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Economists Waging War

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  • A Book Review of Economists at War: How a Handful of Economists Helped Win and Lose World Wars, by Alan Bollard.

Most economists go through their lives wondering if any of their work has had an effect on the world beyond academe. The seven economists that Alan Bollard writes about in Economists at War probably never had to wonder. Bollard, an economics professor at Victoria University in Wellington, New Zealand, traces the effects seven economists had on their governments’ policies before, during, and after wartime. He starts with the oldest economist, Takahashi Korekiyo, born in Edo (now Tokyo) in 1854, and ends with the second youngest, John von Neumann, born in Budapest in 1903.

The book’s weakness is that Bollard doesn’t always give enough background for a non-economist to understand the issues fully. Its strength is in its fascinating stories about the seven men’s lives, the various challenges they faced, and their views of the world. Especially interesting are their views of Communism, which three of the economists—Leonid Kantorovich, Wassily Leontief, and John von Neumann—lived under for all or part of their lives. Fortunately, this strength outweighs the weakness in Bollard’s discussion of economic issues.

Takahashi Korekiyo, H.H. Kung, and Hjalmar Schacht

First up in the book is Takahashi Korekiyo. Takahashi was, at various times, Japan’s Prime Minister, Minister of Finance, and head of Japan’s central bank. During the Russo-Japanese War of 1904-1905, he helped raise foreign loans so that his government could fight the war. He was self-taught in economics, having helped translate Alfred Marshall’s The Pure Theory of Foreign Trade into Japanese. He learned the important basic idea that comes out of trade theory: trade, including trade across international borders, is virtually always good. In 1921, in an early response to the demands of Japan’s militarists, Takahashi argued that Japan’s government should pull its troops and military installations out of China and reduce its coercion of the Chinese. He thought Japan could gain more from trading with a strong industrializing China than from a weak dependent one. Takahashi spent his last 15 years either in retirement or coming out of retirement to argue against bigger budgets for Japan’s military. He ultimately lost that battle, with horrific consequences for the world prior to and during World War II. He also lost a gruesome personal battle: In February 1936, some junior officers in Japan’s Army invaded his house and murdered him.

Second in the lineup is H.H. Kung of China. Kung, born in 1881 to a prosperous family in northern China, was a major player in Chinese politics and government finance. In the early 1900s, Kung studied economics at Oberlin College and earned a Masters degree in economics at Yale University, where one of the most prominent faculty members was Irving Fisher. According to Bollard, Kung was not “absorbed by Fisher’s economic theories,” but had more of a talent for banking, making deals, and making money. This talent served him well throughout his years back in China. Already rich, he gained as a father-in-law a wealthy man named Charlie Soong. Kung was a brother-in-law of China’s first president, Dr. Sun Yat-sen, and also a brother-in-law of Chiang Kai-shek. He followed Chiang Kai-shek as premier of the Republic of China, serving from early 1938 to late 1939, after which Chiang Kai-shek became Premier again. Kung wheeled and dealt to raise funds to fight off the Japanese, always taking a sizable cut for himself. I found him the least interesting of the 7 economists covered. Bollard sums it up well, saying that Kung’s legacy “was his own personal wealth.”

One of the more interesting characters in the book is Hjalmar Schacht, Hitler’s finance minister from 1934 to 1937. Schacht, who is most famous among economists for implementing currency exchange controls in the 1930s, was more free-market oriented than I had thought. In 1914, he was appointed Administrator of the Dresdner Bank in Occupied Belgium, where he clashed with the German military. They simply took whatever supplies they wanted, while Schacht, sympathetic to the occupied Belgians, wanted to maintain a market-based economy. Schacht was involved in the currency reform that ended German hyperinflation, which lasted from 1921 to 1923. Schacht was not a Nazi but made peace with the Nazis. He often conflicted with Hermann Goering about how to run the German economy and, unfortunately, Schacht often prevailed. I say “unfortunately” because if Goering had prevailed, Germany’s wartime economy would have been less efficient. To his credit, Schacht often talked back to Hitler. Indeed, in 1939, he wrote a memo to Hitler condemning his treatment of the church and of the Jews. As president of Germany’s central bank, the Reichsbank, he even used Reichsbank resources to print and distribute 10,000 copies of a speech he had given in which he condemned Nazi policy. Because of his alleged association with some of the Germans who tried to kill Hitler in July 1944, he was imprisoned. Later, he was tried at Nuremberg. Although the U.S. prosecutor wanted him found guilty and the Soviet judges agreed, the British judges disagreed and he was freed. Schacht later went into development economics and died in 1970 at age 93.

John Maynard Keynes, Leonid Kantorovich, Wassily Leontief, and John von Neumann

“To his credit, Keynes, like most economists, wanted the government to avoid price controls because he saw free-market prices as important signals to both sides of the market.”

Next up is the most famous economist of the 20th century, John Maynard Keynes. Keynes’s career-making action was his quickly written 1919 book, The Economic Consequences of the Peace, in which he excoriated French president Georges Clemenceau for his vengeful measures against Germany at the 1919 Paris Peace Conference and U.S. president Woodrow Wilson for his weakness at countering Clemenceau. Keynes predicted that the Germans would hate the terms of the Versailles Treaty and argued that the Treaty would destabilize Germany. Much of the chapter deals with Keynes’s views on how the British government should have funded World War II. To his credit, Keynes, like most economists, wanted the government to avoid price controls because he saw free-market prices as important signals to both sides of the market. Keynes also pointed out the obvious, which, apparently, many British politicians didn’t get: funding the war would require reducing domestic consumption. Bollard shares an interesting tidbit about Keynes’s meeting in the White House with Franklin Roosevelt early in Roosevelt’s time as president. Writes Bollard, “[H]e was surprised at Roosevelt’s economic illiteracy.” One thing that comes across is that Keynes was part economist, part politician. He put enormous energy into trying to organize the postwar financial system and, with Bretton Woods, was somewhat successful. Keynes stretched himself thin and died in 1946 of a heart condition while his parents were still alive.

