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January 06, 2020

President Putin blames Britain and France for World War II

Writing about web page http://en.kremlin.ru/events/president/transcripts/62376

The Molotov-Ribbentrop pact of August 1939 joined Stalin’s Soviet Union and Hitler’s Germany in an alliance. It was not called an alliance, but for nearly two years the two countries coordinated their foreign policies and military operations. In the first phase, they joined together in aggression against Poland and the destruction of the Polish state.

Wars may have proximate causes and deep causes. Whatever the deep causes of World War II, it is clear from the Molotov-Ribbentrop pact that Stalin helped to bring the war about.

On 20 December, Russia’s President Vladimir Putin read a lecture on the origins of World War II. His audience was the heads of state of former Soviet republics that make up the Confederation of Independent States – Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Turkmenistan. His purpose was to defend the Soviet Union against the charge of having helped to cause World War II. Putin used the occasion to argue three things.

First, Putin argued that that the Soviet-German non-aggression pact was merely the last occasion – and the most desperate, and therefore the least blameworthy – on which the European powers would seek to put off or divert German aggression; the Soviet Union agreed to it “pnly after all other avenues had been exhausted and all proposals by the Soviet Union to create a unified security system, in fact, an anti-Nazi coalition in Europe were rejected.” To this extent, he suggested, there was nothing particularly abnormal or sinister about the Soviet-German non-aggression pact.

Second, he maintained, among the other proximate causes of the war were the bad judgement and bad faith of Britain, France, and their ally Poland.

Third, he suggested, the deep causes of the war lay in the peace settlement made after World War I, and especially in the Treaty of Versailles. The Western Allied powers made the treaty and imposed it on Germany. (Russia, an Allied power, was not involved at Versailles, having left the Allies in the lurch in 1917.) Putin blamed this settlement for two things. One was the creation of artificial states and unstable borders that were bound to lead to further conflict in Europe. The other was the imposition of humiliating and unbearable terms on Germany, also bound to lead to a further war. Britain and France were responsible for these things and therefore they were far more deeply implicated in the causes of World War II than Russia.

This was quite a lecture – focused, logical, full of historical detail and quotation. Perhaps English-speaking readers, who have become habituated to the tirades of President Trump and Prime Minister Johnson’s ramblings might feel envious: the Russians have such a scholar for their head of state! As I said, focused, logical, and full of detail.

One quality might be thought more important than detail or coherence: was Professor Putin’s lecture good scholarship? Was it true to the facts, and were the facts understood properly in their context? This is what I will briefly consider. I will comment only on the third and last of these issues, the significance of the Treaty of Versailles among the causes of World War II. Much more could be said about the first and second issues, but perhaps they can wait for another day. For now, you can think of the issues arising from the Versailles Treaty as my sampling of the quality of President Putin’s research.

For background, you can think of the Allies at Versailles pursuing three goals: to punish Germany by seizing territory and assets, to force Germany to compensate the Allies for war damages, and to constrain Germany's future behaviour by imposing limits on its armament. The problem was that on a reasonable interpretation the first and second of these goals undermined the third, by stimulating nationalist counteractions. Too much of the punishment and compensation would have fallen on the people, whereas the leaders went largely unpunished. Still, an important question arises: by how much, particularly the treaty is compared to other possible causes of the next war.

Here’s how Putin's argument begins.

Putin: In this connection [the Molotov-Ribbentrop pact], I am asking you to take a few minutes to return to the origins, to the very beginning, which I find very important. I suggest beginning, as they say, from ‘centre field’, as they say, I mean from the results from World War I, from the Versailles Peace conditions written in the Treaty of Versailles in 1919.

Me: Sounds interesting!

Putin: For Germany, the Treaty of Versailles became a symbol of blatant injustice and national humiliation.

Me: Provisionally, I’d shade this a little. For the German ultra-nationalists, and also for more moderate monarchists and conservatives, yes: the Treaty of Versailles symbolized injustice and humiliation. For others, who were generally in the majority, it’s not clear. More below.

