All 37 entries tagged War

Can Western sanctions on Russia be effective without an energy embargo?

Writing about web page https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Yes, Western sanctions on Russia can be effective without an energy embargo. If "effective" means enough to raise the costs of Russia's war effort and undermine its sustainability, then Western sanctions are already effective. Adding an energy embargo is not only unnecessary but might also get in the way of Western support for Ukraine.

This argument seems to fly in the face of the conventional wisdom, so I will present it as carefully as I can. Objections and counter-arguments are welcome.

Russia is a major exporter of energy to the world, including the West. From the first days of Russia’s invasion of Ukraine, it has been said that by paying a billion Euros a day to Russia, Western economies are effectively paying for Putin’s war. There have been corresponding calls for an immediate Western embargo on Russian energy, despite the wrenching adjustments that this would require.

Who stands to lose more by stopping Russia’s energy exports? When Putin’s war is grinding on far longer than anyone anticipated, the argument that it is paid for out of Russia’s export revenues suggests that Russia must be desperate to keep its place in the world energy market. Meanwhile, most Western powers are working hard towards an embargo on Russia’s exports. They are also expending considerable political capital on efforts to bring backsliders into line, notably Hungary.

Yet Russia itself does not look desperate to maintain its export markets. Rather, the Russian government sets obscure financial conditions for Western buyers, such as payment in rubles, and has already halted gas supplies to Poland, Bulgaria, and Finland.

It seems that both sides are treating Russian exports as their own weapon. While NATO threatens Russia with a stop on purchases, Russia threatens NATO with a stop on sales.

If you find this confusing, then you’ve been paying attention. Too many Western commentators have fallen victim to an old mercantilist error—that the strength of an economy is measured by its ability to attract gold from others through its export trade.

What are the underlying facts?

First, Russia has a large and growing export surplus. The Economist puts last year’s trade surplus at 7.5 per cent of Russia’s GDP . This year, it is expected to rise to 15 per cent of last year’s GDP (this year’s GDP will be smaller by an unknown amount, perhaps 10 or 20 percent, pushing the share of the trade surplus still higher).

The reason for Russia’s growing export surplus is that, while exports are holding up, imports from a broad sample of Russia’s trading partners are collapsing—running at half the level of before the war’s outbreak. Why? There are two possibilities. One is that Western sanctions on Russia’s imports are working. The other is capital flight—holders of ruble balances are converting them into Western currencies, causing the ruble exchange rate to decline sharply and pushing up import prices for Russian consumers. In the short run it does not matter which.

An expert quoted by The Economist finds Russia’s growing trade surplus “disappointing.” Although sanctions on Russia’s imports may be working, it seems we are still buying Russian energy exports at levels similar to before. We are still “paying for Putin’s war”—or so it is said.

To understand what Russia’s growing trade surplus really means, it’s necessary to recall that the money flows are the counterpart of flows of real resources. As money flows into Russian hands, real resources flow the other way. If Russia’s trade surplus will be 15 percent (or more) of its GDP this year, then in terms of the real resources produced Russia is sending the same proportion of its domestic product abroad to be utilized by foreigners.

How does that matter for financing Putin’s war? It is sometimes said that GDP is a measure of a country’s capacity to fight a war, and this is correct—approximately. But when the shooting begins, wars are not fought with GDP. They are fought using the real resources available. For this purpose, exports are not available. What is available is domestic production not exported, plus imports.

The national accounting concept of the resources available to a country at war is not GDP but “domestic absorption”—the total of domestic expenditure, including expenditure on net imports.

With percentage points of last year’s GDP as the units, Russia’s trade surplus of 7.5 units left 92.5 for domestic absorption. This year, absorption will fall by the fall in GDP (say 20) plus the increase in the trade surplus (7.5), so 27.5. A GDP decline by one fifth becomes an absorption decline by nearly one third.

Two things follow. One, the fact that Russia is exporting one seventh of its national income to the rest of the work is weakening, not strengthening its war effort. Two, Russia’s exports are not “paying for Putin’s war.” They are certainly paying for something, but not that. What they are paying for is the accumulation of idle balances of foreign currency. This currency may be held by the state (within Russia) or by private citizens abroad (in the case of capital flight). But, if they cannot be used to import resources into Russia, they are not paying for Putin’s war.

A reality check is available. In two World Wars, the Allies blockaded Germany to prevent the import (not export) of resources. In both wars, Germany responded by confiscating resources from the countries it occupied, just as Russia today is accused of stealing grain and other valuables from Ukraine. In fact, in World War II Germany’s plan of overland occupation of the Eastern territories was designed in the expectation of an Allied blockade German overseas trade. It has been calculated that net imports from Germany’s wartime empire paid for more than one quarter of Germany’s war effort. Net imports, not net exports!

What are the implications?

• First, Western sanctions are working. They are working either directly (by cutting Russia’s imports) or indirectly (by causing capital flight). By the measure of real resources, Russia’s economy is suffering arterial blood loss at an increasing rate
• Second, Russia’s most likely retaliation will indeed be to reduce exports by cutting off energy supplies to the West. The rationale for this will be not only to damage Western economies but also to redirect capital and labour from the energy sector to Russia’s war sector.

It is sensible for Western countries to prepare for this. An efficient way to do so is to impose a tax on purchases of Russian energy, reflecting the risk attached to continued reliance. But it is also wise to ensure that, when the pinch comes, the blame for the disruption is seen to lie where it should belong, with Russia.

• Fourth, by pressing the unwilling, not only in Hungary but potentially in all Western countries, to do without Russian energy before the need arises, we are pointlessly spending NATO’s political capital (and sympathy for Ukraine) while exacerbating the national and social divisions on which Putin relies to make progress.
• Finally, are there risks in allowing Russia to continue to accumulate financial claims on Western economies accruing from energy sales? Yes, but as long as sanctions on Russia’s imports and financial institutions remain in place these risks are long term. The shape of the long term will be decided by the outcome of Putin’s war, which is being decided now.

