Abstract
The need for analysis of the German war economy became urgent after the defeat of France and the threat of an invasion of Britain by Nazi Germany after the battle of Dunkirk in the summer of 1940. The expertise of émigré scholars now was in strong demand. First, this essay discusses the series of twelve articles that Hans Singer contributed at the request of Keynes to the Economic Journal from 1940 to 1944. An important characteristic of war economies is a shortage of consumer goods, which raises the question of the appropriate rationing scheme. Therefore, the notion of a virtual price system, introduced by Erwin Rothbarth, which takes note of the welfare consequences of interventions into the free choices of consumers, is the focus of the next section. Hal C. Hillmann was a leading analyst of the German war economy, the comparative strength of the great powers, and postwar reconstruction. Finally, the article discusses the role of Nicholas Kaldor, who had firsthand knowledge as a key member of the research team of highbrow economists chaired by John Kenneth Galbraith that at the end of the war studied the effects of Allied bombing on the German war economy. Kaldor's experience, also as the director of the Research and Planning Division of the UN Economic Commission for Europe from 1947 to 1949, significantly influenced his pioneering contributions to growth theory.
The last war was the chemist's war. . . . This one is the physicist's. It might equally be said that this is the economist's war.
—Paul A. Samuelson, “A Warning to the Washington Expert” (1944)
If the war gave the medical profession antibiotics, it gave economists new tools and techniques and comparable optimism about what their future role would be.
—Mark Perlman, “Political Purpose and the National Accounts” ([1987] 1996)
1. Introduction
During World War II, in the preparation of the war, in postwar reconstruction, and in the subsequent Cold War, the expertise of economists was in strong demand to analyze ways of financing, to identify the comparative strength of the great powers and their economic vulnerabilities, and to determine the best approach for a successful reconstruction. The resulting efforts contributed to a substantial development of new economic subfields and techniques, such as national income accounting, Keynesian macroeconomics, growth theory, input-output analysis, game theory, and operations research.
Whereas the Great Depression was not only a disaster for the economies but also for the reputation of the economics profession, which had been unprepared for the challenges put forward, the situation changed with the outbreak of World War II. The war raised serious military and economic questions. Consequently, demand for the professional expertise of economists in government service in Great Britain and in the United States1 increased substantially and endowed economists with additional resources.2 Thus, at the Office of Strategic Services (OSS), an intelligence service created by President Roosevelt in June 1942 (dissolved in September 1945 and reanimated as the Central Intelligence Agency [CIA] in 1947), the Harvard economist Edward Mason recruited a great number of excellent economists who later became prominent.3 The same holds for the RAND Corporation founded by the US Air Force after the war to preserve the expert knowledge of the scientists who were engaged in the war effort. The interest now turned to the Soviet Union, and the focus was put on major new subareas such as computer science, game theory, and operations research.4
Naturally, émigré scholars from Nazi Germany or the Soviet Union had specific knowledge and made up a substantial share in these research efforts. The list includes Paul Baran, Wassily Leontief, and Hans Speier, who was a leading expert on German war propaganda in the Office of War Information and later worked at RAND in California for two decades. Speier's work was an important case of an expert analyzing information and data that are messy, that is, uncertain, unreliable, or based on intended disinformation. Herbert Block (1942a, 1942b) had already analyzed the economic policy of the Nazi regime when he moved from the New School in New York to Washington, where he soon became section head of the Soviet department in the OSS and later played a leading role in the analysis of economic policy in the Soviet Union in the State Department (Block 1983).
Most important, however, was the joint work of John von Neumann and Oskar Morgenstern, whose Theory of Games and Economic Behavior ([1944] 1953) marked the entry of game theory as an important part of economic analysis. Von Neumann also was the chief mathematician of the Manhattan Project.5 Morgenstern later became adviser to the RAND Corporation, the White House, and the US Atomic Energy Commission on strategic issues. He was instrumental in the conception of the Polaris submarine strategy, which he justified in detail in his book The Question of National Defense (1959). Although the formalization of game theory took place prior to the Cold War, the subsequent bipolar confrontation between the Soviet Union and the United States involved many leading game theorists on both sides of the Iron Curtain hastening and shaping its evolution (see Hagemann, Kufenko, and Raskov 2016).
Whereas about two-thirds of the émigré scholars finally settled in the United States (Hagemann 2011),6 Great Britain was the other main host country for the refugees. This holds in particular for the years before the outbreak of World War II. In the first period after the Nazis’ rise to power, many émigrés still held the hope and expectation that the Nazi haunting would soon be over and they could return to Germany. Britain was closer, whereas emigration to the United States was considered irreversible. Furthermore, only six weeks after the Nazis had launched the “Restoration of Civil Service Act” on April 7, 1933, as the basis to dismiss scholars from their positions for racial or political reasons, at the initiative of William Beveridge, then director of the London School of Economics, the Academic Assistance Council (AAC) was founded, renamed the Society for the Protection of Science and Learning (SPSL) in 1936.7 It was the explicit aim of the AAC to help “University teachers and investigators of whatever country who, on grounds of religion, political opinion or race, are unable to carry their work in their own country” (Cooper 1992: 7). Keynes, who later played an important role in the British war effort, was one of the most active members of the AAC/SPSL from its beginning, as were Beveridge, the physicist Ernest Rutherford, and William Temple, the archbishop of York and later of Canterbury.