Putin: In fact, it meant robbing Germany. I will give you some numbers, because they are very interesting. Germany had to pay the Triple Entente countries (Russia left the winners and did not sign the Treaty of Versailles) an astronomical sum of 269 billion golden marks, the equivalent of 100,000 tonnes of gold.

Me: No. German reparations were fixed in 1921 by a Reparations Commission set up under the treaty. The Commission fixed the final bill at 132 billion gold marks, of which 50 billion were to be collected in the first instance; the remaining 82 billion were judged beyond Germany’s means, and would be collected only if Germany’s capacity to pay proved greater than expected.

A puzzle: then how did President Putin’s researchers come up with the much higher figure of 269 billion gold marks? Possibly, from one of a number of internet sources that offer this figure, including the websites of the BBC, ABC, and National Geographic. The same figure of 269 billion, but in dollars at today’s prices, can also be found on History.com. But they are all wrong.

The ultimate origin of the figure is possibly an Allied claim of 269 billion gold marks, submitted to the reparations commission during 1920 as a first move for negotiation (Kent 1962: 178). It was not adopted, however.

As for Putin’s gold translation of the reparations total, this appears to be roughly correct; 269 billion gold marks would have been close to 100,000 tons of gold (more exactly 96,000 tons). Of course, the gold equivalent of the figure for reparations actually due, 50 billion marks, would have been much less, a little short of 18,000 tons.

Even a single ton of gold is hard to imagine. It invites the question: how much is a lot? Putin tries to answer this question by offering two alternative standards of comparison:

Putin: For comparison, I would say the gold reserves as of October 2019 are 8,130 tonnes in the US, 3,370 tonnes in Germany and 2,250 tonnes in Russia.

Me: Such comparisons are striking, but the figures seem to have been selected in order to mislead. Germany was expected to pay reparations not out of its gold reserves on hand at the end of the war, but out of its export earnings over many years. (Gold, incidentally, was and is not the only form in which foreign currency reserves are held. For Germany, which has one of the largest gold holdings in the world today, gold is around three quarters of its total of foreign reserves.)

Putin: And Germany had to pay 100,000 tonnes.

Me: No, just 18,000.

Putin: At the current price of gold of $1,464 for a troy ounce, the reparations would be worth about $4.7 trillion, while the German GDP in 2018 prices, if my data are correct, is only $4 trillion.

Me: At last, we have a calculation that would seem to underplay the weight of the reparations burden. Putin compares the gold value of reparations then to Germany’s GDP today, when both are measured at today’s prices. The undervaluation arises as follows: the dollar price of gold has increased by around 100 times, whereas Germany’s nominal GDP has increased by a factor of around 300. Of course, after a century of economic growth, the German economy of today would be much better placed to sustain the burden of the reparations bill fixed in 1921 – even if we overstate it by five times, as Putin’s researchers have done.

The fact is that Germany was expected to bear the burden of reparations at the gold price of the time based on the value of its national resources of the time. A more relevant comparison is then as follows.

What was the scale of Germanys’ indebtedness in 1921, including reparations, in comparison to the indebtedness of the victorious powers? The 50 billion gold marks of reparations, set in 1921, would have represented approximately 125 per cent of Germany’s GDP at the time. To this should be added Germany’s ordinary public debt of around 50 per cent of GDP. Germany’s overall debt burden, including reparations, was therefore 175 per cent of GDP. By modern standards this would be a heavy burden. But the British debt burden of 1921, mostly arising from the war, was around 160 per cent of GDP. At 250 per cent, the French burden was still higher. (For sources and further detail see Harrison 2016: 152.)

In short, the reparations commission did not ask defeated Germany to shoulder a burden of national debt heavier than that of the victorious powers. The complication -- a serious one -- was that the German governent owed this debt mostly to foreigners, whereas the British and French governments owed it mostly to their own citizens.

Claims of the burden of reparations on Germany in the 1920s should also take into account the treaty restrictions placed on German rearmament. To the extent that the restrictions were effective, they relieved Germany of the fiscal burden of maintaining and equipping planes, battleships, and tanks. The size of the relief was large, possibly of the same order as the reparations payments actually made (Hantke and Spoerer 2010). To the extent that the Versailles restrictions were ineffective, then it was Germany ‘s choice to spend money on secret rearmament that could otherwise have been used to compensate the victims of German aggression in the war.