It is far more important for everyone to do what it takes to win that war now, including focusing on Ukraine’s military needs, than to be distracted by worry about the distant financial implications of continuing to buy and pay cash for Russian energy while we can -- cash that Russia cannot currently spend.

Mark Harrison : 30 May 2022 14:34 |  Tags: Energy Russia Sanctions Ukraine War |  Comments (0) |  Close comments |  Report a problem

When Deterrence Fails, Defence is the Only Option

Writing about web page https://warwick.ac.uk/newsandevents/expertcomment/ukraine_invasion_university

Russia’s invasion of Ukraine shows that Western deterrence has failed. Also, Russian deterrence is working: we daren't help Ukraine militarily because of the fear of what Russia would do next. So the situation now resembles a Cold War nuclear standoff: When the Soviet Union suppressed uprisings in East Germany or Hungary, fear of nuclear war forced the West to accept that this was Russia's backyard. This situation is exactly what Putin wanted when he called recently for a new Yalta agreement – one that would assign the Russian backyard to Russian control.

Was the failure of Western deterrence avoidable? Possibly, although not easily. NATO countries, and Britain in particular, have made at least two unforced errors.

First, we have placed far too much reliance on economic sanctions for crisis management. Of all weapons, economic measures are slowest to work (and, incidentally, have the highest ratio of collateral damage to intended damage). So the adversary that is economically weak but militarily strong will always be tempted to escalate military violence in response. Besides, in the short term, Russia is not weak in fiscal capacity. I heard a government minister claim on the radio this morning [yesterday 24 February 2022] that we are going to strike at Russia's capacity to fund the war, he emphasized the damage being done by the overnight fall in Russian equities. Unfortunately this is nonsense. If anything, the climb in oil and gas prices is making Russia stronger, not weaker.

Second, for the same reasons, economic measures are not a way to avoid conflict. They go with (not instead of) military defence and deterrence. If we engage in economic war with Russia and we don’t have strong military defences, Russia will respond with more war. Britain and other Western European state have underinvested in defence for many years. It is not a good time to say so, given Britain’s needs to fund health care, the courts, and the levelling up agenda. At the same time, we also need to look to our defences.

Mark Harrison : 25 Feb 2022 14:02 |  Tags: Russia Ukraine War |  Comments (0) |  Close comments |  Report a problem

When Three Wars Collided: Moscow, April 1982

Writing about web page https://warwick.ac.uk/fac/soc/economics/staff/mharrison/moscow1982/

This column is about a moment when three wars collided: the Cold War, the Second World War, and the Falklands War. It was April 1982; the Cold War was in full swing, and East-West relations were not in good shape. I was in Moscow for a month, thanks to the British Academy's exchange programme with the Soviet Academy of Sciences; I was engaged in a project on the Soviet economy in the Second World War. As I arrived, the Falklands War broke out.

The events that led directly to the Falklands War were taking place as I left the UK. But I had paid little or no attention, so I arrived in Moscow more or less unaware that the Falklands Islands were a British possession, that their sovereignty was disputed, who lived there, and even which hemisphere or ocean they were in. Once in Moscow I was pretty much on my own, with no access to Western radio or newspapers, and I was busy, so I did not even try to follow the news. All in all, I was the last person to find out.

The first I knew of the conflict was a chance remark at the Institute of USSR History, where I was visiting – someone I knew distantly broke into a conversation in a corridor to as: "Why is your country at war with Argentina?" I had absolutely no idea what he was talking about. As I recall, I thought it must be some obscure Soviet joke that I did not understand, so I probably smiled enigmatically and carried on with the conversation as before.

After that, I tried to catch up. But my only source was Pravda, the daily party newspaper. In the first days of the conflict, the Soviet line was strongly anti-imperialist and pro-Argentinian, so they called the Falklands the Malvinas, and they portrayed Argentina as helping the Falkland Islanders to free themselves from colonial oppression and exploitation. I picked up the idea that the islanders were originally brought there as plantation slaves.

After a few days the line shifted. I don't know why, but the Soviet stance became more neutral. The press began to refer to the "Falklands/Malvinas" and, most importantly from my perspective, to report developments from both sides in a more objective way. So I began to get a more accurate fix on what was going on.

In the midst of all this I continued to work on my project, which was on Soviet economic planning in the Second World War and would lead eventually to my first book. Something I was trying to puzzle out was the reliability and consistency of the Soviet official measures of the scale of the war effort. In those days there was absolutely no question of getting archival access to such information, so I had spent a long time combing through all the Soviet publications on World War II and putting together all the data I could find. Not surprisingly, I was left with a lot of questions: things like the concepts and methods used to calculate the growth and scale of Soviet war production, the proportions of resources used for the war, the squeeze on wartime consumption, the role of Allied aid, and so on. The reason I wanted to do this was to be able to make more accurate comparisons of how the different countries fought the war.

I hoped that in Moscow I might find some answers. Of course, I knew that all this information was quite sensitive. I also knew that the Soviets were very proud of their war effort, but I did not see any way in which my digging away would threaten that. With that in mind, asking for help seemed reasonable to me.

In the Institute of USSR History I was attached to the sector on military history. I had a number of interesting conversations there, but i did not get any help with my data issues. When I raised this, I was told: You'd better talk to Mitrofanova.

Avgusta Vasil'evna Mitrofanova was a well-known figure; she'd written the definitive history of the Soviet working class in the war, and at least some of the figures I was puzzling over came from her big book (published in 1971), so this seemed like a good idea. A meeting was arranged. As I was not completely confident in my Russian, I wrote my questions down.

The afternoon of our meeting came around. We met at the institute in a large, rather dingy room. Avgusta Vasil'evna (as I called her, respectfully) was in her early sixties. After all this time I couldn't give much of a description, but I remember a trim lady with an authoritative manner and unshakeable self-possession. There was no small talk. I described my project, and I explained that I had a bunch of unresolved questions which I'd written down, and I passed her the list. She took it and read it. Then, she looked up at me. She said:

Mr Harrison, tell me. Are you an economist, or a historian -- or what?

