The dark side of social capital

We hear much about the wonders of social capital - the dense network of associations facilitating cooperation within a community - of which there are many. It typically leads to positive political and economic outcomes, but is there a "dark side" to social capital? A new NBER working paper suggests there can be.

Bowling for Fascism: Social Capital and the Rise of the Nazi Party in Weimar Germany, 1919-33 by Shanker Satyanath, Nico Voigtlaender and Hans-Joachim Voth

Abstract:

A growing literature emphasizes the potentially "dark side" of social capital. This paper examines the role of social capital in the downfall of democracy in interwar Germany by analyzing Nazi party entry rates in a cross-section of towns and cities. Before the Nazi Party's triumphs at the ballot box, it built an extensive organizational structure, becoming a mass movement with nearly a million members by early 1933. We show that dense networks of civic associations such as bowling clubs, animal breeder associations, or choirs facilitated the rise of the Nazi Party. The effects are large: Towns with one standard deviation higher association density saw at least one-third faster growth in the strength of the Nazi Party. IV results based on 19th century measures of social capital reinforce our conclusions. In addition, all types of associations - veteran associations and non-military clubs, "bridging" and "bonding" associations - positively predict NS party entry. These results suggest that social capital in Weimar Germany aided the rise of the Nazi movement that ultimately destroyed Germany's first democracy.

The economic contribution of prisoner of war labour to Nazi Germany during WWII

The subject of foreign and forced labour exploitation by the Third Reich is not one of meagre proportions. More than 14 million forced labourers passed through the Reich from 1939 to 1945, of whom 4.6 million had been prisoners of war (POWs). Interestingly there is little work on the economic effect of POWs.

Some new work on this issue is discussed by Johann Custodis in an article at the VoxEU.org website on Exploiting the enemy: The economic contribution of prisoner of war labour to Nazi Germany during WWII

Custodis writes,

POWs were exploited through maximising employment, minimising payments, and the use of discrimination and abuse. My recent study complements the work of Herbert (1997) and Spörer (2001) on the employment of POWs in Nazi Germany (Custodis 2012). It provides more consistent employment data from a wide array of primary and secondary sources. Data from the German Ministry of Labour used by other authors is re-analysed for a first quantification of the POW’s economic contribution to Nazi Germany’s war economy. My results revise POW employment figures upwards and they also show that the exploitation of the POW workforce was more significant than previously thought.

Foreign and POW labour made up a significant proportion of the German workforce. At peak in September 1944, 7.5 million, or approximately one fifth of the aggregate German workforce, were foreign workers or POWs; in the munitions industry and in agriculture in 1944, at peak one third and one fifth were POWs or foreign workers respectively. The foreign workforce was largely transferred to Nazi Germany from occupied territories in Europe and contained a vast array of different groups, namely voluntary and coerced workers from Western Europe, forced labour from Eastern Europe, and concentration camp inmates.

The POW workforce itself was similarly heterogeneous. The initial POW workforce in 1939 consisted mostly of Polish POWs, but by 1942, the great majority was Soviet or French with peak employment of approximately one million respectively. The Italian armistice in September 1943 produced an additional labour source of half a million Italian POWs. They were reclassified as Italian Military Internees (IMIs) to circumvent the 1929 Geneva Convention which forbade POW employment which was excessive, dangerous or directly linked to the war effort.

Four main POW groups can be distinguished based on Germany’s adherence to the Geneva Convention. British and American POWs received treatment mostly complying with the Geneva Convention. French and Belgians could suffer from arduous conditions but on average were treated fairly well; Yugoslavs and IMIs only encountered partial compliance; Poles and Soviets possessed no legal protection whatsoever. Initially, most POWs worked in agriculture, but by 1944, they were increasingly employed in coal mining and the munitions industries. Also, the ideological discrimination largely determined work allocation. While for instance half of all French POWs worked in agriculture in 1944, three quarters of the Soviet POWs worked in industry.

There are rather obvious moral hazard problems with forced labour, productivity isn't likely to be high. Custodis continues,

No consistent work has so far been done on the field of POW productivity. Pfahlmann (1968: 233-234) claims that POWs on average were 80% as productive as German civilians, but he does not account for productivity varying by nationality and over time. Skilled French POWs in agriculture for instance were allegedly 80% to 90% as productive as German civilians (Spörer, 2001: 186), but by the end of 1943 their share in the POW workforce was declining rapidly as that of the Soviet POWs began to rise. The Soviets had died in masses until 1942 when Hitler began to tap them as a labour resource such that by January 1945 they represented almost half of the POW workforce. The relative Soviet POW productivity is contested but appears to have ranged from 45% to 60% of a German civilian (Spörer 2001:186; Streit 1978:215). I produce new productivity calculations accounting for these different productivity estimates and factoring in the changing workforce shares over time and the sharp productivity differences by nationality. My results illustrate that the POWs were not as productive as Pfahlmann had claimed. They were on average 50% to 70% as productive as German civilian workers and productivity decreased over time from 70% in 1942 to 55% in 1945. The decrease is mainly driven by the rising share of Soviet POWs with lower productivity figures, but also frequent reassignments, starvation, mistreatment, and bombings reduced productivity, in particular towards the end of the war.