When many émigrés (including a bunch of economists who later became famous) were put into internment prison as “enemy aliens” on the Isle of Man after the defeat of France, this decision of the British government was heavily opposed by Keynes. In the summer of 1940, Keynes fought successfully for the early liberation of Piero Sraffa, Eduard Rosenbaum,8 Hans Singer, and Erwin Rothbarth. At the end of the summer, they were dismissed from internment prison as “friendly” enemy aliens. Singer and Rothbarth were both recruited by Keynes for his activities in the war effort.
The analysis of the German war economy became urgent after the defeat of France and the threat of an invasion of Britain by Nazi Germany after the battle of Dunkirk in summer 1940. The expertise of émigré scholars now was in strong demand. We first deal with Singer's analysis for the leading British journal in section 2. An important characteristic of war economies is a shortage of consumer goods, which raises the question of the appropriate rationing scheme. One of the most important contributions to the theory of rationing, which takes note of the welfare consequences of interventions into the free choices of consumers, was made by Erwin Rothbarth whose notion of a virtual price system is therefore discussed in section 3. In section 4, I discuss the contribution by Hal C. Hillmann, an important analyst of the German war economy, the comparative strength of the great powers, and postwar reconstruction. Section 5 focuses on Nicholas Kaldor who became a leading expert on the German economy at the end of the war and whose experience significantly influenced his pioneering contributions to growth theory.
2. Hans Singer's Analysis of the German War Economy
The reparation problem after World War I had already enforced the construction of a modern national income accounting system in Germany, in which the Statistisches Reichsamt had played a major role. As Tooze (2001) has acknowledged, the innovative statistical methods had moved the Weimar Republic to the international research frontier in this area.9 With the outbreak of World War II, the debate on the efficient organization of the British war economy arose. This offered research opportunities for emigrated economists from Nazi Germany with their expertise knowledge of comparative analysis of the German war economy. This held in particular for scholars around Keynes who played an important role as policy advisers in the British war efforts.
Hans Wolfgang Singer (1910–2006) had started his dissertation at the University of Bonn with Schumpeter, who recommended him to Keynes for the first scholarship for a young graduate whose career had been cut short by the Nazis’ rise to power. In Cambridge, Singer was strongly influenced by Keynes, Richard Kahn, and Colin Clark, who became his thesis supervisor. After finishing his PhD, Singer became investigator for Pilgrim Trust in Manchester from 1936 to 1938, where he analyzed the social and psychological costs of high unemployment in the years of the Great Depression. Thereafter he got a position as lecturer at the University of Manchester from 1938 to 1945. Shortly after Singer, John Hicks moved from Cambridge to Manchester as the Stanley Jevons Professor of Political Economy and head of the Faculty of Economics. While Singer basically was teaching undergraduates and gave a course on wartime planning, Hicks made pioneering contributions to welfare economics and also wrote the first textbook on national income accounting, The Social Framework (Hicks 1942).10
Keynes asked Hans Singer to analyze the sectors of the German economy relevant for the development of the war economy and to compare them with the data for the British economy. Singer began his analysis immediately after release from internment prison in Huyton, Cheshire as a “friendly enemy alien.” He contributed a series of twelve articles on the German war economy to each issue of the Economic Journal between September 1940 and September 1944 (Singer 1940–41, 1942–44).11
Singer's analyses covered a wide range of issues: general planning, organization of supply, labor supply, wage policy, price control, restriction of consumption and private investment, the substitution of products and raw materials that could not be imported or forcibly acquired in sufficient quantities, the development of inferior home-produced grades of previously imported commodities (such as the conversion of private motor cars from petrol to producer gas), and monetary policy and the financing of war. As Singer pointed out repeatedly (e.g., Singer 1940–41, pt. 2: 32), substitution was “often combined with standardisation” to save material inputs, for which special “economy engineers” had been appointed in several applications. He based his reports on the official “Four-Years-Plan” but also on German economic periodicals, interviews with businessmen from neutral countries who had a detailed knowledge of the German war economy, and secret material that he received from the Ministry of Economic Warfare. Usually, Singer contrasted his estimates for the German economy with the British data.
Although Nazi Germany was better prepared economically for the war than Great Britain, until 1942–43, when Stalingrad marked a kind of turning point, it was not operating at full capacity and was somehow surprisingly inefficient. In contrast, as emphasized by Singer, the production of the British economy accelerated quickly beginning in 1940, in some areas, such as fighter aircraft, even forging ahead of the German economy.
That the German economy did not go on a complete war footing in the first years can be considered as the downside of the Blitzkrieg doctrine with its early successes, which dominated the postwar literature for a long time. Furthermore, the inefficiency hypothesis postulated that leading Nazis were mainly men who were suddenly catapulted into high office and could not meet the technical and intellectual requirements for an efficient wartime position.