Putin: Suffice it to say that the last payments of 70 million euros were made quite recently, on October 3, 2010. Germany was still paying for World War I on the 20th anniversary of the Federal Republic of Germany.

Me: This small fact is used to convey several misleading implications – that Germany was forced to pay for World War I over many decades, and that this is a measure of the undue weight of the burden. Neither implication is valid. Even before Hitler, Germany never paid more than a fraction of the reparations bill set in 1921 – perhaps 20 billion marks out of 50 (Marks 1978). The rest was never paid; the rather small payment that Germany made in 2010 was the final instalment not of reparations but of loans that Germany took out in the 1920s, mostly in the United States, to help smooth out the limited reparation payments being made at the time.

Putin: I believe, and many, including researchers, agree that the so-called spirit of Versailles created an environment for a radical and revanchist mood. The Nazis were actively exploiting Versailles in their propaganda promising to relieve Germany of this national shame, so the West gave the Nazis a free hand for revenge.

Me: This greatly overextends the truth. What is true is that “The Nazis were actively exploiting Versailles in their propaganda promising to relieve Germany of this national shame.” It was not only the Nazis that wanted to reverse the restrictions and obligations imposed on Germany at Versailles: the idea was shared by the remaining monarchists and many conservatives. But Versailles did not create this spirit: the spirit of revenge was created earlier, by the fact that Germany lost the war, was defeated and forced to surrender, and then lost its monarchy to a democratic revolution.

The reaction against the democratic revolution became an important expression of radical nationalism in Germany after the war. But the fact is that from 1920 onwards the weight of reactionary opinion opposed to the Versailles settlement declined steadily (as did support for revolutionary communism), if measured by votes cast in successive parliamentary elections from before the Versailles Treaty in 1919 through the publication of the reparations bill in 1921, the conflicts over repayments and the hyperinflation of 1923, through the subsequent stabilization to the Great Depression in 1929 (again, see Harrison 2016: 153). Until the Great Depression, in other words, most Germans just did not care enough about Versailles to vote for the parties agitating against it.

Germany’s radical right was a menace to public order through the 1920s, but not until the sudden wave of bankruptcies and the growth of mass unemployment in 1930 did it come to look like anything more than a temporary nuisance of fading relevance. It was the Great Depression, not the Versailles Treaty, that created Hitler’s opportunity to move from the fringe to the mainstream.

President Putin goes on to quote various authorities – Ferdinand Foch, Woodrow Wilson, and Winston Churchill – to the effect that the Versailles Treaty made poor sense as an exercise in peace-making. Here Putin has a point. The treaty prioritised collective punishment and reparations over justice for the leaders and reconciliation for the people. It was much more in line with the standards of peacemaking of the nineteenth century than of ours.

But did the Treaty of Versailles amount to a deep cause of World War II? No; the evidence for this is overstretched or misunderstood. Did the President consider the origins of the war in an objective, open-minded spirit? No; he argued the case for a predetermined thesis. How then was the evidence found? Most likely hs instructed his research assistants to trawl the internet for favourable evidence, passing over anything that was adverse, and so they selected the supporting views and facts, false as well as true, that they found there.

One last matter:

Putin: The Versailles world order gave rise to many conflicts and disagreements. They are based on the borders of new states arbitrarily drawn up in Europe by the winners of World War I. That is, the borders were reshaped. This created conditions for the so-called Sudeten crisis.

Me: What Putin has in mind here is the validation of frontiers that stranded an ethnically German minority within the interwar boundaries of Czechoslovakia. In 1938, Hitler claimed this territory from Czechoslovakia and the British and French agreed rather than go to war with Germany. In his lecture, Putin associates the ethnic heterogeneity of the countries formed at the end of World War I with the artificiality of their borders; he implies that the conflicts that followed were inevitable and foreseeable consequences, for which the “winners of World War I” (and, therefore, not Russia) may be blamed.