This was not a good start. Not everyone will recall the atmosphere of the time, but the Cold War meaning of "or what" was perfectly clear to me in that moment. She was asking me if I was a spy. I replied politely. I said that I was a scholar, an economist by training, and my field was economic history: I was an economic historian.

Her next question:

Mr Harrison, who told you to work on these questions?

She might as well have asked who put me up to it. I explained that it had been my decision: no one had assigned the topic to me. She gave me to understand she didn't believe me; I was too young and too junior to choose my own research. Afterwards I remember figuring out that perhaps she was just thinking on Soviet lines. If I'd been a young Soviet scholar, I wouldn't have had the authority to define my own project. My department or sector would have had a plan of work, agreed with the administration and the party committee, and I would have been assigned a part of that plan. Anyway, her implication was that I was really just a hired investigator.

By then I knew I was in trouble. I would have continued to argue my case, but she said to me:

Mr Harrison, I don't know the answers to your questions.

And, if I did, I wouldn't tell you.

After that, there were no more questions. Instead, she gave me a lecture. As I recall, it went on for well over an hour, maybe an hour and a half. It certainly felt like a long time. The highlights that I can remember were the great sacrifices of the Soviet people in the war, her own personal sacrifice (her husband was killed in the defence of Moscow), the huge costs of the war effort, the deaths, the destruction, the homeless refugees, the struggle for postwar recovery. I wondered what I could say. Then I realized there was no point my saying anything. I was not expected to respond.

When Mitrofanova reached her conclusion, I nearly tried to prolong the discussion. I think she'd gone back to the iniquities of capitalism and the shirking and backstabbing of the Soviet Union by the wartime Allies. Her final words were:

But, you see, ours is a different social system. We don't need other people's islands.

Ah! I thought. Now we're back in the present, and she's thinking about the Falklands. But me, I'm thinking about an interesting analogy: If yours is a different social system, why does the Soviet Union continue to hold onto the Kurile Islands and Southern Sakhalin, which historically belonged to Japan but were occupied in the final days of World War II and never returned? That's a great question! Why don’t I ask her?

Perhaps better not. My desire to escape from the room defeated my curiosity. I held my tongue. The meeting was over. Mitrofanova swept out through the door, and I strolled after her into the bright sunlight and the warm breeze of an April afternoon.

Avgusta Vasil'evna Mitrofanova lived for another 30 years, dying in 2003 according to an obituary that I found online. She was born in Akmolinsk in 1910. Her childhood and adolescence were marked by war, revolution, civil war, and famine. Evidently a true believer, she became a party worker in the press and a party lecturer; that's how she passed the years of collectivization, more famine, rearmament, terror, and war again. A woman in a man's world, she successfully converted her skills to scholarship, at least as the Soviet Union understood the term.

In our only meeting she was condescending and confrontational, but in the Soviet Union it was often hard to know who was sincere and who was just playing the role that the situation required of them. Maybe the circumstances and timing of our meeting were sure to provoke an East-West confrontation. Maybe in less formal circumstances or at another time she'd have looked for some common ground. But I think she probably meant every word.

One thing that never occurred to me was to say to her: Why are we fighting? Aren't we both on the same side? For, like her, at that time I was a communist party member. All I can say is that it didn't feel as if we were on the same side. Her communism wasn't mine, and I didn't want to pretend it was.

As for the questions on my list, I had to wait another ten years. In April 1982, the country was on the edge of change. Most of the top party leaders were near the end of their biological lifespans. Leonid Brezhnev was 75 and obviously ill. He died before the end of the year. The Politburo voted twice for continuity, appointing first Yurii Andropov (who died in 1984), then Konstantin Chernenko (who died in 1985).

At last the Politburo bowed to the inevitable, turning to the next generation in the person of Mikhail Gorbachev. After several years of attempted reforms, Gorbachev surrendered the party's monopoly of power. It turned out there was nothing else to the pillars holding up the temple, which collapsed. In 1992 the secret archives were opened, and I found my answers (the result was another book).

In 1982 the spring weather was beautiful. During my time in Moscow I walked around with a camera in my pocket (an Olympus Xa-1 or Xa-2, I think) and I took a ton of photographs. I walked a lot around Oktyabr'skaya square, where I was staying, the roads to the city centre, and a few other places. I remember a disused monastery, a visit to friends in the suburb of Sviblovo, and a short trip out of town to the flea market in Malakhovka.

Recently I noticed that my photos were fading. I decided to scan them and to put them online as my record of Moscow towards the end of the Cold War, on the edge of unimaginable changes.

Mark Harrison : 22 Mar 2021 09:30 |  Tags: Communism History Politics Russia War |  Comments (0) |  Close comments |  Report a problem

For VEDay75: Economic Warfare in Two World Wars

Writing about web page https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/wp468.2020.pdf

In two world wars the Allies employed economic warfare against their principal adversaries – Germany in World War I, German and Japan in World War II. Economic warfare meant attacking the enemy not head on by a clash of military forces, but indirectly by attacking their supply chains. In World War I this meant a naval blockade of German ports and restrictions on Germany’s neutral trading partners. In World War II there was a novel dimension: bombing of the enemy’s industrial towns and ports.

What difference did economic warfare make? Its most resolute advocates saw it as a war-winning weapon, one that would avoid wasteful attrition on the battlefield. Sceptical observers saw it as a waste of lives and resources on a project that distracted from the main task, that of defeating the enemy’s armed forces on the battlefield. The truth lay somewhere in between, but where?

I’d taught this subject for twenty years, maybe more, but never written about it. Last year I wrote a short piece on economic warfare in World War II, for The Economics of the Second World War: Seventy-five Years on, edited by Stephen Broadberry and me, and published by CEPR earlier this week. I decided to write a longer paper that would wrap up the issues with others I had been thinking about and seeking to integrate into my thinking.

