Ivan T. Berend. An Economic History of Twentieth-Century Europe. Cambridge: Cambridge University Press, 2006. xv + 356 pp. $89.00 (cloth), ISBN 978-0-521-85666-9; $37.99 (paper), ISBN 978-0-521-67268-9.
Reviewed by Alfred C. Mierzejewski (Department of History, University of North Texas)
Published on H-German (November, 2007)
Economic History for Epigones
John Maynard Keynes famously wrote that "[p]ractical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back." Ivan Berend's new history of the European economy in the twentieth century demonstrates that Keynes's warning applies to historians as well. Berend restates the case for the interventionist welfare state. He provides a survey of its development and apogee, but is unreliable on its decline after the early 1970s. His potentially fruitful approach and often useful insights are undermined by reliance on outdated theories and insufficient research.
Berend concentrates on economic systems, what the Germans call "Ordnungen." The concept of "orders" integrates economic considerations with legal, political and social factors to allow a holistic analysis of an economy. Berend's analysis, however, is based largely on literature that appeared up to the 1970s, omitting the discussion of orders that has appeared since. He contends that the twentieth century saw the demise of laissez-faire capitalism, by which he means free competitive markets. He goes to the heart of the issue by denying the validity of the natural harmony thesis proposed by classical economists. Instead, in his view, state action is necessary to achieve harmony. Berend also asserts that the twentieth century witnessed the collapse of dirigistic economic management, both by socialists in Eastern Europe and by right-wing dictatorships in Italy and Germany. He concludes that the major trend of the twentieth century in Europe was the triumph of the regulated market economy (p. 79).
For his opposition to the thesis of natural harmony, Berend relies on three familiar frameworks. First, he resorts to the explanation developed by Karl Polanyi in The Great Transformation (1944). In this powerful book, Polanyi argued that laissez-faire was developed by English and Scottish economists in the late eighteenth and early nineteenth centuries; it applied only briefly to their own country and served their own interests. Thus, free competitive markets are a historical exception that require unnatural behavior from human beings. On this view, the classical economists' image of the homo oeconomicus is unrealistic. In fact, according to Polanyi and Berend, people are motivated primarily by social considerations. In the face of the social damage caused by free competitive markets, Polanyi argued, societies developed defense mechanisms, including market regulation, social welfare programs, and trade restrictions. Berend develops this thesis from the vantage point of the early twenty-first century to argue that the two prototypical systems--unrestrained competitive capitalism and dirigistic socialism--adopted features from each other, which caused them become similar in practice. This is a restatement of the convergence thesis prominent in the 1960s.
The second major intellectual source of Berend's argument is John Maynard Keynes, who argued in a series of publications (most importantly in The General Theory of Employment, Wages and Money ) that free competitive markets do not function smoothly. The foundation of his analysis was an attack on Jean Baptiste Say's law; as Keynes put it, the idea that "supply creates its own demand--meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate directly or indirectly, on purchasing the product." Classical economists concluded from this principle that there was no obstacle to full employment; in response, Keynes argued that demand was not unlimited and frequently fell behind income and supply because as a community became wealthier, its willingness to spend all of its income declined. Opportunities to invest diminished, leading to a reduction of investment, resulting in recession or depression and unemployment. Keynes's critique of Say's Law was a product of the peculiar circumstances of the Depression of the 1930s, not a general assessment of economic history. The Depression had other causes, and developments since 1945 have taken a very different course than he anticipated. Berend has nonetheless adopted Keynes's thesis and misunderstands Say. According to Berend, "Say['s] ... famous law [states] that each supply creates its own demand because production provides the income to buy the products.... Say's Law, however, apparently stopped working" (p. 72). Say actually argued that "a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." Say did not contend that the production of a good would create the demand for that very good. Rather, it would increase the general demand for goods. Moreover, he even anticipated and refuted Keynes's later contention that demand is the driver of economic growth, stating that "the encouragement of mere consumption is of no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone furnishes those means. Thus it is the aim of good government to stimulate production, of bad government to encourage consumption.... [T]he general demand for products is brisk in proportion to the activity of production."
Berend also employs the imperialism thesis proposed by John A. Hobson in 1902. According to this line of reasoning, European industrialized powers suffered from surplus production, which they relieved by seizing territory in Africa and Asia. The owners of monopoly enterprises directed government policy to suit their private needs, including provoking wars. This thesis was refuted in the 1960s.