Putin’s negative verdict on Europe’s borders after Versailles is striking, and I cannot help being reminded of Molotov’s self-satisfaction in October 1939, when he reported to the Supreme Soviet on the successful conclusion of Soviet Army operations in Poland:

Molotov: A short blow by the German army, and subsequently by the Red Army, was enough for nothing to be left of this bastard of the Treaty of Versailles.

Me: It is fair to say that Putin is not Molotov. Putin does not actually say that Poland or any of the other independent countries formed in the aftermath of the war were “bastard” states, lacking in legitimacy or the right exist. But he does find their existence problematic, and for me this comes uncomfortably close.

Again, it is fair to say that Putin has a point – a rather obvious one. The land borders of every continental state have been shaped by wars, foreign and civil. Particularly in Eurasia, the territorial expanse of which is largely flat, nearly every land border has an artificial character. Russia’s borders are no exception; with the size and weight advantages of a great power, Russia has never been slow to force the adjustment of borders to its own advantage.

But faced with artificial borders, created not in time immemorial but in relatively recent times after much blood was spilled, what do you do? Do you set out to delegitimise the surrounding states that stand on them, in order to destroy the borders that exist and to create new ones more to your liking, or do you seek to soften the borders and make them more porous, opening them to trade and the peaceful movement of people?

The fact is that in 1939 Hitler’s Germany and Stalin’s Soviet Union found common cause in destroying the borders created by the Versailles settlement. Stalin said as much a year later, when he told Stafford Cripps, the British ambassador, that he had come to see German and Soviet interests as fundamentally aligned (Weinberg 1994: 25):

Stalin: The USSR had wanted to change the old equilibrium . . . but that England and France had wanted to preserve it. Germany had also wanted to make a change in the equilibrium, and this common desire to get rid of the old equilibrium had created the basis for the rapprochement with Germany.

Me: It was not the existence of newly independent countries such as Poland or Czechoslovakia that led to war in 1939, but the fact that they neighboured much larger states that were bent on the revision of their borders and the destruction of their independence. These were the countries that brought about the war. Hitler pointed the gun; Stalin helped him pull the trigger.

So, President Putin’s lecture. Focused, logical, and full of detail? Yes. Good scholarship – at least, that part of it that addresses the Treaty of Versailles? No.

References

  • Hantke, Max, and Mark Spoerer. 2010. The Imposed Gift of Versailles: The Fiscal Effects of Restricting the Size of Germany’s Armed Forces, 1924-9. Economic History Review 63/4, pp. 849-864.
  • Harrison, Mark. 2016. Myths of the Great War. In Economic History of Warfare and State Formation, pp. 135-159. Edited by Jari Eloranta, Eric Golson, Andrei Markevich, and Nikolaus Wolf. Singapore: Springer, 2016.
  • Kent, B. E. 1962. Reparation and the German financial system, 1919-1924. PhD dissertation. Australian National University, Canberra.
  • Marks, Sally. 1978. The Myths of Reparations. Central European History 11/3, pp. 231-255.
  • Weinberg, Gerhard L. 1994. A world at arms: a global history of World War II. Cambridge: Cambridge University Press.

February 24, 2014

Kiev, Europe's Dangerous Crossroads

Writing about web page http://www.bbc.co.uk/news/world-europe-26312008

Europe has been at this crossroads before. An ancient multi-national empire creaks dangerously under the strains of modern nationalism and separatism. Its rulers fear the mob, and fast-moving events. It fears especially the example of a neighbouring independent state, once its colony. Above all, it fears the future.

A century ago this was the Austro-Hungarian Empire, where the Hohenzollern dynasty, ruling in Vienna, determined to crush the rising challenge of Serbian nationalism. In planning war on Serbia, the Austrian government knew that Serbia had a powerful ally, Imperial Russia. The Austrians knew they would face strong resistance. They feared their enemies, but they feared the future more. They gambled on war.

Austria was encouraged in its war aims by the rising power of Germany, which expected to take advantage of the resulting conflict to settle accounts with its own rivals and shift the balance decisively in its own favour. This too was a gamble.

Today the ancient, creaking multi-national empire is Russia itself, where the Kremlin looks to events in the neighbouring Ukraine, once ruled from Moscow, with mounting anxiety.