The Nazi ideology of motherhood is also reflected in a low participation rate of women in manufacturing production, which remained rather low, even below the level during World War I and significantly below the British level. This was diagnosed early on by Singer, who also pointed out the greater level of shift work in Britain and the fact that in the first phase of the war, with the successes and great territorial gains of the Nazi war machine, the labor supply of German workers who had become soldiers had been replaced in great part by prisoners of war and other foreigners. In fall 1941, the number of foreigners employed, either as civilians or prisoners of war, reached a preliminary peak with 3,740,000 (Singer 1942–44, pt. 6: 191). Thereafter, the main substantial influx was Russian/Ukrainian labor in agriculture and domestic services.
Whereas Jews were being systematically murdered since 1941, concerning forced labor in Nazi-occupied Europe one can distinguish between a Western and an Eastern pattern.12 According to the racist ideology of the Nazis, workers from Eastern Europe, particularly from the Soviet Union, were treated much worse than forced laborers from Western Europe whose right to exist was not called into question. Being treated in a humiliating way as mean servants or useless eaters, forced laborers from Eastern Europe were much more affected by starvation.13
In contrast to the hunger periods of World War I, food was in nutritionally adequate supply until the end of the war, although many consumption goods were strictly rationed.14 Nevertheless, the level of consumption per person was considerably less in Germany than in Britain throughout the war.
Singer (1943) also published an article titled “The Sources of War Finance in the German War Economy.”15 Despite the difficulties with the German data due to the silent war funding of the Nazis, Singer (1943: 107) observed a distinctly higher level of taxation in Great Britain and that therefore “British war finance certainly appears to be much ‘sounder’ and less inflationary than German war finance.” In Nazi Germany “the financial controls . . . are on the whole effective in preventing inflation. . . . But the slightest relaxation of control would conjure up the violently inflationary forces working under the surface” (Singer 1942–44, pt. 12: 215). Singer's observations and conclusions were fully true and confirmed by subsequent developments in the early postwar period, when hyperinflation and the increasing depreciation of the Reichsmark led to the disappearance of regular markets and the emergence of black markets with parallel currencies (dollars, cigarettes). These turbulent times culminated in the currency reform of June 20, 1948, in West Germany.
The Nazi war economy was characterized by a geräuschlose Kriegsfinanzierung (noiseless war financing) through the banking system. The coverage of war costs through war bonds was massively hampered by the public's experience of the complete devaluation of prewar and World War I government bonds in the subsequent hyperinflation of the early 1920s. The Nazis were fully aware of the fact that war bonds would not be subscribed to the extent necessary and therefore forced the financial institutions to sign government loans and to give ample credit to the state. Since consumption goods were strictly rationed, the surplus money, that is, the excess of purchasing power, was invested in the banks, where it was siphoned off by the government to finance military equipment. During the war, financing through the printing press accelerated, which led to very high hidden inflation. The wage and price freeze gave the illusion of monetary stability.
After four years of observing and analyzing the evolution of the German war economy through its subsequent stages, Singer's series of articles ended on the eve of the Allied invasion in the Normandy. The rationale is given by the editors of the Economic Journal who pointed out that “the changes are now less fundamental and less rich in lessons for our own guidance.”16
3. Erwin Rothbarth and the Rationing Approach
From the beginning, Singer had observed and compared the different rationing systems in Britain and Germany. He made the general observation that “the Germans having reduced consumption so much more have had to introduce a complex system of differential rationing requiring a considerable administrative apparatus. The stricter rationing has also increased the tendency to black market dealing and barter exchange. There are no unrationed ‘overflow’ goods like bread and potatoes in England to take the strain off the rationing system” (Singer 1943: 111).
Singer's account of the “points rationing system” (see Burchardt and Worswick 1941) employed in the German war economy also influenced Kahn and Brian Reddaway, who at that time were responsible for the shaping of rationing schemes in the Board of Trade to coordinate supply and demand for consumer goods and to avoid inflationary pressures.17
The most important contribution to a theory of rationing, however, came from Erwin Rothbarth (1913–44), who had already made statistical calculations for Keynes's How to Pay for the War (1940). With the outbreak of the war, chronic high unemployment and deflation had given way to the specter of inflation. It was Keynes's main aim “to reconcile the demands of war and the claims of private consumption” (Keynes [1940] 1972: 367). The statistical estimations of national income made by Keynes and Rothbarth in appendix 1 (429–31), applying a method of double bookkeeping, are an important link in the history of national accounting from the work of Colin Clark to the work of James Meade and Richard Stone.18
Rothbarth, who was born in Frankfurt, emigrated to England in spring 1933 where he immediately began to study at the London School of Economics. He graduated with first-class honors in 1936 and was widely considered by Kaldor, Kalecki, and others as one of the most brilliant young economists. In 1938 he became research assistant in statistics at Cambridge, where he closely cooperated with David Champernowne, Arthur Cecil Pigou, and Keynes. At the end of the war, Rothbarth volunteered for active military duty. He was killed in the Netherlands on November 25, 1944.19
Keynes ([1940] 1972: 408) considered financing war expenditures and the establishing of equilibrium between the demand for consumption goods and its reduced supply in wartime by means of inflation “the worst possible solution,” mainly because of its negative redistributive effects for wage earners: “Allowing prices to rise . . . merely means that consumers’ incomes pass into the hands of the capitalist class” (376). As a liberal he also had deep aversions to the pseudo-remedy of rationing schemes with their interventions into consumers’ free choices and bureaucratic inefficiencies. “The abolition of consumers’ choice in favour of universal rationing is a typical product of that onslaught, sometimes called Bolshevism, on differences between one man and another by which existence is enriched” (410). Since he regarded voluntary savings as insufficient for financing war expenses, Keynes favored deferred wage payments, that is, temporary forced savings liberated after the war when a reallocation of production from military to consumption goods would take place. However, he finally accepted “to control the cost of living by a combination of rationing and price fixing” (409) as part of a general solution that also would contribute to make wage restraint manageable.
