The Keynesian and Chicago Schools' Early Infatuation with Fascism

0:00From our perspective at the beginning of the 21st century, it is now quite clear that the most influential economists of the last century were John Maynard Keynes and Frank H. Knight. This fact is not only of interest to intellectual historians but to the general public because the ideas and doctrines of these two men continue to powerfully shape the economic theories and policies of today. Keynes, of course, is the acknowledged founder of modern macroeconomics and his ideas still dominate the discipline, even today. Knight's ideas pervade modern price theory or microeconomics, particularly his model of perfect competition, which is the central construct in microeconomics. Given the profound and continuing influence of Keynes and Knight on modern mainstream economics, it is astounding to discover that both express strong sympathy with fascist doctrines during the 1930s.

0:55This is especially startling in view of the reputation of Knight and his colleagues in the early Chicago School as staunch proponents and defenders of a classical liberal social order based on economic freedom. It is even surprising in the case of Keynes, the prototypical modern liberal, whose rhetoric, at least, if post-war left-wing liberals are any guide, we would expect to have been fiercely anti-fascist. In fact, it was quite the opposite. In what follows, I first review Keynes' positive assessment of the fascist economic program of national self-sufficiency and a planned economy. I argue that it represented more than a mere flirtation or intellectual aberration, and that it arose from a strong affinity between key fascist and Keynesian economic doctrines.

1:41I then explain Knight's strangely sympathetic attitude toward the fascist leader principle. I contend that it also cannot be written off as an intellectual quirk or cranky eccentricity, of which Knight had very many, and that it emanates from nice peculiar conceptions of freedom and competition in the economic and political realms. In Mein Kampf, the Bible of the German National Socialist Movement, Adolf Hitler characterized the economy as, quote, merely a necessary servant in the life of our people and our nationhood. The movement feels an independent national economy to be necessary, but it does not consider it a primary factor that creates a strong state. On the contrary, only the strong nationalist state can protect such an economy and grant it freedom of existence and development."

2:28Whenever Hitler touched on economic issues in his writings and speeches, he always emphasized the primacy of this principle, that the economy must serve the political needs of the nation and that the primary need of Germany was economic self-sufficiency or autarky. And this was, I think, emphasized by Dr. Hoppe yesterday. Hitler's position on national self-sufficiency underlay his foreign policy doctrine of Lebensraum, or living space, which meant the conquest of enough foreign territory to provide for all the agricultural and raw material needs of the German nation. As Ludwig von Mises pointed out, quote, Germany does not aim at autarky because it's eager to wage war. It aims at war because it wants autarky, because it wants to live in economic self-sufficiency.

3:16The second foundational principle of the National Socialist Economic Program was for a planned economy that would coexist with an attenuated form of private property. Hitler enunciated this principle in an unpublished interview with a newspaper editor in 1931. And he's very frank. What matters, Hitler says, is to emphasize the fundamental idea in my party's economic program clearly, the idea of authority. I want the authority. I want everyone to keep the property he has acquired for himself according to the principle. Benefit to the community precedes benefit to the individual. That sounds good to me. But the state should retain supervision and each property owner should consider himself appointed by the state.

4:03It is his duty not to use his property against the interests of others among his people. This is a crucial matter. Third Reich will always retain its right to control the owners of property. A contemporary German classical liberal economist and critic of National Socialism, during the time when the Nazis were coming to power, a brave guy, Gustav Stolper, considered this principle of the subjection of the economy to the state as, quote, the very essence of Nazi economics, unquote. Now, Hitler wrote little regarding the details of his proposed economic system beyond the enunciation of its basic principles. Moreover, the National Socialist Movement produced no economic theorists worthy of note. Nonetheless, the Nazi economic program of autarky, or self-sufficiency, and planned economy was not the blind outcome of a series of accidents and ad hoc measures designed to solve specific problems, as many have argued.

4:55In fact, it was explicitly derived from a long tradition in German economics that extended back to the early 19th century to the works of Adam Euler and Friedrich List. With the emergence of the German Historical School in the middle of the century, this tradition achieved a dominance in German economics that continued through three generations, right up through the National Socialist period. Werner Zumbart was the leading representative of this tradition in the third generation and the leading economist in Germany during the interwar period. He considered himself the leading theorist of what he called German Socialism, which also was the title of the book he published in 1934. Now this book was translated into English in 1937 under the misleading title of a new social philosophy. Because they didn't want to put the word socialist in the bad light.

