'The Visionary Realism of German Economics' forms a collection of Erik S. Reinert's essays bringing the more realistic German economic tradition into focus as an alternative to Anglo-Saxon neoclassical mainstream economics. Together the essays form a holistic theory explaining why economic development--by its very nature--is a very uneven process. Herein lie the important policy implications of the volume.
About the Author
Erik S. Reinert is Professor of Technology Governance and Development Strategies at Tallinn University of Technology, Estonia, and also Chairman of the Other Canon Foundation in Norway. He holds a BA from Hochschule St. Gallen, Switzerland, an MBA from Harvard University, and a PhD in economics from Cornell University. For almost 20 years he ran a manufacturing company producing in three European countries. This background brought Reinert close to economics as a “science of practice” (Erfahrungswissenschaft). Lecturing in five languages, Reinert’s work has taken him to more than 65 different countries. His book How Rich Countries Got Rich … and Why Poor Countries Stay Poor, published in more than 20 languages, was shortlisted by the World Economics Association in 2016 for inclusion among the 10 most important economics books of the last 100 years.
Read an Excerpt
GERMAN ECONOMICS AS DEVELOPMENT ECONOMICS: FROM THE THIRTY YEARS' WAR TO WORLD WAR II
Erik S. Reinert
Three main elements make a study of the German economic tradition) particularly rewarding for development economists. First of all, German economics was born late and at a time when the nation was particularly backward, poor and ravaged by the Thirty Years' War (1618–48), which had cost the lives of up to 70 per cent of the civilian population in some areas. Therefore, from its very inception, German economics was that of a backward nation attempting to catch up with its wealthier neighbours. As opposed to English and American economics, whose philosophical base changed radically when the nations attained world economic power, the analytical base of German economics was not modified as the nation grew wealthier. Second, German economics has consistently, through the centuries, seen the economy from a different vantage point with different metaphors: essentially from the point of view of production rather than trade, and operating at a much lower level of abstraction than today's mainstream economics and its predecessors. Third, the scope of economics in the German tradition has been much wider than in the Anglo-Saxon mainstream. Factors such as geography and history, technology and technical change, government and governance, and social problems and their remedies, have all been central to the approach since its very inception.
A frequent theme in German historical writing is the idea of the country as a verspätete nation, a laggard nation, as compared to the rest of Europe. In such a situation, the state plays a very different role than in the more developed nations. As Keynes said, 'the worse the situation, the less laissez-faire works.' It was therefore only natural that other latecomers — in particular, the United States and Japan — built their economic theories and policies on the German model. During the nineteenth century, united in a common position against English economics, economics in Germany and the United States strongly influenced and fertilized each other. These catching-up nations formed a common theoretical front against England, a nation that not only made it politically clear that she saw it as a primary goal to prevent other nations from following the path of industrialization, but also — for the first time in the history of economics — possessed an economic theory that made this goal a legitimate one. From a policy perspective, the novelty of the economics of Smith and Ricardo was that they made colonialism morally defensible.
The nineteenth century produced important German–American economic exchanges and alliances against English classical economics. Friedrich List, a German political refugee in the United States, was inspired by the vision and arguments of US economists: publications by Daniel Raymond and Mathew Carey in 1820 and 1821 provided List with new ammunition and inspiration. Later in the century, another German–American pair of economists, Henry Carey and Eugen Diihring, supported and defended each other. 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 (see Sugiyama and Mizuta 1988). There were no graduate schools in economics in the United States at that time, and most US economists received their Ph.D.s at German universities, as did all the founders of the American Economic Association. Reading knowledge of German was mandatory for a Ph.D. in economics in the United States until World War II.
We should not, however, exaggerate the differences between the German economic tradition and that of the rest of continental Europe. In the long term, the most important dividing line was between the English economic tradition and the continental European traditions seen as a whole. The works available in English on the German economic tradition tend to be seen from an Anglo-Saxon viewpoint, where German economics is seen in contrast to the English tradition without recognizing its similarities to the rest of the continental tradition. To most historians of economic thought, cameralism — the particular German form of economics — is solely a German phenomenon. Many are not aware that both the term 'cameralism' itself and the works of the cameralist authors spread from Sweden and Russia to Spain and Italy. The textbook written by the first professor of economics outside Germany, Anders Berch in Uppsala (Berch 1747), used the term 'cameralism' in its title. The first professor of economics in northern Italy in the 1760s, Cesare Beccaria, was one of 'cameral sciences'.