“A well-conceived policy of rationing” had to avoid the Bolshevist implications feared by Keynes, who considered shop shortages and queues which lead to great injustice of distribution as “the alternative which both Russia and Germany have long preferred to old-fashioned inflation. . . . But it is for us to find the third alternative, which is the genuine solution, preserving both the general interest and the free choice of the individual consumer.” (412)
But how is it possible “to divert consumption in as a fair way as possible” (410)? In his “The Measurement of Changes in Real Income under Conditions of Rationing,” written shortly after his release from internment prison, Rothbarth (1941) elaborated the concept of a virtual price system. How much would it have been necessary to have changed the income in the prerationing situation to make the quantities of goods consumed under the conditions of rationing to the “optimum” ones, that is, those preferred by the consumers under the condition of price-setting in free markets with given nominal incomes (106)? The determination of such a virtual price system, however, proves to be extremely difficult, if not impossible, considering the interpersonal differences in preferences and incomes. Rothbarth demonstrated an excellent knowledge of the modern analysis of index number problems as well as of consumer and welfare theory, as it had been elaborated by Slutsky, Hicks, Allen, Kaldor, and others. His attempt to determine the required change in income with a free formation of market prices constitutes an important step in the investigation of welfare-economic effects of rationing. This was also recognized by Graaf (1947) and James Tobin (1952: 529–30) in his basic survey article on the theory of rationing.
4. Hal C. Hillmann and the Comparative Strength of the Great Powers
One of the most important analysts of the German war economy and of postwar reconstruction was Hal C. (Hermann Christian) Hillmann (1910–90). He had been research assistant of Gerhard Colm (who played a major role in the Statistisches Reichsamt between 1922 and 1927 in developing national income accounting for the reparation payments) at the Kiel Institute of World Economics. In April 1933, he was imprisoned by the Nazis in an early concentration camp from which he escaped, and in January 1934 he emigrated to Britain, where he graduated from St. Andrews with first-class honors in June 1935. From 1936 to the end of 1939, he worked in the Economics Research Department at the University of Manchester directed by John Jewkes. Through his marriage to Elizabeth Bacon, Hillmann became a British citizen in December 1939 and therefore was not put into internment prison in the subsequent year.
In a lecture given to the Manchester Statistical Society on November 24, 1939, Hillmann (1940) analyzed the changes in the volume, direction, and structural composition of Germany's foreign trade after the end of the First World War to answer the likely effects of an Allied sea blockade on Germany's imports and exports. He came to the conclusion that owing to greater efforts in the direction of national self-sufficiency as well as a reorientation of foreign trade from allied countries to neutral states, “it is safe to conclude that Germany is less vulnerable to foreign interference than she would have been in 1929” (Hillmann 1940: 87). Nevertheless, a blockade by the Allies would confront the German war economy “by serious shortages in textile fibres, wool, rubber, hides and skins, nickel, lead, tin and copper” (88). Finally, Hillmann specified the trade conditions that would force Germany to an earlier end of the war.
In early 1940, Hillmann became research officer in economics in the Foreign Research and Press Service of the Royal Institute of International Affairs (RIIA), which was directed by Arnold Toynbee at Balliol College in Oxford. Hillmann was allocated to two research subcommittees: “Social and Economic Reconstruction” and “The German State and the Nazi Regime.”
The RIIA (Chatham House at St. James Square No. 10 in London) had been founded in 1920 after the Peace Conference in Paris. Since the Great Depression research at the RIIA had increasingly turned to questions of economic development in industrialized countries. The establishment of the Committee on Reconstruction–Economic Group in early 1941 marked the beginning of systematic research on the problems of underdeveloped countries at the RIIA. At the beginning the focus was more on Eastern and Southeastern Europe (rather than on Africa, Latin America, or some Asian regions), as indicated by the famous article of Paul Rosenstein-Rodan (1943), who became secretary of the committee in October 1941.20 This focus reflected the pressing needs of the war and was enhanced by the interests of many exile governments from these backward regions in Europe that resided in London during World War II.