5:42But the title was German Socialism. According to Zumbart, his task in the book was, quote, from the standpoint of national socialist opinion, to give a consistent account of the various social problems of the time, viewed in a spirit of detachment from the politics of the day, unquote. Although he was not a member of the National Socialist Party and was never embraced or completely trusted by its leadership, Zombart influenced individual Nazis, including Gregor Strasser, chief of the Nazi Party organization, with whom he met frequently. In addition to Zombart, the more intelligent Nazis, which we were told, were acquainted with earlier writers from the second generation of the historical school, like Gustav Schmoller and especially Adolf Wagner, whom they considered heralds of fascist ideas.

6:28In his book, Zombart articulated the defense of national self-sufficiency and argued that it was a corollary of planned economy. We represent the national economic principle, and I'm quoting Zombart. The whole, which we visualize as a guiding thought, is a national economy linked together in a harmonious union. From this it follows that the national economy must show a certain rounded-off, isolated self-sufficiency which permits it to rest upon its own foundation. We represent this economic principle, primarily because socialism needs for its realization and expression of life as an economic body to be essentially independent of the procedures in foreign countries. That, in consequence of all this, German socialism repudiates world economic formations as something in conflict with its innermost nature is self-evident.

7:17Okay, so self-sufficiency wasn't a strategy prepared for war. It was deeply embedded in German historical school thought and it was picked up by the Nazi economists. Zombart also recognized that a planned economy meant an economy in stasis, one in which all progress must come to an end because it is unpredictable and potentially disturbing to the central economic plan. Thus, he wrote, we renounce progress in the sense in which the economic age characterized it and in which it met the requirements of capitalism which prolonged its existence by a continuous revolutionizing of the process of production and distribution. All in all, we are now ready for a stationary economy and ready to send the dynamic economy of capitalism back to the devil from whence it came.

8:06Therefore, the applications of the principles of the planned economy will be much easier, so planned economy and self-sufficiency. These were the theoretical foundations. Zumbart also elaborated the National Socialist position on private property. Quote, by a planned economy we do not mean the abolition of the private economy, unquote. What is meant, he said, is that in the private economy, quote, the general endeavor must be so directed that no higher interest will be impaired to the application of the profit principle, unquote. In other words, not the economic calculations of private entrepreneurs and capitalists, but the priorities of the Nazi state will direct the allocation of scarce resources. Zumwalt went on to argue the manipulation of credit is the most important weapon at the disposal of the state to keep this sector, meaning the private sector, in order.

8:54He thus advocated nationalizing the banking system, but he warned that the state control of credit is not sufficient to guarantee an orderly economy because not all investment capital is channeled through banks or acquired through retained earnings. Sombart therefore proposed a strong system of control in which all enterprises and extensions or mergers of existing ones must be legally sanctioned by the state, which would also retain the power to eliminate entire industries that are inexpedient. Technology, too, would be tamed by the state. A supreme council of culture would decide whether an invention should be annulled, put into the museum, or put into practice. Finally, the stock exchange would be transformed into simply an adjunct of the nationalized credit markets and will have merely incidental functions to perform.

9:42Form. Sombort summed up the essence of his economic program of German socialism in words that had become the mantra of Hitler and the National Socialists. Quote, private property and common property will continue to exist side by side. The right of property will no longer determine the principles of economic control, but the principles of economic control will determine the extent and kind of property rights. That is a significant point, unquote. So, the economic program of the preeminent academic proponent of National Socialism consisted of four components. National Self-Sufficiency, Planned Economy, Manipulation of Money and Credit, and Nationalization of Investment.

10:30This precisely describes the economic program that Keynes developed between 1933 and 1936. In 1933, Keynes published an article entitled National Self-Sufficiency, whose significance was downplayed by his followers as a temporary deviation from his devotion to free trade and international division of labor. The classical liberal economist and friend of Mises, Michael A. Halperin, however, correctly referred to the article, quote, This passage will quote, as one of Keynes most significant writings and as representing far more than a passing mood, unquote. In fact, it is Keynes' public declaration of a loss of faith in capitalism and a call for experimenting with alternative economic institutions and arrangements. Thus, in a famous passage, Keynes declared, quote, the decadent international but individualistic capitalism is not a success.

