Monday, 18 January 2010

Nazi capitalism: an oxymoron?

In a couple of recent articles in The Freeman, see here and here, Steven Horwitz asks Is the Name “Capitalism” Worth Keeping? Having just read Adam Tooze's book, “The Wages of Destruction: The Making and Breaking of the Nazi Economy” I can see why he may ask such a question.

Tooze refers, in a number of places, to the Nazi economy as a "capitalist economy". For example he writes,
Never before has national production been redistributed on this scale or with such speed by a
capitalist state in peacetime.
To reiterate, the Third Reich shifted more resources in peacetime into military uses than any other capitalist regime in history.
Never before, in peacetime, had a sophisticated capitalist economy been redirected so purposefully.
A question that could be asked is What does Tooze mean by a "capitalist economy"? I would assume that, at least in part, what he means is private ownership of the means of production. This in turn raises the question of What does private ownership mean? Here I follow Grossman and Hart (1986) in defining ownership in terms of control rights. You "own" an asset insofar as you have control rights over that asset. As Grossman and Hart put it
We define a firm to consist of those assets that it owns or over which it has control; we do not distinguish between ownership and control and virtually define ownership as the power to exercise control.
This terminology seems consistent with standard usage. For example Oliver Wendell Homes (1881) writes,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits of policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one but him.
Another characteristic of ownership, I would guess, that Tooze may note is having control over residual income. Note that above ownership has been defined only in terms of control rights, not income rights. As Hart (1997) explains income rights may not be a well defined term,
A problem that one faces when discussing the notion of residual income is that in many contexts it is not well defined. For example, if two parties enter into a profit-sharing agreement, whereby party A receives log(pi+1) and party B receives pi-log(pi+1), where pi is total profit, then who is the residual claimant? The answer is both parties are. Given that profit-sharing contracts are not in principle costly to write if profits are verifiable (and it is unclear how residual income is to be allocated if profits are not verifiable), the conclusion is that residual income may not be a very robust or interesting theoretical concept.
In such a situation is hard to see how ownership can be define in terms of (undefined) income rights. That is not to say there are not good reasons for income and control rights being bundled together, as we normally see, it just means that having control rights over an asset is what makes someone the owner. Firms may, for example, have a profit sharing arrangement with their managers (effectively giving them residual income rights) without the managers being owners in the accepted meaning of the word. However the two sets rights are bundled in many contexts because they are highly complementary. To put it simply, income rights give you the incentive to use an asset efficiency, and control rights give you theability to do so. Thus having residual income rights (alone) in private hands doesn't mean ownership rights are also in private hands. The question of ownership depends on the allocation of control rights.

So did private individuals control rights over "their" assets within the Nazi economy? Tooze makes a number of comments with regard to state involvement in the economy and control over business: to take a few examples,
Now capitalism's deepest crisis left German business powerless to resist a state interventionism that came not from the left but the right
The first years of Hitler's regime saw the imposition of a series of controls on German business that were unprecedented in peacetime history.
As we have already seen, the New Plan, which effectively regulated the access of each and every German firm to foreign raw materials, created a substantial new bureaucracy, which controlled the vital functions of a large slice of German industry.
Managing this burdensome system of controls was the primary function of a new framework of compulsory business organizations imposed by Schacht between the autumn of 1934 and the spring of 1935. In each sector, the existing multiplicity of voluntary associations was fused together into a hierarchy of Reich Groups (for industry, banking, insurance, and so on), Business Groups (Wirtschaftsgruppen, for mining, steel, engineering and so on) and Branch Groups (Fachgruppen, for anthracite as opposed to lignite mining, and so on). Every German firm was required to enrol. Each subdivision in each Business Group was headed by its own Fuehrer. These men were nominated by the existing associations, vetted by the Reich Group and appointed by Schacht. The primary role of the Business Groups was to act as a channel between individual firms and the Reich Ministry of Economic Affairs. Decrees came down from the Ministry via the Business group. Complaints, suggestions and information travelled upwards from the firms, via the Business Groups to Berlin. The organization was tireless in the production of publications, guidelines and recommendations for the best practice. On the basis of emergency decrees first issued during the latter stages of World War I, the Business Groups were also empowered to collect compulsory reports from their members, establishing an unprecedented system of industrial statistics. After 1936 they were authorized to penetrate even further into the internal workings of their members, with the introduction of standardized book-keeping systems.
So far-reaching were the regime's interventions in the German economy - starting with exchange controls and ending with the rationing of all key raw materials and the forced conscription of civilian workers in peacetime - that one is tempted to make comparisons with Stalin's Soviet union.
[...] though there clearly was a dramatic assertion of state power over business after 1933, naked coercion was applied selectively [...]
What his points to is a high level of state control over business. While control over business was widespread, ownership was not taken over by the state in the manner of the Soviet Union. In Germany ownership remain in the hands of private individuals. While it is true that "formal" ownership remained with private individuals, a question has to be asked as to what happened to "real" ownership. As Aghion and Tirole (1997) point out for the case of organisations, there is a difference between formal authority (the right to decide) and real authority (the effective control over decisions). Formal authority need not confer real authority. A similar situation can occur with ownership when the state regulates business activity. Formal ownership (the right to decide) may not confer real ownership (the effective control over decisions) in so much as many of the control rights normally associated with ownership are not in the hands of the formal owners. Formal owners may be left with only residual income rights and a limited range of control rights. Given the level of regulation of the Nazi economy many of the rights usually thought of as making up (real) ownership had been effectively usurped by the state. Avraham Barkai writes in his book "Nazi Economics: Ideology, Theory, and Policy", Oxford: Berg Publishers Ltd., 1990.
In an off-the-record talk with a newspaper editor in 1931, Hitler defined the basic principle of his economic project: "What matters 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 ["Gemeinnutz geht vor Eigennutz"]. But the state should retain supervision and each property owner should consider himself appointed by the state. It is his duty not to use his property against the interests of others among his people. This is the crucial matter. The Third Reich will always retain its right to control the owners of property.
So while formal ownership remained with the private sector, this was little more than just an empty shell since real ownership had been (mis)appropriated by the state.

Also if we think of capitalism as an institutional arrangement involving the use of free markets, a common assumption, then clearly the Nazi economy was not capitalist.

Thus what meaning does the term capitalist retain in this example? If an economy that was so purposefully redirected by the state as the Nazi economy was, is capitalist, then the difference between socialism and capitalism becomes burred, to say the least. This burring of boundaries suggests that there is justification in Horwitz's call for a replacement for the word "capitalism" (and socialism).


  • Aghion, Philippe and Jean Tirole (1997). ‘Formal and real authority in organizations’, “Journal of Political Economy”, 105(1): 1-29.
  • Grossman, Sanford J. and Oliver D. Hart (1986). ‘The costs and benefits of ownership: a theory of vertical and lateral integration’, “Journal of Political Economy, 94(4): 691-719.
  • Hart, Oliver (1995). “Firms Contracts and Financial Structure”, Oxford: Oxford University Press.
  • Holmes, Oliver Wendell (1881). “The Common Law”, Reprint. Boston: Little, Brown, 1946.

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