As Hirschman (1981) emphasized, Keynes had a strong indirect influence on development economics in its formative period by overcoming orthodox mono-economics and by his analysis of unemployment, which provided the basis for Joan Robinson's conceptualization of disguised unemployment (Robinson 1936). The analogy of depressed areas in Britain to hidden unemployment in underdeveloped countries was obvious as were efforts of economic policy to (re)activate unused resources as sources of economic growth and increasing welfare. Emphasis on the mass phenomenon of disguised or hidden unemployment as a crucial characteristic of underdevelopment was a common theme in the pioneering contributions to the new subdiscipline of development economics by Rosenstein-Rodan, Kurt Mandelbaum, and Ragnar Nurkse up to the most elaborated version in Arthur Lewis's famous article “Economic Development with Unlimited Supplies of Labour” (Lewis 1954). This phenomenon first played the central role in the study another émigré economist wrote at the RIIA. In his “Agricultural Surplus Population in Eastern and Southeastern Europe” (1942), Heinz Wolfgang Arndt (1915–2002) was the first to make a quantitative estimation of agricultural surplus population.21 His definition of disguised unemployment as “the number of people engaged in agriculture (active and dependents) who, in any given conditions of agricultural production, could be removed from the land without reducing agricultural output” (Arndt [1942] 1993: 4) had a considerable influence on the subsequent literature. Excess population in agriculture was an indicator and a source of weakness but also implied a potential for future economic development. Thus, the increase of productivity in agriculture was an essential condition for development. However, strategies differed. Whereas Rosenstein-Rodan favored a forced industrialization strategy, Arndt recommended a strategy more aligned with agriculture. The different views early on indicated later dualistic debates on the most relevant asymmetries of production and organization that exist in developing countries and cannot be reduced simply to an asymmetry of a traditional and a modern sector.22
The Economic Group at the RIIA cooperated with two other institutions in Oxford within the War-Time Research Committee: the Nuffield College Reconstruction Survey, founded in February 1941 and chaired by G. D. H. Cole, with a focus on national problems and the colonies, and the Oxford Institute of Statistics (OIS), founded in 1935, with its first director, Jacob Marschak, who remained in the United States with the beginning of the war. At the OIS, émigré scholars played a decisive role in the war years, as indicated by the fact that with the editor Frank Burchardt, who later became director of the OIS in 1948, Kurt Mandelbaum (since 1947, Martin), Ernst F. Schumacher, Thomas Balogh, and Michał Kalecki, no less than five of the six contributors to the famous study The Economics of Full Employment (1944) came from Central Europe.23 Schumacher, together with Kaldor, was instrumental in the transformation of Beveridge to Keynesian economics but was also involved in a controversy with Keynes on international clearing arrangements before and after the 1944 Bretton Woods Conference. At the end of the war, he became economic adviser of the Allied Control Commission and was responsible for the restoration of the German coal industry in the Ruhr area before working for the National Coal Board in Britain from 1950 until his retirement. Burchardt (1945) analyzed the connection between reparations and reconstruction and, together with Kurt Martin (Burchardt and Martin 1947), reconstruction problems in West Germany.
Hillmann's comprehensive analysis of the relative industrial strength of the great powers and the preparations for war in the famous study The World in March 1939 can still be considered today as an important reference work on the different economic starting positions of the nations at war (Hillmann 1952).24 The authors of the Toynbee volume took Nazi Germany's occupation of Bohemia and Moravia in March 1939 (and not the German attack on Poland on September 1) as the true beginning of World War II in Europe. They rightly argued that the world slid into the war in steps and that a main cause originated in the Great Depression when orderly economic and political international relations completely collapsed. Thus, in Asia the beginning could be seen in Japan's invasion of Manchuria in September 1931. With Japan's attack on Pearl Harbor on December 7, 1941, it became a genuine world war. With the United States of America, the British Commonwealth, France, the Soviet Union, Japan, Germany, and Italy, all great powers (considered in the Toynbee project) were involved.
In retrospect, Hillmann regarded the addition of Germany to the group of totalitarian states as the most fateful outcome of the Great Depression. Mainly due to a greater increase of military spending, the joint share of Germany (as the industrially most advanced of the four economies), the Soviet Union (mainly unaffected by the depression), Japan, and Italy in the world output of manufactures rose from 22 to 38 percent in the period between 1929 and 1938, whereas the joint share of the three democracies, the United States, the United Kingdom, and France, fell from 59 to 42 percent in the same period (Hillmann 1952: 439). A positive side effect of the military buildup was that the totalitarian states achieved recovery combined with a severe reduction in unemployment rates, whereas unemployment remained high among the three democratic powers. The industrial and military strength of Nazi Germany was the principal reason for Britain's strategy to play for time (as the main purpose of the appeasement policy) on the eve of the war, based on the expectation that Britain might have to fight Germany, Italy, and Japan together.25 From 1938 onward, British and French efforts to accelerate production of military goods were intensified also utilizing the potential of the empires.
Hillmann emphasized that German war economy management was characterized by half-heartedness and incompetence for a long time, as well as the fact that Hitler relied on Blitzkrieg strategy and did not expect that he would have to fight a prolonged war simultaneously against four of the great powers including the United States and its economic superiority. Consequently, emphasis was on “armament in width,” that is, production of weapons for immediate use, and not on “armament in depth.” “The failure to create synthetic fuel and rubber plants on an even more massive scale sprang directly from the fundamental weakness of Hitler's strategy. . . . In any case Hitler instructed the generals, and not they him. All the same, much more could have been done in the way of economic mobilization for war, if German planners had relied less on blitzkrieg strategy” (Hillmann 1952: 490). In his conclusions, Hillmann (1952) had the advantage of knowing the results of the study Effects of Strategic Bombing on the German War Economy (1945) as well as Kaldor's article “The German War Economy” (1946), with whose conclusions he largely agreed.