11:17It is not intelligent, it is not beautiful, it is not just, it is not virtuous, and it doesn't deliver the goods. In short, we dislike it, he and his Bloomberg friends, and we are beginning to despise it, unquote. However, Keynes was perplexed about what to put in its place. He noted that, quote, the world is embarking on a variety of politico-economic experiments, unquote. Russia, Germany, Italy and other countries are or will be seeking, after what Keynes called, new economic gods. Keynes expected many mistakes to be made in these bold experiments in Bolshevism, Nazism and Fascism, but he added, quote, no one can tell which of the new systems will prove itself best, unquote. As Halperin pertinently remarked in this passage, the fact that the new economic gods of Russia, Italy and Germany were totalitarian despotic gods, destructive of human dignity and human rights, did not, it seems, appear worthy of note.

12:10They were experimenting. That was the wonderful thing about it, unquote. Keynes confided in this article that he is, quote, one whose heart is friendly and sympathetic to the desperate experiments of the contemporary world, who wishes them well and would like them to succeed, meaning Bolshevism, fascism, and so on, who has his own experiments in view and who in the last resort prefers anything on earth to what the financial reports want to call the best opinion in Wall Street, unquote. Keynes' primary concern was that free trade and free movement of capital under the international gold standard be abolished, so that the world would be free to experiment with nationalist and socialist alternatives.

12:55Keynes declared, not believing that we are saved already, we each should like to have a try at working out our own salvation. We do not wish, therefore, to be at the mercy of world forces working out or trying to work out some uniform equilibrium according to the ideal principles, if they can be called such, of laissez-faire capitalism." He went on to proclaim the dawning of a transitional experimental phase, during which, during which, quote, we all need to be as free as possible of interference from economic changes elsewhere in order to make our own favorite economic experiments toward the ideal social republic of the future. Okay, so in short, Keynes was calling for autarky along the lines laid down by the National Socialists.

13:41In this article, which I'll just quickly summarize, he also opposed, like Zumbart especially, the allocation of resources by entrepreneurial profit calculations. And he contended that judging things, judging resource allocations by financial results, transformed the conduct of life in the 19th century into a sort of parody of an accountant's nightmare, unquote. Now, Keynes' fulminations against monetary calculation, which we find in this article, can be compared to the ranting of Zumbart on the same topic. I'll just read a little bit of it. It's pretty funny. The profit account is one of the basest inventions with which the devil has yet deceived mankind. A large part of our misery is connected with the dissemination of this idea. It has destroyed a colorful world and thrown it into a gray, or grayish, monotony of money values.

14:41Culture and economic revolutions are not reconcilable. If one regards as the chief disadvantage of a removal of capitalism, the slowing down of technical and economic progress, our answer is that we see therein a direct blessing. So at the end of his article, Keynes doesn't give us any detail about what his favorite experiment is, but he does conclude with a call for greater national self-sufficiency and a planned domestic economy. Those are his words. Three years later in 1936, he laid out plans for his own national socialist experiment in the final chapter of general theory. I'll merely summarize it for you. Basically, what Keynes wanted to do there was two things.

15:30One, he wanted the state to take over and determine first how much of people's income in the aggregate would be invested, and how much they would be permitted to retain for their own consumption, and second, what rate of return capitalist entrepreneurs would be permitted to earn. Now, he unabashedly described this program as, quote, a somewhat comprehensive socialization of investment. Okay, so he has arrived now at the full National Socialist Program. Okay, self-sufficiency and socialization of investment. In particular, he wanted the state to expand credit to such a degree that it would push the interest rate down towards zero. In that case, you would have an increase in the amount of capital and productivity in society.

16:19And the financial criteria or monetary calculation would no longer keep England poor. Now, what he said, he was also happy about this falling of the rate of interest or forcibly forcing it down through monetary inflation. He was especially pleased that this situation would result in, quote, the euthanasia of the rentier, that is, the stockholder or bondholder, and, quote, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital, unquote. Depriving the islands of perfluous bondholders and stockholders of an income would also improve the equity of income distribution. Now, Keynes' deep aversion towards interest was shared by the National Socialists. Point 11 of the Nazi's unalterable party program demanded, quote, abolition of income not earned by work and toil, breaking the bonds of interest slavery, unquote.