Note what I am not saying. I'm not saying that history repeats itself. It doesn't repeat itself at all, never mind exactly one hundred years later. Over a century the world has changed in too many ways for this to be a nice laboratory experiment with controlled conditions under which similar reagents reliably produce a similar result. All that history can tell us is some of the risks in the situation -- and not all of them, because there is always something latent or new that did not happen before.

But I am saying that Europe is at a dangerous crossroads. A popular uprising has rid Kiev of the corrupt Yanukovych regime. In this moment, 45 million Ukrainians face an unknown future. That's their problem. It's not an easy problem. If it had been easy, former president Yushchenko and former PM Tymoshenko would have solved their first time around, in 2005. They would not have fallen out and Yanukovych would not have been elected president in 2010.

The one thing that Ukrainians cannot change is their location. Russia was, is, and will remain their powerful neighbour. Many Ukrainians speak Russian and feel Russian. Whether the reformers like it or not, they have to take this into account.

The problem for Russia's president Putin begins with the fact that events in Kiev look set to put an end to his dream of uniting Ukraine with Russia and Belarus in a Eurasian Union. Worse than that, Ukraine in this moment embodies an existential threat to his rule. If the people can get rid of Yanukovych, they can get rid of Putin.

The problem for 700 million Europeans in this moment is: What will Russia do now? Does Russia have the will and the capability intervene in Ukraine by whatever means present themselves -- openly or under cover, by inducements, threats, or force? Financial inducements have been tried. Repression from within has been tried. Both have failed. What else can Russia do?

When rulers feel their survival is at stake, the normal restraints and inhibitions can melt away. They may not act rashly or precipitately; they will still calculate and if calculation suggests waiting they will wait. But what enters the calculation and with what weight may change. And pessimism is a dangerous element, because fear of the future may tilt the calculation in favour of taking a gamble on precipitate action today.

If the alternative is to be chased out of the presidential palace, the resort to violence may no longer look so bad. That's what Yanukovych showed us last week. I wonder what Putin is thinking about this morning.


July 16, 2013

Protectionism: A Fairy Tale of the State and War

Writing about web page http://www.pieria.co.uk/articles/in_defence_of_protectionism

On Pieria, John Aziz writes in defence of protectionism, that is, the use of taxes and subsidies to shield a country's economy from foreign competition. He begins from the Ricardian story of the benefits of two countries sharing the benefits of free trade based on comparative advantage.

England was good at producing wool, Portugal wine, so they trade and both are better off. There is the fairy tale about how because market transactions are always voluntary and always beneficial that trade, being simply a market transaction across borders, is always win-win.

But this, he says, is a "fairy tale." In real life, he argues, comparative advantage has little to do with resource endowments and is generally artificial. Comparative advantage may be part of the historical pattern, he concedes. But it misses something essential. What's missing? He goes on.

Let's imagine a model with two different goods, say, guns and butter. England specialises in producing guns and munitions, and Portugal in butter and agricultural produce. For years, they trade and enjoy the benefit of maximising output through specialisation. Then, England starts a trade dispute with Portugal. They cease trading. England loses access to butter and various agricultural products from Portugal's large population of butter-producing cows, having to replace Portuguese butter with lower-quality and higher-priced Welsh butter. Portugal, however, loses access to guns and munitions. Although this is immediately recognised as a risk to national security, and Portugal quickly tries to start up its own domestic firearms industry, the trade dispute escalates into full-blown war and with their geostrategic advantage in guns, England swiftly triumphs and occupies Portugal.

The implication is clear. Portugal should have insured itself against the contingency of conflict with England by limiting trade through protectionism. By means of an interventionist industrial policy, Portugal would have developed its own guns and could then have resisted England.

Several things are noteworthy about this argument.

First, it too is a fairy tale. As John Aziz rightly points out, there's nothing intrinsically wrong with that. All our models are fairy tales. The point is that some are useful and others not. How can we tell? We test them against stuff that has actually happened. If they survive the confrontation, then we can use them to suggest practical implications for the future. So, the fact that it's a fairy tale is of interest, but it's not a problem. Let's move on.