As to the number of POWs employed Custodis revises previous employment figures substantially upwards.

Previous studies show two major deficiencies in this regard: First, they omitted existing government statistics and second they neglected POWs who had been counted as civilians. Herbert (1997: 298) claims that nominal peak POW employment in autumn 1944 stood at 1.91 million, but his individual statistics only add up to 1.73 million as he omits Yugoslav and British POW labourers. Also, statistics by Kroener, Mueller and Umbreit (1999: 212) show that the nominal peak occurred in fact in January 1945 with 2.2 million workers. However, the correction for the omission of ‘hidden’ POW workers shows that actual POW employment was significantly higher. Several hundred thousand French and Polish POWs and IMIs were ‘released’ into civilian status between 1942 and 1945 to increase output and productivity as civilian working conditions were not bound by the Geneva Convention. The civilian releases raise POW employment from 1.9 to 2.3 million POWs workers in autumn 1944 and from 2.2 million to a staggering 3 million in January 1945.

Putting the labour force and productivity measures together get an extimate of the economic contribution of POW's to the Nazi economy.

The POWs at peak made up 5% of the aggregate German workforce. The employment figures can be used to attain an output proxy by assuming that each POW worked a constant amount of days per year with more or less constant working hours per day. Obviously this assumption bears some weaknesses as the majority of POWs were overworked and as working hours and working days per week were far from constant, especially towards the end of the war with Allied bombardment and forced evacuation marches. Still, using this assumption I am able to obtain a minimum base of days worked and avoid upward bias. The resulting sensitivity analysis under different assumptions such as the inclusion or exclusion of the civilian releases and using different sub-datasets yields a range of aggregate man-days worked of 1.7 to 2.3 billion, with the lower bound of 1.8 billion being the most credible result.

And the monetary contribution of POW labour?

Equipped with this output benchmark, the previously attained relative productivity figures and skilled and unskilled civilian wages I then arrive at a range for the monetary contribution of POW labour. The POWs contributed between 1% and 1.5% to GNP every year from 1940 to 1944 and almost 2% per year for three consecutive years from 1942 up until 1944. The contribution of the 7 million foreign and POW workers overall was even greater. Not only was every tenth worker in the Reich foreign or a POW between 1939 and 1944, but the foreign and POW workforce also at peak produced 6% and 7.5% of GNP in 1943 and 1944 respectively and accounted for an average contribution of 4% from 1939 to 1944.

Refs:

• Herbert, Ulrich (1997), Hitler’s foreign workers - enforced foreign labor in Germany under the Third Reich, Cambridge University Press.
• Homze, Edward L (1967), Foreign Labor in Nazi Germany, Princeton University Press.
• Kroener, Bernard R, Rolf-Dieter Müller, and Hans Umbreit (eds.) (1999), Das Deutsche Reich und der zweite Weltkrieg, Band 5, Halbband 2, Organisation und Mobilisierung des deutschen Machtbereichs. Kriegsverwaltung, Wirtschaft und personelle Resourcen l942-1944/45, herausgegeben vom Militärgeschichtlichen Forschungsamt, Deutsche Verlags-Anstalt.
• Pfahlmann, Hans (1968), "Fremdarbeiter und Kriegsgefangene in der deutschen Kriegswirtschaft, 1939-1945", Darmstadt, Wehr und Wissen Verlagsgesellschaft.
• Spörer, Mark (2001), Zwangsarbeit unter dem Hakenkreuz: ausländische Zivilarbeiter, Kriegsgefangene und Häftlinge im Deutschen Reich und im besetzten Europa 1939-1945, Deutsche Verlags-Anstalt.
• Streit, Christian (1978), Keine Kameraden: die Wehrmacht und die sowjetischen Kriegsgefangenen 1941-45, Deutsche Verlags-Anstalt.

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.

and

To reiterate, the Third Reich shifted more resources in peacetime into military uses than any other capitalist regime in history.

and

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

and

The first years of Hitler's regime saw the imposition of a series of controls on German business that were unprecedented in peacetime history.

and

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.

and

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.

and

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.

and

[...] 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).

Suggestions?