5. Nicholas Kaldor: From a Leading Expert on the German War Economy to Modern Growth Analysis
One of the best analyses of the German war economy was given by Nicholas Kaldor (1946) shortly after the end of the war. It contains almost all decisive elements of modern growth economics, a field where Kaldor a decade later became an important pioneer. Born in Budapest on May 12, 1908, in the days of the Danube monarchy, Kaldor was fluent in German. He began studying economics at the University of Berlin for three semesters from fall 1925 to spring 1927. Then he moved to England where he continued his studies at the London School of Economics.26
Kaldor had firsthand knowledge as a key member of the research team of highbrow economists chaired by John Kenneth Galbraith (1981: chaps. 13–14), which in November 1944 started to study the effects of Allied bombing on the German war economy (US Strategic Bombing Study 1945).27 In his paper, which he presented to the Manchester Statistical Society on May 22, 1946, Kaldor pointed out that an important result of this “monster research project” was “that the picture of the German war effort which dominated Allied imagination was very largely a false one” (Kaldor 1946: 33). According to Kaldor, the “war potential,” that is, the maximum war production that the country's available resources permit, depends on “four factors: the capital equipment of its industry, its available manpower, its supply of raw materials, and finally, the ability and skill of its industrial organisers, engineers, and technicians” (34). As also emphasized by Hillmann, serious shortages of raw materials were the main problem limiting war potential, although with the experience of World War I, major efforts had been made in the direction of a greater “national self-sufficiency” in the 1930s. As Kaldor pointed out, the narrow raw material base only became a decisive bottleneck in summer 1944 when the combined effect of Allied bombing and the loss of territory took its toll. Only in the short period between February 1942, when Albert Speer was appointed minister of armaments and became responsible for the rationalization of production, and summer 1944, was the potential of the German war economy much better utilized, as reflected in enormous increases in productivity in some key areas such as fighter aircraft production. This became possible due to a substantial reduction in the number of models, standardization of components, simplified designs, and extremely energetic rationalization. However, and fortunately, this increase in efficiency of the German war economy came too late. Overall, it stands “as a monument to the inefficiency of a system of personal dictatorship” (52).28
Based on international comparisons, the abilities and skills of German engineers, technicians, and workers had been high since the successful catching-up process in the period between 1871 and 1914. Due to the economic expansion in the years before the outbreak of World War II, unemployment had been reduced to very low levels. Although Nazi Germany therefore entered the war with fewer reserves of “man-power” than Britain or the United States, surprisingly the attempts to increase gainfully occupied populations were rather limited. As had been noted already by Singer, in his contemporary reporting, neither was the number of native women working in industrial production increased substantially (mobilization of additional labor took place mainly externally from occupied European countries and prisoners of war) nor was a second and third work shift introduced systematically. Thus Kaldor (1946: 40) noted that “in the middle of 1943 at any rate, Germany's man-power was not nearly so thoroughly mobilised for war purposes as Britain's.” The German economy was not operating at full capacity and was inefficient. In an economic sense, “Germany did not fight a ‘total war.’ . . . She made no serious attempt to exploit her own war potential fully, except perhaps for a brief period in August and September, 1944, when it was too late to be of any consequence” (33).
Despite Germany's attempts to become more self-sufficient, it was well known among the Allies that the supply of raw materials was the decisive bottleneck for the German war economy, particularly in the case of a prolonged war. Whereas for some raw materials, for example, rubber, the development and expansion of synthetic production was successful to cover the requirements, oil supply was the major weakness. However, as Galbraith and his research team discovered, the “strategic bombing” over a long time only had the effect of destroying the German cities almost completely, with a strong social bias that the residential areas of the workers were far more destroyed than the villa areas of the rich, which are usually located outside the city centers and away from the factories. It took until late summer/fall 1944 for the targeted bombing, particularly the destruction of the oil industry and truck manufacturing, such as the Leuna complex that produced a substantial share of the synthetic oil and main truck manufacturing facilities by Daimler-Benz and Opel, to result in German war production being severely decimated. Furthermore, the German transport system was paralyzed in the last year of the war when the German air defense had lost efficiency.
Kaldor used his wartime expertise as director of the Research and Planning Division at the United Nations Economic Commission for Europe (UNECE) in Geneva from 1947 to 1949, when the focus was on the conditions for a successful reconstruction process overcoming the destructions during the war. In that period, his Dutch colleague P. J. Verdoorn ([1949] 1993) published an article in which he pointed out the empirical generalization that there exists a close linear relationship between the rate of growth in industrial output and that of labor productivity in the long run. Thus, a substantial part of productivity growth is endogenous to the economy's growth process. With particular emphasis on the manufacturing sector and increasing returns to scale as a decisive cause, it was mainly due to Kaldor's inaugural Cambridge lecture, published as Causes of the Slow Rate of Economic Growth in the United Kingdom (Kaldor 1966), that Verdoorn's law became prominent and a key element of modern empirical growth studies and their theoretical interpretations.