This was much more difficult than I anticipated. I hoped to write a short, zippy paper with a few bullet-point takeaways. That didn’t happen. My paper is a long read. Much of it is about one campaign – the Allied air offensive against Germany, the most comprehensive and controversial episode of economic warfare in two world wars. The answers to my questions depended. I knew, on the effects of economic warfare, which could be understood only after considering how the adversary’s economy and society responded to being attacked. There was no one answer to what happened next.

On the internet, “TL;DR” stands for “”Too long; didn’t read.” It’s a signal to stop droning on and cut to the finish. In that spirit I’ll paste in my conclusions, of which there are seven. If they make you want to read the paper, the full text is linked here.

This survey points to seven conclusions. (1) It was often hoped that economic warfare would act as a substitute for combat, but experience showed that this was largely an illusion. The complementarities between economic warfare and combat were much stronger.

(2) The most important effect of economic warfare was to raise the overall costs of the adversary’s war effort. This was a gradual process, one that gave the adversary ample opportunity for countermeasures.

(3) The main countermeasures were Olsonian substitution, nationalism, and the escalation of violence. Substitution and nationalism did not nullify the effects of economic warfare, but they redistributed them and postponed them. Heightened violence aimed to pre-empt the effects of economic warfare by breaking out. Whichever of the three routes was taken, the one thing that was certain was that economic warfare found its logic only in protracted wars of resources.

(4) Wars of resources evoked vast productive efforts, and it was easy to conclude from this that the objective of economic warfare should be to attack production. The example of the Allied air war against the German economy in World War II suggests that the most effective way to prevent production from taking place was not to attack production facilities directly, but to demolish the transport system, which provided the means of supply-chain cooperation and coordination. This had to be done at many points at once, which could not be done without air superiority. Thus, success in economic warfare relied on success in combat – another aspect of their complementarity.

(5) Wars of resources were also wars of attrition. Economic warfare was sometimes seen as a way to avoid the attrition of armed forces. Instead, economic warfare turned out to be a phase of the war of attrition. This too emphasizes the complementarity between economic warfare and combat, because the resources available to each side for attrition in deployment and combat were limited to those that survived the attrition arising from the other side’s economic warfare. From another perspective it suggests that economic warfare and combat were not so much separable elements of warfare as neighbouring bands on the continuum of warlike activities.

(6) The complementarity of economic warfare and combat is further illustrated by cases in which choosing one over the other carried high costs. It was inefficient to engage in combat without considering the possibility of striking at the enemy’s supply chain, as the Soviet Union did in 1941. It was reckless to embark on economic warfare without the readiness to engage in combat, as the United States did in 1940; this encouraged the adversary to respond by aggression.

(7) While the age of mass warfare is hopefully over, similar lessons may apply to the peacetime use of trade sanctions to resolve disputes. When an economy is sanctioned, losses to civilians are inevitable. A country under siege can exploit Olsonian substitution and nationalism to mitigate the effects. If sanctions raise the cost of resistance by enough, violence may become an attractive option. If trade sanctions heighten the risks of militarized conflict, strong defences or credible deterrents are required to manage them.

Mark Harrison : 07 May 2020 06:41 |  Tags: Blockade Bombing Economics War |  Comments (0) |  Close comments |  Report a problem

COVID–19: When This Lousy War is Over

Writing about web page https://www.mirror.co.uk/news/politics/coronavirus-what-happens-war-won-21852580

Nigel Nelson, political editor of the Sunday Mirror, was kind enough to quote me at the end of his article Coronavirus: What happens when war is won as UK stands on crossroads as in 1945, in this morning’s paper. Here’s the notes I sent him last week.

Do you think Boris Johnson will come out of this crisis as the hero of it or could he go the same way as his great hero Winston Churchill?

World War II fuelled a desire for change in British society, with more social provision for those people who faced the greatest risks that no one could control – sickness, old age, and unemployment. Churchill was (and for many still is) the hero of the war, but the voters still tossed him out afterwards because he did not sufficiently identify with the turn to a welfare state. Attlee and the Labour Party went that way and took the voters with them.

In a time of national crisis, it’s natural that people rally round the leader, and the polls suggest a degree of rallying around Boris Johnson right now. That may not last. Whether Boris keeps hold of the halo afterwards depends on whether he “gets” the swing of the popular mood and is able to go with it.

How are British values changing (clearly we put a new value on the worth of NHS staff and key workers who have been undervalued for so long)?

Our society is going through a severe shock. Lots of things we took for granted have suddenly been taken away: jobs, schools, incomes, easy shopping, foreign holidays, contact with friends and family. There is risk to life – of our parents and friends. There is fear of a rather cruel way to die. It’s natural to suppose that we will come out of this with a much greater desire for security against these risks. We will look to the government to “do something” to give us that extra security, so we will have greater expectations of the government than before.

There were signs of this before the coronavirus struck. The new Johnson government already did not look like an old-style Conservative free-market austerity administration. Whoever won the election was going to pay more attention to public services, infrastructure, and levelling up. These trends will be reinforced by the coronavirus emergency.

If that is correct, then we should expect that key workers and care workers will be paid more, social security will become more generous, and public services like the NHS will be allowed to build a margin of spare capacity in order to be able to respond better to emergencies. So cost-cutting and “efficiency gains” will go out of fashion. Meanwhile the taxpayers will be under much greater pressure to pay for all this – as well as for servicing our much larger public debt. Putting it all together, there will also be some levelling of inequalities.

Once we come through the crisis, not everything will go right. Mistakes will be made, and some measures will be taken too far. Some people will find they enjoy bossing others around in the name of the community, and they will find ingenious ways of defending their authority. Efficiency will be neglected in public services, even when it would benefit everyone. This also happened after World War II. Britain did not have to have food rationing for nine years after the war, but that’s what happened.