Next noteworthy point: Let's test this model against something that actually happened. Not literally, because England has not been to war with Portugal since long before gunpowder came along. Replace Portugal by Germany, however, and the fairy tale suddenly acquires an ominous ring of truth. Doesn't it have an uncanny fit with what happened in 1914?

No, not exactly. In 1914 Germany and Britain went to war. While Britain was the pioneer of free trade, Germany had practised protectionism since 1879. German tariffs limited trade and promoted self-sufficiency in both industrial and agricultural goods. In Britain, by contrast, free trade accelerated the decline of agriculture and maximized the exposure of the British economy to imports. In 1913 at least 60 percent of the calories used at home for human consumption were imported. Many observers thought that left Britain ridiculously vulnerable to wartime blockade. German naval strategists agreed. It's true that in World War I food became a weapon of war just as much as guns.

Yet in the outcome it was Germany, the protectionist power, that struggled to manage the wartime disruption of trade and saw civilians die of hunger, while the British got by without serious shortages.

What explains this turnaround? As Mançur Olson (1963) argued (and before him Friedrich Aeroboe), the German economy entered the war in 1914 already weakened by protectionism. Food tariffs had encouraged peasant farmers to stay on their farms. This kept a large subsistence agriculture in being and reduced productivity and incomes. Because German farmers were already well into diminishing returns it was then hard to increase output at need, when war broke out.

As for industry, because imports of food into Germany were restricted in peacetime and labour held back in agriculture, German urban employers faced higher wage costs. To compensate for higher wage costs, industrial firms economized on labour and pushed up productivity. But across the economy as a whole, efficiency and average incomes were reduced.

A history of protectionism gave no national advantage in either World War. I've argued (in several places; see Harrison 2012 for example) that the main factors that gave systematic advantage were a country's size and wealth, and the main source of disadvantage was a peasant-based agriculture.

In that case, what's protectionism all about? In understanding protectionism, redistribution is much more important than development. Whether tariffs and subsidies raise or lower long-run growth, in the short run they redistribute income away from consumers and exporters to import-competing firms, often by very large amounts. This should draw attention to their political significance. As Dani Rodrik (1995, p. 1470) once wrote:

Saying that trade policy exists because it serves to transfer income to favored groups is a bit like saying Sir Edmund Hillary climbed Mount Everest because he wanted to get some mountain air.

In history, protectionism has given politicians a powerful instrument to bind those "favored groups" into their projects. To Bismarck, protectionism was political: it brought together the interests of "iron and rye" to share rents and support Germany's "peaceful rise." Similar motivations lie behind most real-life experiments in protectionism that I am familiar with. The only real exception is the Soviet experience of autarkic industrialization; that was different because Stalin was an absolute dictator who ruled by fear and had no need to pay off campaign funders.

Modern promoters of the developmental state (including Dani Rodrik) could reply that they advocate only those selective interventions that are designed to improve social welfare, not corrupt the political process. That's an argument I understand, but it requires a benevolent, far-sighted government with the power to intervene and the self-restraint to do so only for the common good, not for the good of its supporters. That's a bit of a problem. I don't see a political system anywhere, short of totalitarian dictatorship, in which you could advance those policies and see them implemented without vested interests jumping on your bandwagon and hijacking it for their own purposes, which will have nothing to do with social welfare.

(It's ironic, then, that John Aziz lists "graft and corruption" as a problem of trade liberalization, because opportunities for corruption are created only where the government has something to withhold.)

The historical link between protectionism and aggressive nation building is strong. Using data for 1950 to 1992 Erik Gartzke (2007) has shown that restricting a country's trade and capital flows is a good predictor of its propensity to engage in conflict. From data for 1865 and 1914, Patrick McDonald and Kevin Sweeney (2007) have shown that protectionism was a robust precursor of engagement in "revisionist" wars.

John Aziz concludes with a warning:

China's monopoly on rare earth metals which have very many military applications may have national security implications for other nations including Britain and the United States whose ability to manufacture modern military equipment might be impeded by a trade breakdown.