The only two German-language economists broadly studied in the rest of the world — Karl Marx and Joseph Alois Schumpeter — are, in fact, much less original in the context of the German tradition than they appear in the standard historiography of economic thought. Marx and Schumpeter indeed shared a typical 'German' view of productive forces bringing about change in society. In his Foreword to the Japanese edition of The Theory of Economic Development (reproduced in Clemence 1951: 158–63), Schumpeter stressed the similarities between Marx' approach and his own, contrasting their approach with Walrasian and Marshallian economics. In the German productionbased tradition, capital per se has no value, and this is reflected both in Schumpeter and in Marx. As a result, the interest rate under perfect equilibrium in Schumpeter's system would be zero. This finds its parallel in Marx's proposition that constant capital does not produce any surplus value. However, these similarities, according to Schumpeter, are 'obliterated by a very wide difference in general outlook' (in Clemence 1951: 161).
Seen from the perspective of German economics, the part of Marx's work alien to this tradition was his use of Ricardo's labour theory of value. Marx's contemporaries among German economists, starting with Eugen Diihring who was the first to comment on his work, therefore tended to be sympathetic towards Marx's economic analysis but not to his turning the social pyramid upside down as the solution to society's ills. Still, Marx's influence on the German economists who followed him is clear. In fact, in his book review of Werner Sombart's main work, Der moderne Kapitalismus, Gustav Schmoller, the oldest of the giants of the New Historical School, chided his younger colleague for being too greatly influenced by Marx.
Permanent Characteristics of the German Economic Tradition
It is possible to distinguish an economic tradition in Germany from after the end of the Thirty Years' War in 1648. Prior to this date, in the tradition of Xenophon, a literary tradition generally labeled Hausvaterliteratur gave advice on how to run estates, small and large. Fiirstenspiegel (Wings' Mirror'), of which the best known is Sachsenspiegel from the twelfth century, were books that collected the laws and customs of the German states. During the three hundred years from 1648 until the German economics tradition dissolved after World War II in 1945, a continuity of principles and approaches can be observed that clearly distinguished this type of economics, both from English economics after 1776 and from today's mainstream economics. In the chapter on 'Mercantilism and Economic Development' in this volume, we point to the similarities between English economics before 1776 and the German tradition.
Different types of economics tend to be influenced by the professions from which the economists are recruited. English economists were, to a large extent, merchants and traders who brought their professional perspective with them. Adam Smith spent many years as a customs inspector, adding to the commercial bias of English economic theory. Indeed, a common German criticism of English classical economics has been that it reduced the science of economics to catalectics, to a science limited to the study of barter, trade and exchange. German economists, by contrast, were involved in the management of the many small German states. The term cameralism itself originates in the camera principis or Kammer, that is, treasury. The perspective of the cameralists was that of public management, of taxes and institutions, laws and regulations. Their view of economic development was, therefore, very practical, and led them to a consideration of production — rather than trade alone — and the balance between different economic activities. For example, the need for creating a healthy base for taxation led them to favour the promotion of mechanized manufacturing, whose employees would gain a taxable income and whose owners were much better tax subjects than farmers or small artisans. German economists were, almost to a man, in ardent opposition to the French Physiocrats, who established agriculture as the only producer of 'net wealth' (see also the chapter on 'The Italian Tradition of Political Economy' in this volume).
The German economic tradition focuses on the state as an important economic facilitator and occasionally also as an entrepreneur of last resort in difficult situations (Reinert 1999). Probably also as a legacy of the chaos of the Thirty Years' War, a chaos similar to that of any 'failing state' today, pragmatism called for an orderly environment, with the state as a necessary facilitator in order to create individual opportunity and happiness. The state is seen as something through which, rather than against which, individual liberty and progress are gained within the framework of a common weal? Through this tradition, German economics provides key insights for contemporary economies where the 'natural order' is non-productive rent-seeking involving raw materials and/ or cheap labour, and where the 'natural order', at times, is utter chaos.