And more broadly will our attitudes to what is important be permanently changed by what we've been through in the way they were after the war?

The crisis has already shown that most people are thoughtful and sensible, they balance self-interest with concern for others, and they put a high value on community. Three quarters of a million of them have already volunteered to help with the NHS and care support. There are other people who might try to be like that, but they are also thoughtless or behave in ways that are divisive. A tiny minority are selfish and take advantage of the situation to exploit others. This won’t change.

What seems likely is that for most people community will feel a lot more real than before. We don’t have a foreign enemy, but we do have a common cause. Faced with the coronavirus pandemic, none of us can be excused. Those who serve in health care are in deadly danger. To help protect them, others stay home. The sacrifices may not be equal, but everyone contributes something. We all depend on each other for survival. These are important lessons, and they could last for a generation.

After that, it will probably be time for another change of direction.

Mark Harrison : 12 Apr 2020 10:28 |  Tags: Coronavirus Politics War |  Comments (0) |  Close comments |  Report a problem

The War on COVID–19: Lessons from Wartime

Writing about web page https://www.bbc.co.uk/news/topics/c8nq32jw8r1t/boris-johnson

Many people have likened the war on COVID-19 to World War II. Those I've noted range from US Senators Bernie Sanders and Lindsey Graham to the head of Britain's Office of Budget Responsibility Robert Chote. Our own Boris Johnson says it is as if we have a wartime government.

I have some sympathy with this view. The time we are going through will be seen as an historical watershed, like the two world wars. The reason is that it is changing the way of life of every family worldwide, in a way quite unlike 9/11 or a financial panic. Moreover its effect will be persistent, at least for several years. Our world after COVID-19 will be more nervous, more prepared, and less globalized and interlinked for some time to come.

When historical novels are written about our time, every author will have choose the setting: before, during, or after the coronovirus epidemic?

Yesterday I was interviewed on this subject for a radio programme. Understandably, I think, the interview was spiked in favour of more practical and pressing concerns. Beforehand I made some notes, based on questions I was given. Below, I'll share my notes.

Was there any similarity in the challenges facing governments now and at the start of World War 2?

There are several similarities, although not a perfect fit. As in WW2, we face a clear enemy: a disease.

It is a surprise attack – even more than in WW2. In 1941 the Soviet Union suffered a surprise attack by Germany and the USA suffered a surprise attack by Japan, but still most people had seen a war building since the 1930s, so just about all governments had incorporated war into their thinking. This is not the case today: we are at a standing start.

Resistance requires resources to be mobilized urgently into the medical sector: people, equipment, power supplies and provisions.

At the same time the enemy is striking at our supply chains – it attacks economic cooperation and the division of labour. It is forcing us into isolation and self-sufficiency and isolated, self-sufficient people are very unproductive, so our economic capacity is falling. This is what bombing and invasion did in WW2, but the coronavirus is doing it much more efficiently. It is already among us and it is unseen.

There is fear and anxiety. Before WW2 many people feared a bombing apocalypse, which did not actually happen until 1945. A similar fear is present today.

Were there bailouts and nationalisations of businesses and industries disrupted by WW2? What about coronavirus?

World War II brought an explosion of demand. Rather than people losing their jobs, they were called up to serve in the military or in war production. Schools, shops, and pubs did not close but their staff of working or fighting age did. The war economy still required films and entertainment. As for business, most businesses repurposed their production for the war effort. The government paid for the building or converting of factories to war production. There was very little nationalisation. There were very limited bailouts (money for nothing) because the government was primarily spending money to pay people to do something else.

It is true that some small businesses lost out, but most people understood the needs of the war and complaints were muted. I have a letter of 1942 from the wholesale cocoa distributors to the London Chamber of Commerce. They complain that the government has taken over the distribution of chocolate. They no longer have a business. Milk wholesalers have been compensated: what about us? Will we not be needed again after the war?

So some suffered financially. Wealthy people took a hit. But everyone had a role. The war killed, injured, and bereaved millions, but no one was cast into destitution because everyone had a role and could find a job. Old people (fewer than now) benefited from a widening social safety net. After the war, British society was a lot more equal than before.

How did governments manage shortages and supply chain disruptions?

The main tools were licensing and rationing. These converted our market economy into a command economy. There were still markets and money and prices, but for the most part you could not spend money on anything without a government license. The most important exception was bread: through the war you could always buy as much bread as you wanted, so no one went undernourished. This made Britain different from many other countries at war.

But to buy steel or components, a business needed a license. To import materials, you needed a license. To borrow for investment, you needed a licence. You got this licence only if you were on the government’s priority list: important for the war effort. In this way the government could protect the essential industries and the inessential parts of the economy withered.

The problem was inflation – not price inflation, but priority inflation. At first, a few things were seen as crucial – priority A1. As the economy became more and more stretched many other things competed for top priority. When everything was top priority, the priority system stopped working, and government committees had to set limits even on top priorities. You’d think you could never have enough soldiers in a war, but in 1942 the government had to cap the armed forces at 5 million in order to keep enough workers in the war factories and other essential industries.

How was production of munitions (then, medical equipment now) ramped up, and how were people recruited for the war effort (then, for intensive care units etc. now)?

I read today that the government is hoping to find British manufacturers of a basic ventilator – 30,000 in two weeks. Here the standing start is important. For years before WW2, the governments of all the major powers were ordering new weapon designs and thinking about the industrial capacities that the next war would require. Nearly all the major aircraft types of WW2 were designed before the war broke out. Here we are in the middle of our war with a blank sheet of paper.

War preparations made it possible to boost war production to peak levels within one or two years of the outbreak. One or two years, not two weeks.

Market economies do have great flexibility. If the government throws enough money at it, I am absolutely sure that something will be achieved, although not necessarily on the timescale that is demanded, because of our unpreparedness.