Shouldn't we worry? Yes, but that's because we need to understand China, not because we should be preparing for war. Indeed, one of Mancur Olson's key conclusions was that it's a mistake to think of particular raw materials, and even oil or food, as in some way "strategic" or "essential." Only the final uses of resources are essential. In practice, if some particular material suddenly becomes scarce, the price goes up and and opportunities present themselves to economize at the margin or find alternative sources or substitutes.

The price goes up, it's true. In other words, the alternatives may be costly. But the richer you are, the more easily you can meet the cost. That's why rich countries survive trade disruption and win wars. As for protectionism, to the extent that it diverts resources from their best uses, it makes the country poorer in advance and so less able to afford the measures that might become necessary in a national emergency.

Which brings me to the last noteworthy point about the arguments that John Aziz makes: They have nothing to do with personal well being. As he correctly comments:

The relative value of outcomes is simply a matter of one's criteria.

In truth, the two fairy tales that he tells differ in addressing completely different criteria. The free-trade fairy tale always was and is about the personal welfare of all members of society. Here, society is global: when trade is free, all gain, not just the residents of one country. The protectionist fairy tale, in contrast, is about nation-building and facilitating conflict in a world where elite coalitions build states, states compete for power, and a gain for one country is a loss to others.

The world is a complicated place. In the same spirit as John Aziz when he notes that the free trade story has some merit, I'm going to accept that the unregulated interaction between real world economies sometimes creates losers. There have evidently been historical circumstances when protectionist policies accidentally did no harm, or even did good by accidentally correcting some market failure.

But the design of protectionism has generally been far more driven by vested interests and power building than by concern for social welfare. Those who enter themselves in the reckoning against free trade often rely on an idealized understanding of the record.

References

  • Gartzke, Erik. 2007. The Capitalist Peace. American Journal of Political Science 51:1, pp. 166-191.
  • Harrison, Mark. 2012. Pourquoi les riches ont gagné: Mobilisation et développement économique dans les deux guerres mondiales. In Deux guerres totales 1914-1918 − 1939-1945: La mobilisation de la nation, pp. 135-179. Edited by Dominique Barjot. Paris: Economica, 2012 (here's a preprint in English).
  • McDonald, Patrick J., and Kevin Sweeney. 2007. The Achilles’ Heel of Liberal IR Theory? Globalization and Conflict in the Pre-World War I Era. World Politics 59:3, pp. 370-403.
  • Olson, Mançur. 1963. The Economics of the Wartime Shortage: A History of British Food Supplies in the Napoleonic War and in World Wars I and II. Durham, NC: Duke University Press.
  • Rodrik, Dani. 1995. Political Economy of Trade Policy. In Handbook of International Economics, vol. 3, pp. 1457-1494. Edited by Gene Grossman and Kenneth Rogoff. Elsevier.

March 10, 2013

From 1914 to 2014: The Shadow of Rational Pessimism

Writing about web page http://www.ft.com/cms/s/0/e29e200a-6ebb-11e2-9ded-00144feab49a.html

China’s territorial claims and bellicose actions in the Western Pacific have aroused concerns about where this process could lead. In The Shadow of 1914 falls over the Pacific (in the Financial Times on 4 February), Gideon Rachman asked whether we are watching a re-run of events that led to the outbreak of World War I in 1914.

Then, a rising power (Germany) was challenging the established power (Britain) for a say in world affairs and a share in the world's colonial territories. It was not Germany's plan to make war on Britain; German leaders wanted only a say and a share. The economic, military, and naval power that they built was not made to go to war, only to prevent Britain from blocking Germany’s demands. They wanted to ensure peace and to command respect. The war that then came about was not meant to happen. The war would not have happened at all if allies, agents, proxies, and third parties beyond their control had not helped to bring it about.

Replace Britain by the United States, Germany by China, and Austria-Hungary, Russia, and Serbia by Japan, Vietnam, and North and South Korea, and you have Rachman's story in a nutshell. Rachman's conclusion is hopeful, however: China's leaders have tried to learn from history. That, and the inhibitions added by nuclear weapons, will help to avert war.

What was the role of calculation in the outbreak of World War I? Rachman writes as though the war was not calculated at all:

Leaders on all sides felt helpless as they were swept towards a war that most of them did not want.