Finally, Berend draws upon more recent advocates of government regulation of markets, particularly Joseph E. Stiglitz and, to a lesser extent, George Soros. Stiglitz contends that asymmetrical access to information prevents market participants from making rational decisions, leading to market failure. The solution to this problem is for government, which Stiglitz presumes to be a neutral, benevolent actor, to intervene to correct market behavior. Stiglitz's thesis, which has proven very popular, has nonetheless been effectively dismantled. The price mechanism exists precisely to overcome asymmetries in access to knowledge. Indeed, the market and its price mechanism can be seen as devices to discover and make available the knowledge necessarily dispersed among market participants.
Based on these untenable theoretical foundations, Berend builds a historical narrative that is distorted. The dominant explanation among economists would attribute decisive influence to supply, not demand. It holds that markets facilitate the discovery and dissemination of information, access to which is necessarily uneven. All of the information necessary for rational decision making cannot be gathered in one place and assessed effectively. Consequently, state planning, even to a limited extent, is inherently less efficient than dispersed planning through markets. Finally, the historical consensus is that states seek to control foreign territory for strategic, not economic reasons. Viewed from these mainstream perspectives, the economic development of Europe looks very different from the one presented by Berend. Nevertheless, some sections of his book contain useful insights.
Berend begins with a discussion of the situation at the outbreak of World War I, noting that most states on the Continent had already largely abandoned laissez-faire. He observes that the war demonstrated that economies could be controlled by government to achieve a single, well-defined goal: in this case, the production of large quantities of armaments. This lesson encouraged governments to expand their intervention in both domestic and international markets during the 1920s. The Depression led to the final discrediting of laissez-faire and its abandonment in favor of various forms of state intervention, ranging from the dirigiste systems of right-wing dictatorships in Germany and Italy to the Soviet command economy. Berend points out that World War II reinforced the idea that economies could be managed successfully by the state (p. 6). Unfortunately, his account of the Nazi command economy is marred by numerous inaccuracies.
Berend follows with an excellent description of the economic planning apparatus built by the Soviet Union. He correctly points out that Soviet leaders were able to industrialize the country rapidly and is clear about the system's imperfections. However, he does not mention the human cost that it exacted, a cost measured by scholars such as Robert Conquest in the millions. Berend also offers a good explanation of the disintegration of the socialist command economies of Eastern Europe in the 1980s.
The final section of the book deals with the post-World War II period in Western Europe, during which the classic interventionist welfare state was built. This section can be divided into two parts: one concerning developments up to 1973 and one treating those thereafter. The first section provides a highly idealized picture. The second completely misstates the causes of the problems encountered by the interventionist state. In the first part, Berend contends that throughout the West, planning and intervention supported economic growth, a highly controversial argument, to say the least. Astonishingly, in light of evidence from state-owned and -operated firms such as ENI in Italy, Total and SNCF in France, and VW in Germany, Berend asserts that state-owned companies behaved in the same way as private enterprises. Following in the anti-trust tradition of Louis D. Brandeis, he suggests that regulation actually increased competition and that markets survived regulation unimpaired. These assertions should be set against the record of developments in the telecommunications and air travel markets.
Similarly, citing examples from France and West Germany, Berend contends that state intervention promoted technological innovation and modernization. In light of European companies' difficulty in generating innovations in leading sectors such as data processing and communications (Nokia being the exception that proves the rule), and their concentration on second industrial revolution sectors such as automobiles, this assertion must be discounted. Berend also argues that state intervention has promoted free trade (p. 190). Although the Common Market and its successors, including the current European Union, have indeed promoted intra-European trade in some goods and services, an examination of the record reveals a somewhat different picture. The European community has erected both tariff and non-tariff barriers against the import of goods and services produced outside of Europe, most notably agricultural products. The current problems confronting the Doha Round of international trade negotiations bear eloquent witness to this state of affairs. Moreover, even within Europe, many restrictions on the free movement of goods and services remain. The most glaring example is the exclusion of Eastern European workers from Western European labor markets.
Finally, Berend contends that the postwar welfare state promoted social peace. This controversial point is frequently denied by advocates of the welfare state, since it casts a shadow over the motivations of Europeans. It is a topic that would bear further research. He attributes the crisis of the welfare state to factors outside of the regulatory regime and welfare state itself. He mentions the problem of stagflation but does not probe its causes. While noting the appearance of alternative economic and social ideas, especially in the 1970s and 1980s--particularly the theories of Friedrich von Hayek and Milton Friedman--Berend does not analyze them or assess their influence. Berend fits the collapse of socialism into his image of the interventionist welfare state. He contends that social systems in Eastern Europe disintegrated due to the superior competitive model of the Western welfare state and the philosophical challenge provided by Eurocommunism. The evidence is overwhelming that the socialist economies of Eastern Europe collapsed because they simply did not deliver the goods. Eurocommunism was irrelevant. The alternative model was the free competitive economy proposed by neoliberals, which many East Europeans thought they would get when they overthrew the socialist regimes.