17:13Although Keynes' call for the euthanasia of Narantie was merely figurative, it was chillingly reminiscent of point 25 of the Nazi program, which declared that usury, profiteering and the like must be punished by death, irrespective of creed or race, unquote. So, this scheme for state direction of the economy bears a striking resemblance to the system that eventually emerged in Nazi Germany under Hitler's chief economic planner, Helmut Schock. This is not a matter of coincidence, as the evidence strongly suggests an intellectual cross-fertilization between Keynes and Nazi economists and policy makers. I'll just give you a little bit of this evidence because I want to move on tonight. For example, the man who translated Keynes' treatise on money and the Keynes-inspired Macmillan report into German was Karl Kramer, who was head of a special bureau established by Schacht in Berlin in 1932 and whose mission was to coordinate Hitler's economic bodies in order to, quote, enable the Nazi party to present an economic platform in which industry and commerce can participate, unquote.

18:19So the guy running this bureau translated these two earlier books by Keynes. by Keynes. Wilhelm Lautenbach was sometimes called the German Keynes because he had developed a notion of aggregate demand and elaborated the theory of the multiplier in 1931. He also drew up a plan for the Bruning government for large-scale public works financed by monetary inflation. This plan was very similar to the plan later implemented by Schacht under the Nazis. Lautenberg also referred to Keynes in a lecture in 1931 stating, quote, this view concurs to a large extent with that of the Cambridge School in economics, in particular with Robertson and Keynes, unquote. The Nazi economist Otto Wegener once suggested to Hitler that he read Keynes' book because it was, quote, a highly interesting study, one field that he feels that he moves in our direction without being acquainted with us or with our views.

19:10Wagner pointed in particular Keynes' idea of abolishing the gold standard. Hitler very humbly responded that he was not sufficiently familiar with these matters and didn't read the book. And Keynes himself saw evidence of similarity between him and the Nazi economists. Someone yesterday, I won't read it again, read the foreword that Keynes had written to the German translation of the general theory. I might mention one other point. In the early 1940s, Keynes also vigorously promoted what he called the Schachtian device, the Nazi device, of international barter or bilateral trade as an alternative policy for Britain in the post-war world. So he's taking this right from the Nazis, and he knows it, and he says that Britain should engage in this policy if some version of his inflationist scheme for international monetary reconstruction were not accepted.

20:07Keynes labeled anyone who signed an agreement to preclude the use of such a device in advance, quote, as a great traitor to his country, as if he were to sign away the British Navy before he had a firm assurance of an alternative means of protection, unquote. Okay. What the implications of that are, I'll leave to you. Now let me turn to Knight, a little more complex case. Before we can make sense of Knight's attitude toward National Socialism, we must take one more detour through Zumbart. It's always humorous to read Zumbart. According to Zumbart, quote, It is obviously established in God's plan of the world that the destiny of mankind is to be realized within the sphere of political associations.

20:53Sombart designated this general comprehensive political association by the word state and attributed to it a number of essential qualities. First, the state is old, as old as mankind, and all theories of its origin, which assume a pre-state condition, are false. Second, the state is ideal, meaning that it lies in the realm of the transcendental and is immune to empirical and rational explanation. Finally, membership in the state is fundamentally unlike the relationship of the individual to any other organization. Here I would agree with him, but not in the way he thinks. As he points out, he says, in all non-state organizations, membership endows the member with some claim. He claimed, membership in the state, however, is a sacrifice and a sacrifice unto death. Right.

21:47But the sacrifice presupposes necessarily a super individual something, holding an idea for which man sacrifices himself. It is senseless to have one individual sacrifice himself for another, the mother for child, the warrior for the civilian, unquote. So he goes on to say that the idea of compelling sacrifice may be abstract, like liberty or faith, it may be concrete, like the political association. In any case, it characterizes having ideas, so the state in some sense has ideas, its meaning points beyond this world, unquote. It is because the state exists beyond empirical reality that its members, individually or collectively, are unable to interpret its true meaning and purposes, The principle of leadership means the acceptance of the supreme will of a leader who receives his directions, not as an inferior from a superior leader, but only from God, the supreme leader of the world.