My guess is that ECMO machines will be the tip of the iceberg. We have a £2 trillion economy. If we pay the top rate for ventilators, which is £50k, and buy 100,000, they will cost us only a fraction of a percent of national income. BUT in addition to producing them, you have to build the new infrastructure.

Again, I read that a bed in intensive care costs £15k a day – that’s staffing, maintenance, paying off the building. Keeping 100,000 of these beds open for a year would be a big slice of Britains’s GDP, maybe a quarter. And we are a rich country. No doubt we could do it for less by makeshift building and cutting back on training and standards.

And at the same time, we will be having a big recession: output might fall by 10, 20, or 30 percent, so the burden could be even greater. That’s more like Russia in 1942 than Britain or America.

Uncertainty: Did governments have to make things up on the fly?

To some extent. But most governments had spent a long time thinking about how the next war would go, and this helped. It was only 20 years from WW1 and every government had tried to learn the lessons. WW1 was much more improvised than World War II. In WW1 it took years to learn how to get out of the trenches and move on the battlefield. It took years to learn about the public-private partnership and the public finance necessary to ramp up production. So, in WW2 governments generally made fewer mistakes than in WW1.

That’s also probably why Japan, Taiwan, and Hong Kong are having a better time today. They had the experience of SARS in 2003, and they were determined to learn from it.

What were long term effects on how the government ran the economy? And on society?

I think we are going to see a lot more compulsion in a short time. Certainly, compulsion in terms of quarantine. Everyone needs to understand there’s no such thing as a public health measure that doesn’t end up infringing on someone’s rights. The clue is in the name: public, not private health.

Compulsion in rationing basic supplies? Maybe. But my instinct is that we will soon all be making do with less.

Compulsion in service? Medical service, like military service in a war, is going to be dangerous. I hope there may soon be a pool of young, willing volunteers who have survived exposure and been immunized by it.

The persistence of these regulatory changes may be for years after, but not for decades after. The war gave Britain a much larger state and food rationing and food subsidies lasted for years after. The war essentially created the basic elements of a national health service, formalized after the war. But the war did not create nationalized industries. It was postwar socialism, not the war, that led to nationalization. If you look at the share of the state in economic activity in neutral Sweden over the long run, it follows a similar course as in Britain. There were deeper forces at work than the war. The war just brought things a forward a bit.

The same may be happening now. Before we were struck by the plague, things were already changing. Austerity was already ending, the government was already set to throw money at the police, the health service, infrastructure and the regions. That had already begun; maybe now it will be reinforced. There’s visible pressure in society for government to do the right thing and be accountable for it.

I would like to live in a free society and in most settings, it seems to me, free markets will do the best job. But in the present setting I would support a little more of the clarity that comes from compulsory rules. How do I reconcile these things? You can think about compulsion in two ways. One is the Chinese way: do as the unelected party tells you or fear the consequences. But there is also a British way, which is different: when the elected government tells you it’s your turn to do the right thing. It’s your turn to serve in a hospital, or stay at home, or go out to buy the goods you need. There’s a line: don’t step out of it.

That’s how it worked in Britain in WW2. There were lots of rules, which most people accepted, and the few that didn’t were vigorously pursued, with the support of most people. It did continue for too long after the war; that’s something we should aim to avoid.

Mark Harrison : 18 Mar 2020 17:53 |  Tags: Coronavirus Economics Politics War |  Comments (6) |  Close comments |  Report a problem

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.

Mark Harrison : 06 Jan 2020 08:00 |  Tags: Germany Russia War |  Comments (1) |  Close comments |  Report a problem

Brexit as Economic Warfare

Writing about web page https://www.thetimes.co.uk/article/no-deal-brexit-planning-assumptions-the-leaked-operation-yellowhammer-document-797qxkrcm

This column is about the short-term costs of a no-deal Brexit. Like many economists, I tend to think any disruption will prove temporary, even in the case of no deal. It’s in the nature of temporary costs that, in the long term, they disappear. It’s the long-term costs that we will be left with, and they will exceed the short-term costs by many orders of magnitude. Nonetheless, the only way to the long run is via the short run. As the short run looms before us, we are all understandably fixated on a single issue: what will happen next?

According to yesterday's leaked disclosures, the Cabinet Office’s Operation Yellowhammer report predicts the short-term consequences of a no-deal Brexit: a three-month paralysis of Britain’s maritime trade, a hard border in Ireland, shortages of fresh food and medicines, and many other things. This is the central estimate, not a worst-case scenario.

One side of what passes for Britain’s Brexit debate has seized on the findings as confirming what was claimed all along: Brexit is an act of national self-harm. The other side derides them as more “Project Fear.” The government itself now claims that the report is already out of date: the government has everything in hand.

Uncertainty over the likely short-term outcome of a no-deal Brexit (or any kind is often blamed on the idea that this has never happened before. Never before has a major trading nation deliberately disengaged from deep integration with its nearest and wealthiest neighbours. But this is not entirely true. There are two precedents: 1939 and 1914. The precedents are not recent, of course. Still, they might offer something to discover.

The outbreak of World War I was preceded by what some today might call an Edwardian version of “Project Fear.” Liberally minded commentators – best known were the banker Ivan Blokh and the journalist Norman Angell – warned that war among the industrial powers would lead inevitably to disaster. They offered two predictions, one, that industrialised war would be horrible; and two, that it would prove economically and socially intolerable.

On the first prediction, Angell and Blokh were correct. Total war was horrible. But their second prediction was wrong – at least in the short term.

The industrial powers, they argued, had become so economically integrated that they could no longer tolerate the interruption of trade by war. Within a few months they would run out food – first Britain, then France and Germany. After that, they would starve and surrender. Russia might survive, based on its food surplus. But this is not what happened.

When Germany went to war in 1914, the direction of their attack was against their main trading partners. Britain alone accounted for more German trade than all Germany's allies. Russia was a major source of German food and fodder. Yet as the war dragged on the German economy did not collapse. Like Britain and France, which were even more exposed to the global economy, Germany mobilized its resources for four years of total war.