References:

• 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.

The economy of the Third Reich

Earlier I posted on an essay by Steven Horwitz on The fascist economy. Horwitz made the point that under fascism there was a large degree of distrust of the unplanned order of free markets and that the power of the state was used to set economic goals. Both these points suggest that the fascist economy should be considered as a form of socialism or planning.

Writing in the current issue of The Freeman historian Steve Davies briefly discusses the success of the fascist approach to the economy using the example of the Third Reich:

In the case of the Third Reich, the widely held perception even now is that whatever else may be said about his regime, Hitler managed to bring about a dramatic revival of the German economy. After 1933 Hitler and his finance minister Hjalmar Schacht stabilized the economy and managed to solve the huge unemployment crisis that had destroyed the Weimar Republic’s legitimacy. This was partly due to Schacht’s imaginative monetary policy and partly to massive public works programs, such as the autobahnen. There was a sharp move away from free markets to a much more interventionist economy that worked better than what had gone before. During World War II this economy was able to achieve great success in terms of war production, notably under Hitler’s armaments minister, Albert Speer.

Obviously there is some truth in this account, or else it would not be credible. There was indeed a sharp move in the direction of a more state-controlled economy. In fact few people realize just how interventionist—even socialist—the policies of the Nazi state were (although the full name of the party should give some indication of this). However, the picture overall is mostly wrong. Adam Tooze conclusively debunked this account in his masterful work, The Wages of Destruction: The Making and Breaking of the Nazi Economy. Tooze shows that the public works programs had little effect on unemployment and wasted resources; that the 1930s saw constant financial and foreign-exchange crises for the Reich; that by 1939 the condition of the German economy was desperate and that this was in fact a major factor in Hitler’s increasingly aggressive policy; that the supposed success of Speer simply did not happen; and that overall the regime was so crippled by its economic incompetence that it is nothing short of a miracle that it had as much military success as it did.

Thus the Nazi planning based approach to economic policy was unsuccessful. An outcome that would not have surprised economists like von Mises and Hayek.

The fascist economy

At the Fraser Institute economics professor Steven Horwitz has a brief essay on Fascism. On the topic of the economics of fascism Horwitz writes,

What emerged as the fascist economic system then was a combination of the socialist rejection of capitalism and the nationalist rejection of internationalist socialism. It’s not coincidental that “Nazi” was short for National Socialist German Workers Party. The very name suggests that the fascists started from a socialist premise (including the emphasis on being a “workers” party), but added the “nationalist” (and specifically “German”) twist.

Rather than have full-blown socialism as we saw in the early years of the Soviet Union, the fascists generally preferred hybrid forms that often maintained the appearance of elements of capitalism but with a much larger role for the state in allocating resources. A look at the Nazi Party platform of 1920 shows the very strong influence of socialism in the economic planks, including objections to the earning of interest, the desire to nationalize industries, the confiscation of profits, and land reform. Not all of these were put into place when Hitler gained power, but the Nazis’ antipathy toward capitalism is quite clear, even as they often co-opted big business into their power structure in during their reign. The trappings of private ownership were often preserved, but the Nazis used the power of the state to try to ensure that private ownership was used as a means toward the national ends that they defined.

The Italian model was similar in its broad outlines, though different in its execution. The Italians were more clear than the Germans about the way in which market competition was destructive of national goals. They didn’t see Russian socialism as a solution for the reasons noted above. Instead, they argued for industry-level partnerships among labor, capital, and the political class. The idea was that by working collectively, these cartel-like organizations could resolve questions of what to produce, what price to charge, what wage to pay, and the like all without the need for cut-throat competition among firms or workers, or the use of strike threats between workers and capitalists. By putting national interests first, these collectives could plan out production industry by industry and ensure a cooperative peace among Italians. So, once again, the system kept some of the trappings of capitalism, such as nominally private ownership, but set them in a system where collective planning of a limited, and nationalistic, sort was the overarching structure.

Both of these systems are probably most accurately called “corporatism.” In such a system, we get these sorts of private-public collaborations in which private ownership is combined with state control and privileges for labor, and where all are expected to serve some larger national goal. It looks like private ownership, which is often the source of the claim that fascism is a form of capitalism, but the degree of distrust of the unplanned order of free markets and the de facto power that falls into the hands of the state to set goals both point to it as being more accurately a form of socialism or planning.

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." Here we have all the basic assumptions that later determined the Nazis' economic plans and their actual policy: virulent antiliberalism, subjection of the economy to the primacy of political and social goals as defined by the national leadership, and state control over all economic activities. [p.26-7]

So you could do anything you liked with your own property, just as along as it was exactly what the state wanted you to do with it.