23:00One who wholly grasps and affirms leadership principle must believe in progressive revelation. The ruler of the state receives his commission from God, which means, in the last analysis, all authority comes from God. He is not required to listen to the voice of the people in so far as he does not recognize in it the voice of God." Zumbart went on to argue that the leader is really, when he's guided by revelation from God, is really conducting affairs according to the general will. So in some sense he's starting to talk, he sounds like Rousseau in the French Jacobins. Wrote Zumbart, the general will which is to be realized in a metaphysical, not an empirical reality. It is not concerned with the will of all, meaning the will that's expressed through democratic voting.

23:47The leader cannot ascertain it through a plebiscite. He must recognize it and can only have experienced it through revelation. For this reason, the approval of the people is not necessary for justification of a leader's conduct. He also points out that the state itself and its will is embodied differently according to different historical circumstances. He says that the authoritarian power of the state can be instantiated in an absolute monarch, but during democratic times, it would take the form of maybe a single party system along fascist and soviet lines, a military dictatorship, or a constitution that enacts a powerful presidency.

24:33He also pointed to the Catholic Church and its College of Cardinals as an exemplary model of every democratic authoritarian constitution. His point was that you had to choose the right leader and you needed a group of very wise people to choose the elite, which tended to be one person. In any case, let me get to Knight. In 1930s, Knight became greatly disillusioned with democratic politics. He believed that liberal democracy had failed abysmally to discover and apply the knowledge necessary to provide social order, and particularly to solve, quote, the problem of social control of economic life. Night's deep pessimism regarding liberal democracy was first expressed in two lectures he gave in 1932. These lectures were not published until 1991 and they were really suppressed in some sense by his students who published reams and reams of his lectures over the years.

25:30But it was published in 1991 under a remarkable title, The Case for Communism, from the standpoint of an ex-liberal. In this article, Knight intended to show why our social order shows symptoms of breakdown and why the future belongs to communism or to some really aristocratic social system, a military dictatorship, unquote. He also confessed his conversion to communism. Whether or not his personal conversion was tongue-in-cheek, engaged to get a rise out of his audience, as some of his students have claimed, is besides the point. In this rambling and turgid article, Knight made a number of statements that were profoundly anti-liberal and favorable to a national socialist style regime. Knight contended that in liberal democracy, those in power engaged in talking down the opposition, while in non-liberal regimes, the rulers beat up the opposition.

26:20Knight prefers the latter. The advantage of the latter was that the opposition will stay beaten up a little while, as they do not stay talked down, and government would get a chance to govern instead of continuously campaigning for retention of office. Knight went on to state, quote, that a minority party dictatorship would be made up of men of some kind of ability and some conception of what they wanted, and that wishing to keep power without perpetual war and requiring the cooperation of the people in their constructive program, they would have more respect for the needs and wishes of the country than is true of our system of multiplex bureaucracy and passing the buck, unquote. Knight also argued that the basis of social cohesion was not the mutual benefits realized through the social Social Division of Labor, as Mises and the Austrians believe, but secularized religious myths and lies that men make, or that, I'm sorry, that make men accepting of, quote, a government based on force, unquote.

27:20wrote Knight, the basis of unity must be mystical, religious. The effect of content itself cannot be utilitarian, and the sociological character and historical role of religion, morals and legal formalism is precisely to furnish this mystical basis for unity which enables men to accept a degree of rule of force or traditional law which is necessary for peace within the group. A society which hangs together and functions has to have a religion, which from a scientific or critical point of view is nothing but fiction or mythology, but it must also have a government which not only uses force, but uses the social religion as well.

28:11One of the secrets of the political greatness of Rome is that its rulers knew their onions in the matter of religion, unquote. Later rulers in Europe were successful, claimed Knight, to the degree that they recognized religion, including popular morality as good for society, puts that in quotes, in quotation marks, without allowing their own style and action to be seriously cramped by regard for any of its sacred principles. So basically lying and beating people up is what Knight was in favor of, because that would restore social order. Knight published an article in 1935 entitled Economic Theory and Nationalism, in which he really lets himself go. He argued that laissez-faire capitalism was for doom to break down.

