Some Developments Since 1900

Some Developments since 1900, Germany and Austria Economic Thought

The foregoing classification sums up the situation as it existed at or shortly after 1900. Concerning developments in the first quarter of this century, it may be said (1) that the Classical economics — except as " reconstructed" by the Austrian School or a few mathematical economists— has seemed to become almost extinct; (2) that each of the other seven groupings has continued to find some adherents; (3) and that to these has been added (a) the nationalistic theories of Spann and Lenz, (b) the "general-equilibrium" or mathematico-price economics of Schumpeter and Cassel, (c) the monopolistic-competition theory of Stackelberg and Amonn, (d) the theory of location and the spatial factor of Alfred Weber, and (e) a valuable body of discussion concerning what may be called the philosophy of economics and the validity of economic laws. The system of economics which Fr. Oppenheimer (1864-1944) built around the idea of land reform is also to be mentioned.

No doubt under the influence of German thought tendencies while World War I was brewing, and certainly in reaction from the individualism of the Austrian School, Othmar Spann (b. 1878) undertook to revive and develop the Romantic nationalism of Fichte and Miiller in his leading work, Fundament der Volks-mrtschaftslehre (1918). He assailed the atomistic individualism of Classical economics, and proceeded in a highly idealistic and teleological fashion to attempt a system of economics which treats the nation as an organic whole, and the individual as a subordinate member. His economics deals with the means to a social end. He called his system "Universalism." He stressed the idea that the "sociological presuppositions" must be safeguarded, and that the goals or ends of life, and especially the quality thereof, must be considered. He rejected subjectivity (it is individual) and the study of individual motives, and "sets out from the extant articulated objective totality of the body economic" — whatever that may be.

Rudolf Stolzman accepts Spann's thought in part; and a group of disciples included Andreae, Baxa, Heinrich, and Seidler-Schmid. One outcome was such extreme totalitarian thought as that of Gottl-Ottlilienfeld and others.

Friedrich Lenz (Aufriss der Polilischen Oekonomie, 1927) shows some similarity, in treating economics as concerned with an organic social entity. He follows List in his nationalism, the goal of economics being the nation's welfare, and the means being productive capacities.

Almost the antithesis of the foregoing, Gustav Cassel's work was published in Germany in 1918 as Theoretische Sozialokon-omik, and had great influence. Cassel's concept of economics narrows the field to a study of prices. He would eliminate theory as to causation, motivation, and valuation, and would deal with mathematical equations, which Spann says give us no fresh knowledge and are tautological. Cassel's work caused great debate. The majority of German economists do not accept his thought. Their numerous criticisms range all the way from the point of his logical inconsistency up to his neglect of social and public-control factors.

Between 1920 and World War II, and particularly after the crisis of 1930, came an increased interest in cycle theory and the relation of bank credit thereto. The base for this phase had been laid in 1912 by Schumpeter's Theorie der Wirtschaftlichen Entwickelung. This work treats bank credit as money, and considers it as capital when used in connection with "new" channels of industry. Within limits, therefore, credit creates capital. Interest and profits are considered as existing only under "dynamic" conditions. Banks charge interest only because of their liquidity preference. And interest serves to equilibrate investment and bank credit. Also, Sombart's Der moderne Kapitalismus (1919) treated monetary expansion as a "dynamic" factor.

Albert Hahn (b. 1889) about 1920 put forth similar ideas, going even further in treating bank credit as capital. He, too, treated interest as merely equating investment and bank credit, and referred to the liquidity preference of banks. Oversaving arises, he said, and reduces effective demand. Thus the propensity to consume falls. Hahn's work, which clearly anticipated much of Keynes's thought, caused much discussion. E. Lederer (1883-1939) followed Schumpeter in emphasizing credit, and argued that mechanization of industry leads to lagging wages, unemployment, and underconsumption. H. Neisser3 developed the idea, putting underconsumption cycle theory on a monetary (credit) basis, and bringing in international conditions.

This phase is probably to be regarded as characteristic of war-born inflation and depression in Germany. Hahn has recanted. Lederer wrote "there is hardly any radical defender of that tenet [that the cycle is a purely monetary phenomenon] to be found any more."

Closely associated, is the old British controversy over "the currency principle"; that is, the question whether deposit currency created by bank loans (and investments) is a net addition to a nation's money supply, making the whole controllable by money rates. The Currency School stood for "sound money," insisting on reserves of some standard material, and convertible notes, and emphasizing the danger of overexpanding bank credit. The earlier champions of this idea were the Swedish Economist, Knut Wicksell and Ludwig Mises. The opposing "Banking School" considered deposit credit as an important addition to the currency, which may be controlled by money rates. Such was Halm's earlier thought, and, to a limited extent, Schumpeter's. This led to an overemphasis of bank credit and money markets in cycle theory, as just pointed out.
Something of a swing back toward the Currency School occurred after the collapse of German finances following 1923.

Valentin F. Wagner, just before World War II, discussed all this, taking a moderate position between the two schools, but criticizing exaggerated ideas as to the power of a banking system to "create" deposit currency.

Alfred Weber (b. 1868) is notable as the early developer of the theory of industrial location, emphasizing the spatial factor and its effects upon cost of production. This direction has been taken by several others. The application of the theory to international trade by B. Ohlin (1933) and A. Losch (1940) has not accepted Weber's approach, but has been more akin to general-equilibrium theory. This phase of economic theory has been highly abstract. It has been used by some to defend the totalitarian state.