German economics is above all an Erfahrungswissenschaft — a science based on experience. There is little metaphysical speculation and high abstractions; many considered the economic theories of David Ricardo to be an example of 'metaphysical speculation'. Strukturzusammenhänge — structural coherence and connections — among economic factors, and between the economy and the rest of society, are not only obvious, understanding such connections is also most important for both economic theory and policy. Synergies would be one example of this. Compared to Anglo-Saxon economics, the German approach has therefore always been holistic. Economics was to become an umbrella science of the social sciences. There was only one criterion for what was to be included under the heading of 'economics': relevance. To the degree that nutrition might be important to the economy at one point in time, it would be a part of economics.
Praxisnähe — closeness to reality — and relevance have been key criteria for academic quality in this tradition. There is also a fundamental understanding that important economic factors are irreducible to mere figures and symbols. A frequent criticism is that standard economics often produces qualitätslose Grössen, quantities that are devoid of any qualitative understanding. Even the most accurate and comprehensive description of a human being by all his or her quantifiable aspects — height, weight, percentage of water and trace minerals — would leave out the key factor in economic development, what Friedrich Nietzsche called Geist and Willenskapital: the wit and will of mankind.
As it developed, German economics came to be solidly based on the philosophical foundation of Gottfried Wilhelm von Leibniz (1646–1716) and Christian Wolff (1679–1754), arising from the legal tradition of Naturrecht or natural law. The devastation of the Thirty Years' War created a need for a common basis of law regardless of creed. In the natural 'uncivilized state', the natural law tradition maintains that man still has moral obligations, the origins of which are to be found in nature. Modern state theory also emerged in the same period. At the core of the system of Christian Wolff, who came to be the basis of German economics starting around 1750, rests the presupposition that man is essentially a social, peaceful and rational being. Related to this is a fundamental belief in man's common sense: der gesunden Menschenverstand.
Schumpeterian elements are deeply embedded in the German economics tradition. A focus on learning and progress, very clear in Leibniz and Wolff, is based on the Gottesähnlichkeit of man: man's near-God-like quality of being able to create new things. Being born in the image of God meant that it was man's pleasurable duty to invent. 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 — a tabula rasa — with which he is born, and which passively receives impressions throughout life. 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 tradition that followed Smith, ideas and inventions have been produced outside the economic system. Karl Menger, the founder of the Austrian School of Economics, dedicated a whole chapter in his Grundrisse to refute Smith's view on this point. 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. Putting these elements together, we have an impressionistic picture of what differentiates English from German economics — barter and 'metaphysical speculation', on the one hand, and production and institutions, on the other.
To sum up, the following are the main characteristics that distinguish the German economic tradition — from Gottfried Leibniz and Christian Wolff, via Johann Gottlob von Justi and Friedrich List, to the Verein fur Sozialpolitik and the Historical Schools:
Centre of theory: man and his needs: Der Mensch and seine Bedürfnisse.
A non-m echanical understanding of the world: qualitative (verstehen, as opposed to purely quantifiable 'begreifen' (Drechsler 2004).
An activist–i dealist approach to economic policy based on morality and ethics, as opposed to a passive–materialistic attitude to economic policy (these are Werner Sombart's terms).
'History matters': theory and policy must be based on the context and should understand the cumulative mechanisms in economics.
Technology and new knowledge are the driving forces of the economy.
Focus on production, rather than trade.
Economic activities are seen as qualitatively different as carriers of economic growth.
Economic harmony is man-made, not natural. Passivity is more likely to create 'spontaneous disorder' than 'spontaneous order'.