28:58The breakdown comes because he believed monopoly and inequality at some point becomes intolerable, and the losers of the contest, the economic contest, become ideologically disillusioned and turn to democratic socialism, such as the New Deal, Fabian Socialism or Social Democracy. However, democratic socialism is not a real New Deal, he says, because political democracy as it works in practice is like free enterprise, competitive and individualistic. Hence, democratic socialism is incapable of initiating the ideal democratic discussion that will at last awaken the social mind. So now we're back at some part. Out of its ages-long slumber and succeed in ascertaining a real general will, ascertaining a real general will are Knight's words.

29:44Politics and economics under liberalism, meaning either democratic socialism or laissez-faire capitalism, are the same game, in Knight's words. The fundamental fact in both is the moral fact of rivalry, competitiveness and the interest in power." Knight argued that democratic socialism was actually less stable than laissez-faire capitalism because both theory and experience go to show He wrote that the cumulative tendency to inequality and the consequent disruption of the system is likely to be actually stronger in the political field where the power is purely moral and psychological than in the economic sphere where such power is supplemented by, or competes with, control over material agents. So he's slightly more favorable to laissez-faire capitalism than democratic socialism.

30:30However, these are not what he proposes. Knight concluded that both wealth power and persuasion and prestige power will exist and be utilized under democratic socialism to acquire more power of both kinds, and that the predominance of politics under democratic socialism will render it susceptible to an even quicker self-destruction than laissez-faire capitalism. In any case, now he's watching now as he believes the US economy is becoming more socialistic with the New Deal. So he says, as the liberal game inexorably degenerates, the unfulfilled quote, moral cravings, unquote, of the masses for justice, freedom and interesting activity compel a change in the rules of the game, which gives rise to a real New Deal. Now, this real New Deal is what he calls fascist nationalism. Quote, the next stage in the and the political evolution of the liberal democracy.

31:26So this was the next higher stage of evolution. Knight characterized fascist nationalism as, quote, natural, although extreme, reaction to economic individualism, as a movement from crushing competitivism to a worship of emotional unity and from intolerable insecurity to morbid craving for security. Despite his professed hatred for nationalistic dictatorship, Knight perceived in the emergence This truth is that there can be no human life without group life and no group life without real devotion in a religious sense of the members to the group as a more or less mystical entity and beyond it to some set of values for which the group is supposed to stand.

32:20Stan, unquote. Now we get to the leader. The position of the leader under fascist nationalism relies partly on power in the forms of both armed might and charismatic persuasion, but also, quote, rests in part on deliberate acceptance by the group based on failure to secure adequate unity by democratic methods. In other words, in some way the group brings forth the leader, okay, as democracy breaks down. Cooley considered, Knight says, the ethical ideal of fascists, bread and circuses cannot be considered inferior to the ideal of economic man, although he did express his personal regret at the, quote, passing of freedom as an ideal to be striven for and to an important degree in actuality, unquote.

33:05So in some sense we actually did have freedom under laissez-faire capitalism, but following the group mind is something that's much more important. Knight's main objection to fascist nationalism was that the leader and his party are ultimately incapable of truly ascertaining and articulating the social mind, quote, because they do not secure their position through an active, intelligent and moral selection within the group, unquote. Let me just sum up here. What was Knight's ideal system? Very difficult to figure out, but his ideal system, as I saw it, was democracy defined, is defined, quote, as a process of discussion leading to agreement, which is necessitated by the existence of a value cosmos, a world of objective super individual norms to be thought of as discovered or progressively approached in the discussion process.

33:56That is a discussion of a true democracy, in which people, in which most people shut up. People who don't know what they're talking about, they're not supposed to talk. They're antisocial if they do. I mean, he has a whole article on the sociality of talk. I mean, he's really crazy. And let me finish. The discovery and progressive realization of valid norms governing social interaction is thus the product of a real social choice This is a social choice that presupposes the existence of a group mind and manifests itself as, quote, free choice for a group of free individuals acting as a unit, unquote. Such group freedom of choice stands over and above individual freedom and leads to the intellectual direction of social processes by society in its own interest, unquote.

34:44Okay, so there's some real group mind. The fascist leader comes close to articulating it in some sense, but he fails, and you can really only find it when you have true democracy. So for Knight, the only problem with fascist nationalism is that the leader is chosen by a defective mechanism. He might have agreed with Zumbart's recommendation that the leader be chosen by a small group of socially minded intellectuals, possibly based, say, in Chicago.