In every country the war imposed wrenching adjustments and sacrifices on soldiers and civilians alike. But the results were not intolerable, for the people tolerated them. Two forces were at work that Angell and Blokh had neglected, that prevented collapse or at least staved it off for several years. One was the basic flexibility of market economies, which enabled the industrial powers to adapt much more easily to the loss of trade and the demands of war than anyone predicted. The other was the arousal of national feeling among the peoples now at war, which led them to hate the enemy and to tolerate readily the changes and sacrifices necessary for war mobilisation to proceed.

It is true that after several years of total war the populations of Russia, Germany and Austria-Hungary gave up the struggle. But it was Russia, most self-sufficient in food, with the least industrialised economy, that dropped out of the war first. So Blokh and Angell were wrong about that too.

If the Second World War was different, it was that the great powers entered it knowing what had happened in the First. They prepared accordingly. From September 1939, the British blockaded Germany at sea and German submarines waged war on British shipping. Britain, importing 70 per cent of calories for human consumption, was as vulnerable to blockade in 1939 as in 1914. The volume of food imports into Britain halved between 1939 and 1942. Yet the economy and the people adjusted. Domestic farming expanded and prices and rationing shifted diets from meat to cereals and potatoes. The calories available for human consumption barely changed from year to year through the war.

What should we take from such experiences?

• First, market economies were generally more adaptable than government and public opinion expected. When particular goods were suddenly in short supply, it was natural for those who needed them to find substitutes and work around the shortages. As a result, shortages were usually temporary and rarely, if ever, endangered the economy.
• But second, in some countries, survival was endangered eventually, after years of war. In Germany, for example, this was much more because of war mobilization than because of the loss of trade. Still, trade had been lost, and substitutes and workarounds for missing supplies were never costless. Such costs accumulated and were added to the costs of the war. It took time for the overall costs to become evident to the point where they might drag down the war effort itself. The costs of lost trade were hidden from sight at first, partly, because the processes of market adjustment redistributed them around the economy, so that they were rarely salient and were lost in the general step-by-step erosion of everyone’s standards of living.
• Third, in the process, governments took over more and more responsibility for the basic functions of economic life. The methods of command economies were invented during World War I and were widely used from the outset in World War II. While these were usually effective in directing resources into the war effort, the consequences for ordinary people varied. In Britain, food rationing was limited to luxury foods, and was generally effective, so the nutrition of poorer households was levelled up. But where clean government and non-corrupt administration failed, food was diverted into black markets and inequality grew.
• Fourth, while the war continued, most people were motivated to accept the resulting sacrifices by leadership that provided the sense of a shared national struggle, that focused their anger at the enemy who imposed these losses on them. War leaders created an atmosphere of national unity and solidarity in which the overwhelming majority became willing to “keep calm and carry on” through years of hardship.

Since 1945 the nature of economic life and the structure of international trade have changed nearly beyond measure. Despite this, all four lessons are deeply relevant as we contemplate what will happen on 1 November, the day after Brexit.

• First, don’t underestimate the flexibility of the market economy. Any real disruption is likely to be short lived. (Unless the government makes shortages worse by adopting price controls, say.) Whatever is suddenly missing from our lives, we will adapt, find substitutes, or work around what is missing. Our lives will certainly change, but we will probably get by. If Russia and Iran can survive trade sanctions, we will survive Brexit.
• Second, adaptation and substitution will incur many minor costs, and the costs will cumulate and may well grow over time as Britain decouples from the European economy. The sharper the shock, the more trust will be broken. Since trust underpins all long-term relationships, the more our long-term relationship with Europe will be damaged.
• Third, demands for the government to “do something” about disruption and shortages will push the government to intervene more and more in our economic life. For a time at least, scarcity pricing will be regulated by public pressure if not by law. Supplies will be prioritised. Failing firms will be bailed out. Once in place, these controls will take on a life of their own. Don’t forget that food rationing, which began in Britain in 1939, did not end in 1945; the last controls were not relaxed until 1954.
• Fourth, our willingness to “keep calm and carry on” will be much less than was the case in 1939 or 1914. We are not at war. We are divided among ourselves. Our government is representative of an extreme, not of a broad national coalition. Half the country expects Brexit to be painless or quickly beneficial. The other half sees it as a self-inflicted wound. Neither of these constituencies seems likely to put up with much pain for the good of the cause.

This can change, only if the government is successful in persuading the majority that we are in fact at war, that Europe is the enemy, that pro-Europeans are the “enemy within,” and that departure from the European Union is worth any sacrifice.

Mark Harrison : 19 Aug 2019 13:43 |  Tags: Brexit Economics Politics War |  Comments (5) |  Close comments |  Report a problem

D–Day: What If . . . ?

Writing about web page https://soundcloud.com/980cjme_650ckom/bls-mharrison-june6

Here's my 75th anniversary tribute to D-Day. Some 15,000 Canadian troops went ashore on D-Day, around 10 per cent of the Allied total. To mark the day I was interviewed on The Brent Loucks Show on 650 CKOM in Saskatchewan, Canada. There's a disappointingly muffled recording. Alternatively, these are the notes I made beforehand, most of which we got through, although not in the same order.

• What led up to the decision to invade in June of 1944?

In the spring of 1944, three things. Britain and America were bombing Germany from the air with rising intensity. British American forces were advancing through Italy. The main action was still on the Eastern front where 90 per cent of German ground were being driven back towards Germany by the Red Army. In essence Germany was already being defeated but was still fighting hard. Final victory looked years away. The main beneficiary on the ground looked like Stalin, because his was the main action on the ground. The western Allies by now had a huge material advantage over Germany. But unless they turned that advantage into fighting on the ground in France and then in Germany, it would not be reflected in the postwar control of territory.

