Keynesianism is Wrong: A View from Post War Germany

Paul krugman

Ludwig Erhard: ”Wohlstand für alle” is a book with a lot of lessons for everyone.

You can download it in German from the following link:

What is the idea of reviewing a 50 year old book by a German politician and economist?

Simply to get a grip of what is going on in the political and economic system in Germany and Europe. Reading American economists point to a dire need. They think Europeans are Americans that speak better English than they do themselves. While this has an element of truth it is hardly sufficient.

Erhard’s essential points were:

  1. The growth in productivity in industry must be the determining factor to growth in wages and salaries. Other branches of the economy should follow with a time lag, as these branches are slower to adapt – especially in a downwards direction.
  2. As wages and salaries do not grow faster than productivity a growth in consumption and savings prices can be kept stabile. What the wage and salary earners don’t get for consumption will be increased profits that eventually will return to the savers – the very same people that are wage earners and consumers.
  3. Enterprises will be able to keep stable prices on the export market because they only have to deal with raw material price increases – which will be equal to all. Devaluation is a mistake, as that will only result in increased import prices, thus an unwanted redistribution from the wage earner to the nations you import from.
  4. If others debase their currency it will mean cheaper imports, thus eventually lower prices – and a continued pressure on industry to rationalize their production and invest. The investments will result in better productivity.
  5. When industry’s workers and salary earners get pay raise their ability to consume, save and pay taxes goes up – provided the raise do not evaporate into rising prices.

The basic proposition can be summarized thus:

–          To the employers: No pay raises (and no strikes) unless the workers work harder and more effectively; BUT absolutely no protections against imports – stay on your toes – or die!

–          To the workers: No pay rises unless you work harder, but when that happens – of course! BUT what you don’t get at the negotiations you will get in cheaper imports.

This trickles down to retailers that have to stay profitable with lower prices and they have to rationalize retailing. That will kill a lot of small shops – certainly. But the volume of trade will go up, as there is more money in the pocket of the consumers. The home market will be constantly squeezed to rationalize as imports are cheap.

This is the tenor of German economy – it has all but killed their agriculture and kicked peasants off mountains where you still harvest with a scythe. German agricultural products are either unpayable or inedible.

There is general agreement ever since WW2 on this proposition. 30-40 years ago I read in a magazine that the head of the metalworkers union (at that time Eugen Lodere) very bluntly and publicly told the employers that should get off their XXX XXXX and take a trip to Japan (the gurus of the brain dead at the time) and look into how you could rationalize production and fire some workers.

The condition for this policy was:

a)      In 1948 there was no capital in Germany – factories were bombed out and savings were war profiteering. The latter was nimbly removed with the introduction of the D-mark. Over a minor amount 90% of deposits were confiscated. The capital for investment came from the Marshal Plan.

b)      The big cartels (a constant pest in German economic structure) were ruined. F.i. Volkswagen was originally stolen from people killed in the concentration camps – and reconstructed in public ownership. Price fixing did not really have a chance, as imports were without tax or assizes – thus stripping the large manufacturers of any profits above normal.

c)       The economy from say 1936 to 1948 was infested with regulated prices. The administrations walls were covered with bookracks full of tariff and price lists prescribing to the most insane details what everything was to cost in shops and from suppliers. That – in time – at prices that in no way reflected value. Thus everything had to be rationed and the nation was on coupons. Erhard’s dictum was: “The only coupon or rations book a German need is a D-mark note – earned by honest work!”

There was – of course – an outcry that that would lead to a price explosion – it did – briefly. The rationing made for a black market of atrocious proportions post war – when the death penalty for war profiteering was rescinded. Thus the price rise was only relative to the official lists and with no connection to real street value.

Erhard was the first to admit, that his efforts were minor – after straightjacket was removed.

d)      The “Economical Miracle” was limited to West Germany and thus excluding the big estates in East Germany. This gave a food supply problem which made West Germany very interested in supplies from other European nations. The origin of the European Union was however the Coal and Steel Union where France had ore and Germany had coal (or was it the other way round?). The focus shifted to food however, where Germany lived with atrocious overcharging by France and others – that was nothing new, as the big estates had overcharged grain for centuries and the small farms were inefficient.

e)      Seeing old movies just after the war it is difficult to understand how such masses of labor could be employed gainfully. Few people realize today what masses of refugees that came from East Germany up to 1961 when the Berlin Wall was erected. After that time the workforce was recruited in Southern Europe and Turkey – you can get by in Turkey with German – with difficulty.

After the reunification in 1989 yet another country needed rebuilding.

Personally Ludwig Erhard was connected to Carl Friedrich Goerdeler that was the proposed chancellor of a government after Stauffenberg’s attempted assassination of Hitler.

His trade was originally draper – many of Erhard’s examples involve footwear and textiles – but a war wound in WW1 led to a career change and the study of economics: A practical economist with a detailed knowledge.

He was never a member of the political party he was elected for – despite pressure from Konrad Adenauer. He remained a member of parliament to the day he died in 1977.

His foreign policy can be summarized into: “How can we buy East Germany?” A deal left to his successor Helmut Kohl – many years later.

A short fat man – rarely seen without a big, freshly lit cigar – not the type to win an American election. The illustrations in the book are mainly newspaper cartoons of him. The book contains much of the contemporary political squabble – most of it reminiscent of today’s arguments against the German policy, so some his scathing comments on his opponent and detractors are still relevant today – 50 years later where different European governments attempt to press forward committing the same mistakes their predecessors did.

It wasn’t that he had a free run. He had repeatedly to compromise (in anti-cartel matter f.i.). His setbacks were mainly a question of time.

It is only fair to say, that without at least a nodding acquaintance with Ludwig Erhard and his work any understanding of German and European economic politics is flawed.

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