simply bomb those who have already learned too much?