Cameralist Economic Policy: From Veit von Seckendorff (1626–1692) to Wilhelm von Hörnigk (1640–1714)
Veit Ludwig von Seckendorff (1626–1692) has been called the 'Adam Smith of Cameralism' (Small 1909), and justifiably so. His times were violent and extremely difficult for Germany. The Thirty Years' War (1618–48) was a religious war, initially intra-German, which gradually came to involve several European powers at the time, including Spain, France, Denmark and Sweden. The war had no winner, but it became obvious to a number of German intellectuals of the next generation that the real loser was civilized society as such. When Seckendorff was 16 years old, his father, a German in the service of the Swedish army, was executed as an alleged spy. By the time Seckendorff died at the age of 66, the armies of Louis the XIV of France had recently utterly destroyed one German state, the Palatinate (Pfalz). In between, there were wars with the Turks and two more wars with France that led to the loss of Strasbourg, where Seckendorff had studied. Cameralism, in our view, cannot be properly understood outside this context of a simultaneous reconstruction of a civilized society and of what would today be called 'failed states': states where economic life and basic institutions had to be built, virtually, from scratch. The 'natural order' of the day was barbarism.(Continues…)
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Table of Contents
Introduction; 1. German Economics as Development Economics: From the Thirty Years’ War to World War II;
2. The Role of the State in Economic Growth;
3. A Brief Introduction to Veit Ludwig von Seckendorff (1626–1692);
4. Exploring the Genesis of Economic Innovations: The Religious Gestalt-Switch and the Duty to Invent as Preconditions for Economic Growth (with Arno Daastøl);
5. Johann Heinrich Gottlob von Justi (1717–1771): The Life and Times of an Economist Adventurer;
6. Jacob Bielfeld’s “On the Decline of States” (1760) and Its Relevance for Today;
7. Raw Materials in the History of Economic Policy; or, Why List (the Protectionist) and Cobden (the Free Trader) Both Agreed on Free Trade in Corn;
8. Compensation Mechanisms and Targeted Economic Growth: Lessons from the History of Economic Policy;
9. Karl Bücher and the Geographical Dimensions of Techno-Economic Change: Production-Based Economic Theory and the Stages of Economic Development;
10. Austrian Economics and the Other Canon: The Austrians between the ‘Activistic-Idealistic’ and the ‘Passivistic-Materialistic’ Traditions of Economics;
11. Nietzsche and the German Historical School of Economics (with Sophus Reinert);
12. Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter (with Hugo Reinert);
13. Schumpeter in the Context of Two Canons of Economic Thought;
14. The Role of Technology in the Creation of Rich and Poor Nations: Underdevelopment in a Schumpeterian System;
15. Towards an Austro- German Theory of Uneven Economic Development? A Plea for Theorising by Inclusion;
16. The Qualitative Shift in European Integration: Towards Permanent Wage Pressures and a ‘Latin- Americanization’ of Europe? (with Rainer Kattel);
17. Primitivization of the EU Periphery: The Loss of Relevant Knowledge;
18. Mechanisms of Financial Crises in Growth and Collapse: Hammurabi, Schumpeter, Perez, and Minsky;
19. Full Circle: Economics from Scholasticism through Innovation and Back into Mathematical Scholasticism. Reflections on a 1769 Price Essay: “Why Is It That Economics So Far Has Gained So Few Advantages from Physics and Mathematics?”;
20. Pouring out the Baby with the Bathing Water: Werner Sombart and the Death of the German Tradition in Economics; Index.
What People are Saying About This
"Almost but not quite alone, Erik Reinert has for decades tended the flame of an economics based on history and the urban, industrial, developmental state. These essays assemble his prodigious scholarship on the German tradition, a labor of love and dedication with enduring relevance, especially in today's Europe, dominated by a Germany alienated from centuries of her own ideas.”
James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations, LBJ School of Public Affairs, and Professor of Government, University of Texas at Austin, USA, and Author of The End of Normal: The Great Crisis and the Future of Growth
“Erik Reinert’s 20 essays on three centuries of German economics are a remarkable work of scholarship by an outside observer. They highlight the focus on the role of the state and on development as well as the less abstract methodology and the interdisciplinary tradition as distinguishing characteristics. The book is strongly recommended to every reader longing for an economics which is not only rigorous but also relevant for solving the problems of the real world.”
Harald Hagemann, Professor of Economic Theory, University of Hohenheim, Germany
“This important book reveals how the Anglocentric approach has impoverished both recognized economic thought and the profession of economics. Over three centuries, writers of the German Historical School made relevance (not available tools) the starting point for economic analysis and so incorporated insights from many other fields of knowledge. Reinert’s wisdom and erudition showcased here have immense methodological significance not just for economists but for all social scientists.”
Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University, India
“If Standard Textbook Economics does not work (and it doesn’t), then the classic older German tradition, with its committed insistence on realism rather than on self-referential modeling, is one of the best alternatives to check out. Erik Reinert, one of the most distinguished, erudite and solution-focused experts on the topic today, presents us here with this cornucopia of usable knowledge for the 21st century.”
Wolfgang Drechsler, Professor of Governance, Ragnar Nurkse Department of Innovation and Governance, TalTech, Estonia, and Associate, Davis Center, Harvard University, USA