As is well known, Kaldor and Arrow were the main precursors of modern endogenous growth theory integrating in their theoretical models the empirically relevant fact that the state of technology depends on past investment activity.29 In his article on the German war economy, Kaldor had already addressed the importance of capital equipment in industry for the war potential and had stated that “Germany's war production was at no time limited by her machinery equipment” (Kaldor 1946: 36).
It was one of the major results of the United States Strategic Bombing Study that immobile buildings were destroyed at a higher rate than more flexible machinery equipment, which could be shifted to smaller cities, cellars, or tunnels. Despite the bombing and destruction, and contrary to widespread belief, the capital stock of West German industry at the end of the war in May 1945 was about 20 percent larger than at the beginning of the war in September 1939 (see table 1). Only since summer 1944 net investment became negative, and remained negative until the currency reform in June 1948, due to war damage, dismantling (which was much higher in Soviet-occupied East Germany), and very low gross investment, so that the capital stock was only but still slightly higher than in September 1939.
However, there existed a decisive difference between the West German economy and most other Western European economies in which investment activities were quite low during the war and in the early postwar period. Due to very high investment activity until the beginning of 1944, the age structure of the capital stock was still remarkably modern in 1948.30 The favorable vintage structure is a main explanation for the rapid economic growth of the Federal Republic of Germany in the 1950s and 1960s.31 This growth “miracle” was enhanced by the fact that the marginal productivity of private and public investment was extremely high in the first years, due to priority for investment activities that were designed to overcome the main bottlenecks that were caused by war damages in industrial production and in core public infrastructure.
6. Concluding Remarks
The analysis of the German war economy became urgent for Britain after the defeat of France and the battle of Dunkirk. It was natural in this situation to fall back on the specific knowledge of émigré economists, although several of them shortly before had been treated as “enemy aliens.” An important group including Hans Singer and Erwin Rothbarth were part of a network gathered by Keynes, who played an important role in the British war effort. Expertise was also concentrated at the Oxford Institute of Statistics, where research work during World War II was dominated by émigré economists from Central Europe, and at the Royal Institute of International Affairs directed by Arnold Toynbee. Here, Hal C. Hillmann was a main analyst of the German war economy (and later of postwar reconstruction) from the beginning of 1940, and Paul Rosenstein-Rodan became the secretary of the Committee on Reconstruction–Economic Group in October 1941, which pioneered systematic research on the problems of underdeveloped countries, with an initial focus on Eastern and Southeastern Europe.
Rosenstein-Rodan was born in Cracow 1902 and grew up in Vienna where he got his PhD in economics in 1925 and developed a close friendship with Oskar Morgenstern before he moved to London in 1931. He and Nicholas Kaldor are two exemplary cases of scholars who came from the former Danube monarchy where they had been influenced by a German cultural community, but they had already settled in Britain before the Nazis came to power. Kaldor rose to become a leading expert on the German war economy as a member and chief of the planning staff of the team of economists recruited by Galbraith to investigate the effects of Allied bombing. In 1946 Kaldor served as an advisor to the British government to support the British bombing survey unit and to the Hungarian government on postwar reconstruction. His accumulated expertise caused Gunnar Myrdal, the first executive secretary of the newly founded UNECE, to invite Kaldor as research director, who stayed in Geneva from 1947 to 1949. Whereas the imperatives of war and postwar reconstruction had switched Kaldor's mind from pure theory to applied economics, he returned to economic theory with his move to King's College, Cambridge in October 1949. His later pioneering work on growth economics, including the technical progress function, the Kaldor-Verdoorn law, or the stylized facts of economic growth, can be considered as the outcome of a fruitful synthesis of theoretical analysis and the practical experience of an applied economist in turbulent times.
In a similar way, this also holds for the new field of development economics, where many émigré scholars from German-language areas made significant contributions in the formative period at the end of the war and in the two decades thereafter. Exile very often had the consequence of liberation from a deep embeddedness in national traditions, as well expressed in Paul Streeten's illuminating autobiographical essay “Aerial Roots” (Streeten 1986). The fate of the émigrés contributed to the fact that they took more care of the underprivileged countries. Thereby émigré scholars became “citizens of the world” and carriers of the process of internationalization after the war.
For critical comments and valuable suggestions, the author thanks the participants of the 2023 HOPE conference and two anonymous referees.
Notes
For the United States, see Bernstein 2001: chaps. 3 and 4.
There exists a remarkable contrast with Nazi Germany and the Soviet Union. Although military power always had been a main driving force for Stalin and the Soviet planners to promote forced industrialization; Leontief (1960: 262) made the following pertinent statement: “They were their own economists.”
On Mason, see the forthcoming article by Alacevich (2024).
On the wartime origins of activity analysis, see the contribution by Dimand in this volume.
For their impact on Anglo-American economics, see Scherer 2000.
Since 1999, the name has been the Council for Assisting Refugee Academics (CARA).
Rosenbaum was a leading librarian at the LSE who had come over from Hamburg. He also supported Richard Kahn in the translation of Knut Wicksell’s Interest and Prices.
