Monday, January 24, 2005


Prof William Coleman appears to have started a column at the Social Affairs Unit blog with the theme of Anti-Economics. I was very impressed with a talk he gave at the IEA a while ago and I am looking forward to more from the column:

Consider the society that in 1870 had:
• the largest population of any Western country;
• the largest and densest academic system of any country; and
• had over the preceding 40 years made distinguished contributions to economic theory (including marginal utility theory, marginal productivity theory, and the first supply and demand schedules ever drawn).

That country is Germany. But despite the strength of its heritage in economics, from the time of the formation of German Empire in 1870, economics (as it is ordinarily understood) died. It was replaced by the German Historical School of Economics (GHS), led by Gustav von Schmoller, who could claim after a period of time that the appointment of any "Smithian" in the German University system was impossible.

Repudiating all theory, the Historical School dedicated itself to eliminating "Smithianismus" and "Manchesterismus", and providing rationalisations for the cartelisation of industry and the establishment of protection. They were keen advocates of "social welfare" programmes to preserve cohesion of the new state. They also eagerly lent themselves to the collection of colonies in Africa and the Pacific, and the construction of a massive naval fleet. Giving something to everyone, German lecture theatres were flooded with students keen to absorb the economic wisdom of the Historical School of the day.

The hostility of the Historical School to theory amounted to a program of intellectual disarmament. Did Germany suffer? Not immediately. Between 1871 and 1910 real GDP per head grew a more than respectable 73 percent. (Protectionists should note that Germany did not grow as much as Sweden. With a distinctly less protectionist policy, Sweden experienced a real GDP growth per head of 117 percent over the same period.) But economics – like medicine or dentistry – proves its value best, not in the easy times, but the difficult ones. The GHS amounted to a piece of intellectual disarmament, and this had two catastrophic consequences after 1914. The German hyperinflation of 1922-23 is directly attributable to the precepts of Historical School that had "proved" the falsehood of what we call "monetarism". The ineffectiveness of German economists in dealing with the Great Depression is also attributable in part to the intellectual impoverishment of the Historical School. The most effective responses to the Depression, recall, came from the centre of mainstream economics, in Cambridge.

Germany paid for its anti-economics in material terms. And perhaps it paid in other terms. For the costs of damaging the credit of economics will never be purely material. Economics is built on premises that have a far wider remit than the simply material. These premises include; the oneness of human kind; the value of rationality, utility, freedom; the strong likelihood that each person is the best judge of their interest. Damage these premises, throw them away, or cover them with doubt and derision, and it is not just a lower GDP that is in prospect. Anti-economics may yet be as dangerous as the guillotine.


Anonymous Eckeman said...

The German response to the great depression had little or nothing to do with the supposed dearth of economic theorists of a neoclassical variety in that country. With just a little reading you would know that there were many German marginalist economists working in Germany between 1900 and 1940--Dietzel, Conrad, Wagner, Eucken and Schumpeter come to mind (the latter holding a professorship at Bonn in the 1920s). So these are simply fairy tales retold ad nauseam by economists who wished they had some relevance for the world. F.A. Hayek was particularly keen to retell these stories. The fact remains that it was heterodox thinking (and in the case of the Nazis) willful and ruthless disregard of economic "fundamentals" (i.e., guns and butter) that ended the depression in Germany. As Keynes himself later observed, Germany was the first country to recover from the depression. The Brüning government which preceded the Nazis was committed to the very orthodox remedy of deflation between 1930-33, one that Hayek himself prescribed to his own great later embarrassment (he never forgave Keynes for getting this right). One of the last countries to pull out of the depression was France, then also pursuing a policy defending gold convertibility of the franc. Economics as it is currently taught is the naked emperor of the social sciences. Have a look at Roger Middleton’s “Charlatans of Saviours” or Steve Keen's “Debunking Economics” if you're not convinced. Neoclassical economics is in a deep intellectual funk, one that‘s terminal I’m afraid. There is an inverse relationship between higher education in economics and economic performance. Britain bwteeen 1890 and 1990 is a case in point. An endless retinue of highly-respected economists advised various British governments in these years (Edgeworth, Pigou, Marshall, Beveridge, Robins, Hicks etc.) and yet the British drove their economy into the ground. By comparison, Germany did rather better, perhaps because neoclassical and Keynesian economists were kept at arms length from the levers of power. Economics as a discipline is completely irrelevant to technological change, wealth creation and overall material prosperity.

6 November 2005 at 11:46  
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