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Tuesday, January 5, 2010

Dangerous Historical Myths

One of the most powerful influences on human affairs is historical myth—beliefs about the past that are simply wrong. Some historical myths have far-reaching and baleful effects because they shape the way people understand not only the past but also the present, leading them to make harmful or even dangerous decisions. This seems to be especially so with economic history.

Take the standard account of the Great Depression and the New Deal. In many ways the New Deal itself was one result of another historical myth: the widely received account of what had happened to the German economy in the first half of the twentieth century, particularly during World War I and the Third Reich. That myth probably did more harm than almost any other in that century.

In the case of the Third Reich, the widely held perception even now is that whatever else may be said about his regime, Hitler managed to bring about a dramatic revival of the German economy. After 1933 Hitler and his finance minister Hjalmar Schacht stabilized the economy and managed to solve the huge unemployment crisis that had destroyed the Weimar Republic’s legitimacy. This was partly due to Schacht’s imaginative monetary policy and partly to massive public works programs, such as the autobahnen. There was a sharp move away from free markets to a much more interventionist economy that worked better than what had gone before. During World War II this economy was able to achieve great success in terms of war production, notably under Hitler’s armaments minister, Albert Speer.

Obviously there is some truth in this account, or else it would not be credible. There was indeed a sharp move in the direction of a more state-controlled economy. In fact few people realize just how interventionist—even socialist—the policies of the Nazi state were (although the full name of the party should give some indication of this). However, the picture overall is mostly wrong. Adam Tooze conclusively debunked this account in his masterful work, The Wages of Destruction: The Making and Breaking of the Nazi Economy. Tooze shows that the public works programs had little effect on unemployment and wasted resources; that the 1930s saw constant financial and foreign-exchange crises for the Reich; that by 1939 the condition of the German economy was desperate and that this was in fact a major factor in Hitler’s increasingly aggressive policy; that the supposed success of Speer simply did not happen; and that overall the regime was so crippled by its economic incompetence that it is nothing short of a miracle that it had as much military success as it did.

Fortunately, while Nazi Germany’s economic policy and its supposed success had some influence in the 1930s (not least among some New Dealers), it had none after 1945. However, an earlier episode in German economic history had much greater consequences and influence—both entirely malign. When war broke out in July 1914 the German government and High Command planned and hoped for a short and decisive war. Things of course did not work out that way and by the fall of 1916 it was clear that this strategy had failed, while the British blockade grew ever more stringent. In the face of impending defeat, the German Empire’s government was effectively taken over by the military in the person of the army’s quartermaster general (and effective chief of staff) Erich Ludendorf. His thinking and policy were set out in his 1935 work and apologia, Der Totale Krieg (The Total War).

Ludendorf argued, first, that all the human and physical resources of a nation made up its military capacity, or Wehrkraft. To ensure victory and survival in the zero-sum game of nations, all these resources had to be controlled and directed to a single purpose. Who was to do this? The answer for him was simple: Since the goal was victory in conflict, it had to be the military. What this meant in practice was a form of planned economy in which all economic activity was directed by the general staff through a series of planning boards and detailed regulations and targets.

The main point was to remove the profit motive—Ludendorf never tired of ranting against unpatriotic profit seekers and selfish individualists—and replace it with structured command relations. In one sense the aim was to transform the entire economy and society into an army, with the typical command-and-control structure of the modern military. In another sense the goal was to turn German industry into one giant corporation by a process of planning and cartelization. One important aspect of the regime created by Ludendorf, just as for Nazi Germany, was a close alliance between the military, the political and bureaucratic classes, and the managerial elite of large corporations, or at least some of them.

Ludendorf’s policy was a disaster. Production actually declined or was wasted, and the financial methods led to severe inflation, which of course became even worse after the war. The policy also led to increasing resistance from the population, as his ever-more-furious outbursts revealed. Eventually the increasingly desperate situation led to the gamble of the huge spring offensive of 1918. Its failure meant the war was definitively lost.

However, the policy of Germany after 1916 was not seen at the time or for long after as the enormous mistake that it was, even from the High Command’s point of view. Instead it was thought to have been a huge success. Strangely this view became even more widespread after 1918—not least among the victorious powers. A myth took hold: that the organization of the economy under Ludendorf was a model for other nations in peacetime.

This belief had disastrous consequences. It certainly did in Germany itself since it provided much of the basis for the economic policies of the Third Reich, as well as providing yet another justification for slave labor and the systematic plunder of subject populations. In milder form this received view had a major impact in both Great Britain and the United States during the interwar years.

However, its most significant effect was felt in the east. When the Bolsheviks came to power in 1917 they had no real idea of what socialism would look like. Their initial effort, so-called war communism, proved utterly catastrophic and was reversed with the introduction of the New Economic Policy in 1921. What followed was a huge debate as to what kind of model to adopt. The “center” argument that eventually triumphed under Stalin was to adopt the supposedly successful model of the World War I German war economy. So the Soviet economy was in many ways the product of a mistaken idea about Germany’s war economy and how it had worked.

Misunderstandings of what is actually happening in economic affairs do not only have immediate consequences. When they shape the politicians’ and public’s view of history, their effects can be immense, sometimes comically, but more often tragically.

  • Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.