Sunday, June 5, 2011

Austerity and the Weimar Republic

With the neoliberal press gloating over what they perceive as the “success” of austerity in the Baltic states, a question poses itself: what happens when this type of brutal wage and price deflation is inflicted on an advanced capitalist nation?:
“The [sc. Weimar] German government struggled, however, within the confines of the rules of orthodox finance, that is, the gold standard. As the downturn began due to the combination of American and German policies already described, the German authorities responded to their external difficulties by depressing their internal economy. Schacht, president of the Reichsbank until March 1930 and chief German negotiator for the Young Plan, had consistently pursued a deflationary strategy. Hans Luther, his successor at the Reichsbank, followed suit, keeping the discount rate well above the rates in London and New York in attempt to reduce the bank's continuing loss of gold ... the fiscal authorities were even more aggressive in their deflationary efforts. The move toward highly restrictive government budgets came in the beginning of 1930. Heinrich Brüning, chancellor from March 1930 to May 1932, continued this, relentlessly attempting to deflate the economy to restore equilibrium in the manner of the gold standard. Germany, unable to pay its foreign bills at gold par, had to reduce internal prices until it could” (Temin 1989: 30–31).

“Economic breakdown [sc. during the Great Depression] led to political upheaval which in turn destroyed the international status quo. Germany was the most striking example of this complex interaction. Without the depression Hitler would not have gained power. Mass unemployment reinforced all the resentments against Versailles and the Weimar democracy that had been smouldering since 1919. Overnight the National Socialists were transformed into a major party; their representation in the Reichstag rose from 12 deputies in 1928 to 107 in 1930. The deflationary policies of the Weimar leaders sealed the fate of the Republic” (Adamthwaite 1977: 34).
One also wonders how an “Austrian” policy of dismantling government and complete privatisation (anarcho-capitalism) or even more savage government spending cuts and abolition of the central bank (Misesian Classical liberalism) would not have collapsed the Weimar economy to even greater extent, and inflicted even greater suffering on the German people, radicalizing them even further and driving them into hands of extremists like communists and Nazis.

And, no, I am not saying that Baltic-style austerity in the US, the UK or Germany will lead to fascism, but it will result in greater votes for extremists of either the right or left. Not only are such deflationary polcies wrong on economic grounds, but also their social effects are too high a price to pay, and the worst case political outcomes of deflationary depression are catastrophic for human civilization. This is another reason why the 1930s Hayekian solution of doing nothing in response to depression was morally objectionable to many people.


Adamthwaite, A. P. 1977. The Making of the Second World War, Allen & Unwin, London and Boston. p. 34.

Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass.


  1. LK, given that you justify many of your positions on the grounds that there is a democratic support for it, I am surprised that you have decided to disregard your Efficient Democratic Hypothesis for once.

    So democracy is the right barometer for what should be done...until people start voting for extremists with no sense of proportion?

    Now, I am glad that you have decided to abandon the position of using democratic support as sufficient grounds for determing good policy (assuming you have), but you can't have it both ways - holding both your Efficient Democratic Hypothesis and holding a view that popular support for dangerous groups is bad.

    But either way, I am also wondering why you abandon your generally subjectivist position about uncertainty as well. Surely you would have held that it is impossible to predict the future on the scale of what millions of voters would choose, given that each one voter has dynamic subjective thought processes and that you multiply the same problem by several million when you look at the entire voting population. Somehow, you have already decided in advance how voters will react, by making a clear cut cause-effect relation between deflation and extremist candidates.

    But you don't know how to predict that - nobody does. In the case of Estonia, the current prime minister has had re-election and he may even get re-elected again (who knows?) One may venture to assume that his radical plan of pushing government spending down to 9% of the GDP was going to lead to mass riots and Estonian nazis coming to power...and yet that hasn't happened yet.

    But you'd still not consider his mere re-election to be vindication of his policies, right? So why justify anything on frivolous democratic grounds?

  2. "So democracy is the right barometer for what should be done"

    I do not claim that. My position on what is moral and right public policy is this: A policy implemented by a government must

    (1) be moral under a rule consequentialist ethics, and

    (2) command majority support.

    "position of using democratic support as sufficient grounds for determing good policy"

    I do not regard broad democratic support as a "sufficient ground" for action. Action must be (1) moral as well, as I have said above.

    Policies implemented by extremists will be unacceptable if immoral and an intelligent person would oppose them, even if they managed to command majority democratic support.

    There is no contradiction in this position.

    "Somehow, you have already decided in advance how voters will react, by making a clear cut cause-effect relation between deflation and extremist candidates."

    The empirical evidence for this quite clear. Inductive arguments can justify such a prediction.

    If you think induction is irrational, then a hypothesis - that in general deflationary depression tends to radicalise the voting population in over 60% of cases where it happens - can be treated a Popperian theory falsified by hypothetico-deduction.

    Again, there are no problems with making such predictions.

    And the case of Latvia is already explained in my previous post: this is a country with a weak labour movement and voting is explained by extreme ethnic nationalist bias: proof, if you really need it, of the insanity of extreme ethnic nationalism.

    And you are wrong that there is no public opposition to austerity in Latvia:

    "Latvia’s president threatened on Wednesday to call early elections after anti-government protests led to the Baltic country’s worst rioting since independence in 1991.!/103370/Latvian_buses_hit_by_protests_against_austerity_measures

    Read the first link "worst rioting since independence in 1991."

    This doesn't quite fit your comment above, does it?

  3. Estonia and Latvia are two different countries, yes? I mentioned Estonia only.

    I have read reports of how bad things are getting in Latvia for the past 2 years, but while Estonia implements more-or-less similar reforms, the reactions have not been similar there. (Thanks for the links, btw.)

    Estonia currently enjoys +0.68 for political stability, on a scale of -2.5 and +2.5. Nowhere close to a Greek situation of anarchists committing terror attacks on the streets.

    Basically, I can't I say I know how to determine in advance how people react. They can be quite capricious in some occasions. They can react in any known possible way to the exact same thing. Interestingly, while extremist parties have gained power in Europe during bad times, US has stuck so firmly to its monolithic core of two parties, that the Populists and the Socialists never really made it big in the US. One would have expected great prospects for the more radical Socialist Party in America during highly deflationary periods of Great Depression, but it never happened. A >10% fall in GDP was not enough for Socialists to become a viable third party.

    I agree with you that an induction is within reasonable bounds of drawing conclusions, but I am personally too wary of a 40% error margin, even with a 60% rate of things turning in a particular way.

  4. "Interestingly, while extremist parties have gained power in Europe during bad times, US has stuck so firmly to its monolithic core of two parties, that the Populists and the Socialists never really made it big in the US"

    But the crucial issue here is that in the 1930s there were radical changes in the Democratic party: it converted to Keynesian economics, and intervened in the US economy in ways unthinkable 50 years earlier.

    The Republicans converted to conservative Keynesianism and big goverment, despite their rhetoric. When the genuine small government Republican Goldwater ran against Johnson in 1964, he got hammered.

  5. This is quite interesting and fairly on point considering the recent election results in Greece, where mass rejection of the austerity measures have led to a couple of extremist parties (includng the neo-nazi Golden Dawn party) gaining seats in parliament. It would be fairly hard to deny a link between austerity and political extremism given the political shift in the country's voters and the continuing social unrest. cheers for the post.