Possibly the saddest story in the book is of Soviet economist Leonid Kantorovich. Born in 1912, Kantorovich was one of the earlier mathematical economists, and spent all his years in Russia and, later, the Soviet Union. One of his early jobs was harder than any of the other economists had to put up with. In late 1941 and early 1942, when Germany’s and Finland’s armies tried to starve Leningrad into submission, Kantorovich cautiously measured how thick the ice was on Lake Lagoda, in order to determine what size vehicles could be used to get food and other supplies to Leningrad. Kantorovich was a pioneer in linear programming and used his mathematical tools for the forbidding task of planning the Soviet economy. In 1938, Stalin had executed the economist Nikolai Kondratiev, and Kantorovich got the message that he shouldn’t use economic tools for big-picture economic planning. So he focused on practical problems such as optimizing production of plywood and minimizing waste in cutting metal, both of which were important applications of linear programming.

Kantorovich was cut off from economists in Western Europe. In a seminar during Stalin’s era, someone accused Kantorovich of being a follower of the famous Austrian economist Eugen von Bohm-Bawerk. Kantorovich had to ask friends who that was. Fortunately, Stalin died in 1953. In 1959, Kantorovich had the courage to criticize Stalin-era economic thinking. In the 1960s, Soviet premier Alexei Kosygin introduced “partial marketization” and Kantorovich was free to use his tools. In 1975, Kantorovich left the Soviet Union for the first time, going to Sweden to accept the 1975 Nobel Prize in economics.

One of the more interesting economists covered, Wassily Leontief, was more impressive than the view I had of him during graduate school suggested he would be. Although most biographies say that he was born in 1906, Bollard maintains that he was born in 1905. Whatever the year, Leontief was born in Germany. He grew up in Russia and, later, the Soviet Union. When the Bolsheviks seized power, revolutionary sailors took over his family’s apartment, stole their furniture, and kicked them out. Because of Leontief’s vocal advocacy for free speech, the Cheka, one of the predecessors of the KGB, imprisoned him briefly at age 16. He emigrated to Germany in 1925, where he earned his Ph.D. in economics under Werner Sombart, and then moved to the United States in 1931. Leontief is best known for developing input-output analysis, work that earned him the 1973 Nobel Prize in economics. Input-output analysis quantifies how inputs in one industry produce outputs for consumption or output that serve as inputs to other industries. He published his input-output analysis of the U.S. economy in 1941, just before the United States entered World War II. During that war, government analysts used Leontief’s input-output framework to map Germany’s economy, taking advantage of the fact that the Germans liked to record everything. Based on this analysis, they recommended bombing ball-bearing factories because ball bearings were crucial inputs in much war materiel. Bollard writes, “the Germans were soon busy designing alternative friction-reducing techniques to reduce the need for ball-bearings.” The ability to substitute one input for another always limited the usefulness of input-output analysis.

Leontief was an early critic of Keynes’s 1936 magnum opus, The General Theory of Employment, Interest, and Money. He argued that the General Theory really wasn’t general at all but was a special case, an argument that some economists make to this day. Leontief also disdained Marxist economics and criticized Soviet economic planning. In one article he wrote, “[S]o far as the Russian technique of economic planning is concerned, one can apply to it in a paraphrase what was said about a talking horse: the remarkable thing about it is not what it says, but that it speaks at all.”

The final economist covered in the book is John von Neumann. Bollard leads his discussion of von Neumann with a famous quote from Nobel Prize winning physicist Eugene Wigner: “[T]here are two kinds of people in the world: Johnny von Neumann and the rest of us.” Born in Budapest in 1903, von Neumann showed early that he was an incredible genius. At the age of 6, for example, he could divide 8-digit numbers in his head. Von Neumann was arguably the greatest mathematician of the 20th century. In 1920, he and his family saw the horrors of Communism up close during what von Neumann called “The 133 Day Red Terror” under Communist tyrant Bela Kun. In the early 1920s he studied chemistry at the University of Berlin and went on to get a Ph.D. in mathematics at Budapest University in 1926. He moved to Princeton University in 1930. In 1935, Von Neumann traveled to Moscow, concluding that Soviet repression was even worse than Nazi oppression. He also observed the chaos that Soviet economic planning was causing. Not surprisingly, von Neumann agreed with Keynes that Karl Marx’s Das Kapital was obsolete and erroneous.

In 1935, von Neumann predicted a major conflict in Europe and hoped it would be between Nazi Germany and the Soviet Union, both of which he despised. In 1939, presumably in response to the Germany/Soviet pact, he lobbied the U.S. government to join the war. During the war, he helped the U.S. government calculate the impact of complex explosions, work that was important in such applications as anti-tank bazookas. Von Neumann also was an important player in the Manhattan Project, which produced the atom bombs used against the Japanese.

Some final remarks

Economists at War contains one odd claim. On Germany’s 1921-1923 hyperinflation, Bollard writes, “The demand for high denomination notes was so great that the Reichsbank could not print them fast enough.” In fact, the rapid printing of high-denomination notes caused the hyperinflation.

If you find any of these stories fascinating, as I did, I recommend that you read Economists at War.


*David R. Henderson is Emeritus Professor of Economics with the Graduate School of Business and Public Policy, Naval Postgraduate School in Monterey, California. He is also a Research Fellow with the Hoover Institution and a Senior Fellow with the Fraser Institute. He blogs at EconLog.

For more articles by David R. Henderson, see the Archive.


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