But something is missing here. While the war was in some sense unwanted, the leaders were not helpless: they chose war. It was a calculated decision, and it was not a miscalculation: those who favoured war correctly estimated that victory was far from certain. They had a war plan for a quick victory over France that relied on a high speed military manoeuvre on a colossal scale, a decision by Britain to abstain, and a Russian mobilization that would obligingly wait until the German Army was ready to switch its focus from West to East. They knew it was an outrageous gamble.

Critical to this story was something that I will call rational pessimism. By 1912, Germany no longer felt itself the confident, rising power once led by Bismarck. Germany’s leaders had come to fear the future. Their own attempts to secure Germany’s rightful place in the sun, they feared, were leaving Germany ever weaker.

These fears were well founded. Externally, the balance of power was tilting away from Germany. More countries were adhering to the anti-German alliance of Britain and France. Britain and Russia were rearming at a pace that nullified Germanys’ own efforts. Given time, Germany would only become weaker. Within Germany the balance was tilting away from monarchism and conservatism towards parliamentary socialism. The fiscal demands of rearmament were opening up new social divisions. Germany’s Prussian bureaucracy and aristocracy felt itself more and more besieged.

Increasingly the calculation became: If we fight, we may lose but at least there is a chance that we win. If we remain at peace, we certainly lose. From this point of view the war was a gamble, but it was not a miscalculation. It was simply the choice with the highest expected value. For this reason the leaders of the Central Powers went to war full of foreboding, but they went to war anyway.

In July 1914 the German chancellor Bethmann Holweg confided in his friend Kurt Riezler, who wrote in his diary:

Russia’s military power growing fast … Austria grows ever weaker … This time things are worse than 1912, because now Austria is on the defensive against the Serb-Russian agitation. … The future belongs to Russia, which grows and grows into an ever great weight pressing down on our chest.

The chancellor is very pessimistic about Germany’s intellectual condition. Frightful decline of our political niveau. Individuals are becoming ever smaller and more insignificant; nobody says anything great and honest. Failure of the intelligentsia and of the professors.

This pessimism was general. When Germany’s Wilhelm II was informed of the Austrian ultimatum to Serbia, he wrote:

Now or never.

In Vienna, Kaiser Franz-Josef wrote:

If we go under, we better go under decently.

(The latter quotes are from Holger Herwig’s The First World War: Germany and Austria-Hungary, 1914-1918, published in 1997 by Arnold).)

From this perspective it becomes crystal clear why North Korea’s predicament is so dangerous. Day by day, North Korea is provoking enemies and losing friends. The tensions within the country are largely unknown but surely increasing. What insider would predict a peaceful future for the Pyongyang regime that is better than today? What does Kim Jong-Un have left to lose from gambling on conflict, no matter how poor the odds? Rational pessimism is surely tilting North Korea’s choices towards war. Still, we are not there yet.

As for China itself, the threat of war should be thought of as one for the future. It seems unlikely that China’s leaders would ever choose to gamble everything on a major war as long as they expect to gain more from a continuation of peace. Their optimism is a bulwark against war.

The risk is that optimism is fragile. China faces many problems that could sap the confidence of its leadership. Edward Luttwak (in The Rise of China vs the Logic of Strategy, published in 2012 by the Belknap Press of Harvard University) has written that China is pursuing an impossible trinity of prosperity, diplomatic influence, and military power. China’s economic growth may falter. Even if economic growth is sustained in China, the chances are that at some stage the West will recover its prosperity and technological leadership. Meanwhile China’s rearmament and territorial claims are losing it friends in Japan, Vietnam, and India. At home, there are protests over a range of issues that widens continually: the rule of law, corruption, censorship, inequality, wages and working conditions, land grabs, and pollution. China’s rulers rely on xenophobia and stories of foreign encirclement and penetration to manage these threats to their legitimacy.

Putting all this together, it is not hard to envisage a future in which China’s leaders would become rational pessimists. Would they then be held back by knowledge of history and by the possibility of nuclear war? Maybe. Is Kim Jong-Un restrained by these things today? So far, yes. If Germany’s rulers in 1914 could have seen the future, would they have chosen differently? Perhaps. Unfortunately, we can’t be sure.


I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).



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