For a detailed history of national accounting in international perspective, see also Studenski 1958 and Vanoli 2005.
For further details, see Keith Tribe’s interview with Sir Hans Singer (Tribe 1997: chap. 4).
Strictly speaking, there were two articles, one in four parts and titled “The German War Economy in the Light of Economic Periodicals,” the other in eight parts (with the first part numbered as pt. 5) and titled, simply, “The German War Economy.”
Nazi Germany used forced labor as a means to support Germany’s warfare on a larger scale than did Imperial Japan in World War II. For more details, see the contributions in Boldorf and Okazaki 2015.
For more details, see Spoerer 2015, which specifies the peak in September 1944 as about one-quarter of total workforce on the territory of the Third Reich (including Austria, Sudetenland, and Memelland) as the sum of foreign civilians (7.4 million), prisoners of war (1.5 million), and concentration camp inmates (0.5 million). Whereas due to increasing military service the number of German men among the workforce was almost halved from 24.5 to 12.8 million in the period between May 1939 and September 1944, the number of German women remained almost constant around 14 million.
Severe hunger problems arose in the postwar period between spring 1945 and the currency reform in June 1948.
Externally, German warfare was financed by robbery from occupied countries and by imposing on them high occupation costs. In other words, these countries financed their occupation and exploitation to a large degree themselves. See Scherner and White 2016.
Economic Journal 54, no. 214, June–September 1944: 216.
On the German war economy, see, e.g., pp. 29–31 in pt. 2 of Singer 1940–41, where the author emphasizes that the German rationing system “leads not only to heavily increased demand for the non-rationed goods, but even to wasteful demand for the rationed good itself” (30).
In the United States, Simon Kuznets and Robert R. Nathan, director of planning at the War Production Board, which was erected shortly after Pearl Harbor, made pioneering efforts and elaborated national income accounting in the period from 1933 to 1948. Military output in the United States increased from 4 to 48 percent of gross national product in only four years between 1941 and 1945. For more details, see Perlman (1989) 1996.
For more on Rothbarth’s life and work, see Cuyvers 1983–84. See also Cuyvers 1983 for Keynes’s collaboration with Rothbarth.
On Rosenstein-Rodan, see also the contribution by Michele Alacevich in this volume.
Arndt, as well as Warner Max Corden, later became one of Australia’s leading economists. Both were born in Breslau, Silesia, today’s Wrocław in Poland, where Arndt’s father, Fritz, had been dismissed as professor of chemistry by the Nazis in April 1933. At the RIIA, Arndt was also asked to write “The Economic Lessons of the Nineteen-Thirties,” a report that had been very controversial among the members of the Economic Group. Arndt’s report (1944) marks an interesting connection between the economic problems of the more industrialized countries in and after the Great Depression and the structuralist approach in early development economics.
On the relevance and variety of dual economy models, see the surveys by Kanbur and McIntosh (1958) and Temple (2005).
For further details, see Hagemann 2007.
In 1948 Hillmann was appointed to a lectureship at the University of Leeds (promoted to senior lecturer in 1956) where he stayed until his retirement in 1976.
There existed uncertainty and reluctance concerning the formation of an alliance with the Soviet Union, which was enhanced by the Hitler-Stalin pact in August 1939.
For more on Kaldor’s early life, and his activities in the war and in the reconstruction of Europe, 1940–49, see Thirlwall 1987.
Galbraith’s team also included, among others, Paul A. Baran, Edward F. Denison (who became a pioneer in growth accounting), E. F. Schumacher, Tibor Scitovsky, and Jürgen Kuczynski, who later became the leading economic historian in East Germany.
Beginning with the reassessment of Adam Tooze (2005, 2007), and enhanced by subsequent work of economic historians, however, the Blitzkrieg hypothesis as well as the postulate that significant inefficiencies were only overcome after Speer’s appointment, which previously dominated the literature, were increasingly rejected. Tooze points out that “German resources were in fact heavily committed to the war from the outset” (Tooze 2005: 440) and that Speer constructed this “miracle” to strengthen his position in the Nazi hierarchy as well as the stamina of the German population. He was supported by his chief statistician Rolf Wagenführ whose data influenced the Galbraith team and whose postwar work on the German industry during World War II (Wagenführ 1954) had a long-term impact.
In Kaldor and Mirrlees 1962, as in Arrow 1962, the technological level of an economy depends on gross investment, thus considering that technical progress enters the production system also via replacement investment, i.e., it is embodied in all new machinery.
This constituted also a decisive difference compared to the capital stock of the East German economy at the date of the currency union on July 1, 1990.
See also the studies of Rolf Krengel and his research team at the German Institute of Economic Research (DIW) in Berlin (Krengel 1958, 1963), which basically confirmed and elaborated the results of the Galbraith team. The industrial investment series carefully elaborated by Jonas Scherner (2010) show a significant upward revision of about 24 percent higher than the Krengel data and therefore stronger effects of Allied strategic bombing. Since 1937, investment activities were targeted at broadening the industrial foundation for war. On the other side, Scherner’s revised data point to the fact that in the non-war-related sectors the vintage structure of the postwar capital stock was even more modern than assumed before, thus strengthening the growth process of the West German economy in the 1950s.