D-Day was hugely important. It did not cause Hitler’s defeat, because that was already under way. It did two things: immensely speed up the end of the war; and ensure that Western Europe fell into the hands of the Western Allies not the Soviet Union. For which we should be immensely grateful.

• What kind of logistics were involved behind the scenes of the invasion?

The planning took two years and was on an immense and comprehensive scale. The SHAEF headquarters tried to plan every last nut and bolt, from the choice of the beaches to the order of creation of port facilities to the rate of advance across France towards Germany to the order and priority of deliveries over time.

All these plans failed. Some landings were in the wrong places. At first the advance away from the beaches was much too slow, so there was an abundance of fuel and not enough ammunition. Then there were unexpected advances so fuel became short while ammunition piled up. But the advantage of the Allies was so great that, once established in France, they could afford a few mistakes. The mistakes also slowed down the Allied victory, but could hardly turn it into Allied defeat.

• How might the war have played out if D-Day failed?

The war would have dragged on. While it went on, probably every country – those fighting and those occupied – would have suffered more casualties than was the case. Germany would still have lost in the end, but the balance of power in Europe would have shifted away from Britain and North America towards Stalin and the Soviet Union. For that reason, postwar recovery would probably have been much more painful.

• What would Europe look like now if the war had dragged on?

Much more of Europe would have ended up under Soviet domination – Germany and Austria for sure. Italy and France might well have elected communist governments. After that, who knows?

• Would atomic bombs have been used on Germany?

What shortened the war in the Pacific was the atomic bomb, which was ready by July 1945. Used against Japan, it shortened the war and forestalled any Soviet attempt to occupy the Japanese islands. Would the atomic bomb have been used against Germany with the same intention? Who knows, but it’s clearly possible. Even as things worked out there were strong pressures to destroy German industries and reduce Germany to a country of farmers and artisans.

Mark Harrison : 06 Jun 2019 16:09 |  Tags: D-Day Economics War |  Comments (0) |  Close comments |  Report a problem

The Soviet Economy Collapsed After the World for Which it was Designed Disappeared

Writing about web page https://www.elindependiente.com/opinion/2017/10/28/por-que-colapso-la-economia-sovietica/

This column appeared (in Spanish) on 28 October on the website of El Independiente.

Soviet economic institutions were inspired by two western economic models of the early twentieth century. One was the German war economy of the Great War, which Lenin observed and admired for its government priorities, the control of supply chains by committees of industrialists, the rationing of commodities at fixed prices, and obligatory labour mobilization. The other was the American system of mass production of standardized products in great factories under centralized management.

Combined with an authoritarian single-party dictatorship, these two models made the Soviet economy as it emerged under Stalin and persisted until 1991. Everything was designed for mobilization, production, accumulation, and expansion. To ensure this, the state owned nearly everything and directed nearly everything from the centre, either by decree or by pressure to conform, backed up by the secret police. The citizens were motivated to comply with authority by a mixture of patriotic appeals, fear, and meagre rewards. The economy could supply basic consumer goods and services, but its special advantage lay in supplying the means of national power in the world, especially a mass army with vast quantities of standardized weapons. By the outbreak of World War II, Stalin’s Soviet Union had become one the world’s two leading producers of armaments, the other being Hitler’s Germany.

The Soviet economy was capable of growth, but it never proved capable of catching up with the innovative market economies of the time. Moreover, the growth rate of the Soviet economy steadily deteriorated through the postwar period. From the mid-1970s, the Soviet Union was falling further behind the United States in productivity and prosperity. While its economy began to stagnate, the Soviet Union faced additional challenges of the time. One challenge arose from the U.S. rearmament under Presidents Carter and Reagan. Another arose from the self-imposed burden of the Soviet Union’s entanglement in Afghanistan. In the international economy the Soviet Union was reliant on the oil market, where prices collapsed.

The Soviet leaders made repeated efforts to overcome economic constraints through reforms. The reforms sought to raise productivity by decentralizing management and improving incentives for efficient behaviour, while retaining the framework of state ownership and the party monopoly of power. All such reforms failed, as the economy reverted to its basic type. Later, the Chinese leader Deng Xiaoping would say that the last Soviet leader, Mikhail Gorbachev, was a fool for abandoning the party monopoly of power without reforming the economy. But this was unfair. Gorbachev did so only after all economic reforms had been tried, including most of the reforms that had been tried out successfully in China. Why they failed in the Soviet Union is an important story, but one for another time.

The end of the Soviet economy cannot be explained by economic factors alone. This should be clear from the example of countries like Cuba and North Korea, where ruling parties are facing vastly greater economic problems and threats than the Soviet Union ever faced, yet regimes have not collapsed. In the case of the Soviet Union, politics was decisive. The conservative generation of leaders such as Leonid Brezhnev, born in the early twentieth century, died out. A new generation took command, led by Mikhail Gorbachev. The new generation was more open-minded, and their open minds had been influenced by the ideas of the dissident movement – nationalist, liberal, or social-democratic. Gorbachev was decisively influenced by ideas about social democracy and rule by consent. He did not want to rule at any price, or to rule by fear. Once it became widely understood that resistance to power would not be punished, people stopped being afraid. The Soviet Union became ungovernable and fell apart.

Politics was decisive in the moment, but at the same time we should not ignore the deeper economic forces. The Soviet economy was designed for a world of mass production and mass armies. That is no longer the world in which we live. In the 1970s, the information revolution gave rise to flexible production and a services economy based on information sharing. In the same decade, precision guidance and miniaturized nuclear weapons put an end to the idea that the future of Europe could be decided by a great battle fought by thousands of tanks and planes and hundreds of thousands of soldiers in the central European plain. The world for which the Soviet economy had been designed was disappearing. The Soviet Union had no future. No one should want to see it return.

Mark Harrison : 28 Oct 2017 09:48 |  Tags: 1917 Communism Economics History Politics Russia War |  Comments (0) |  Close comments |  Report a problem