Ivan Berend raises important issues and makes stimulating arguments. The strongest part of his book is his analysis of the economies of the Soviet Union and Eastern Europe. However, his assessment of the post-World War II regulated economies of Western Europe is untenable due to a lack of analytical rigor, the misapplication of basic economic ideas, and inadequate research. Berend's book amounts to an attempt to resurrect the post-World War II interventionist consensus, an opinion that collapsed in the stagflation of the 1970s. Ironically, it shows that Keynes was right about defunct economists.
. John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace and World, 1936), 383.
. For a discussion of this concept, see the works of Walter Eucken, Die Grundlagen der Nationalökonomie, 6th ed. (Berlin: Springer, 1950 ), and Grundsätze der Wirtschaftspolitik, 6th ed. (Tübingen: Mohr, 1990 ).
. Karl Polanyi, The Great Transformation (New York: Rinehart, 1944). This book can be seen as a counterpoint to Friedrich von Hayek's contemporary The Road to Serfdom (Chicago: University of Chicago Press, 1944).
. Keynes, General Theory, 18. Keynes never cites Say directly, relying instead on John Stuart Mill and Alfred Marshall.
. Jean-Baptiste Say, A Treatise on Political Economy: Or the Production, Distribution, and Consumption of Wealth, trans. C. R. Prinsep (Philadelphia: J. B. Lippincott, 1863 ), 133-134.
. Say, Treatise, 139.
. J. A. Hobson, Imperialism (Ann Arbor: University of Michigan Press, 1965 ).
. Ronald E. Robinson and John Gallagher, Africa and the Victorians: The Official Mind of Imperialism, 2nd ed. (London: Macmillan, 1981); William Roger Louis, ed., Imperialism: The Robinson and Gallagher Controversy (New York: New Viewpoints, 1976); Winfried Baumgart, Imperialism: The Idea and Reality of British and French Colonial Expansion, 1880-1914, rev. ed. (New York: Oxford University Press, 1982); Henri Braunschwig, French Colonialism, 1871-1914, rev. ed., trans. William G. Brown (New York: Praeger, 1966); Phillip Derby, Three Faces of Imperialism: British and American Approaches to Asia and Africa, 1870-1970 (New Haven: Yale University Press, 1987); Wolfgang J. Mommsen, Theories of Imperialism, trans. P. S. Falla (Chicago: The University of Chicago Press, 1982).
. Joseph E. Stiglitz, "Toward a General Theory of Wage and Price Rigidities and Economic Fluctuations," American Economic Review 89 (1999): 75-80; Joseph E. Stiglitz, "Keynesian Economics and Critique of First Fundamental Theorem of Welfare Economics," in Market Failure or Success: The New Debate, ed. Tyler Cowen and Eric Crampton (Northampton: Edward Elgar, 2002), 41-65; George Soros, The Crisis of Global Capitalism (New York: Public Affairs, 1998), and idem, Open Society: Reforming Capitalism (New York: Public Affairs, 2000).
. See the articles reprinted in Cowen and Crampton, eds., Market Failure.
. This concept was initially proposed by Hayek. See Friedrich A. Hayek, "The Meaning of Competition," in idem, Individualism and Economic Order (Chicago: University of Chicago Press, 1948), 92-106; Hayek, "Competition as a Discovery Procedure," in New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago: University of Chicago Press, 1978), 179-190. For a brief, simplified explanation of the concept of the market as a discovery mechanism see Israel M. Kirzner, How Markets Work: Disequilibrium, Entrepreneurship and Discovery (London: Institute of Economic Affairs, 1997).
. See Adam Tooze, The Wages of Destruction: The Making and Breaking of the Nazi Economy (New York: Viking 2007), which raises the discussion of the Nazi economy to a new level.
. Robert Conquest, The Harvest of Sorrow: Soviet Collectivization and the Terror-Famine (New York: Oxford University Press, 1986), The Great Terror: A Reassessment (New York: Oxford University Press, 1990), and Stalin, Breaker of Nations (New York: Viking Penguin, 1991).
If there is additional discussion of this review, you may access it through the network, at: https://networks.h-net.org/h-german.
Alfred C. Mierzejewski. Review of Berend, Ivan T., An Economic History of Twentieth-Century Europe.
H-German, H-Net Reviews.
Copyright © 2007 by H-Net, all rights reserved. H-Net permits the redistribution and reprinting of this work for nonprofit, educational purposes, with full and accurate attribution to the author, web location, date of publication, originating list, and H-Net: Humanities & Social Sciences Online. For any other proposed use, contact the Reviews editorial staff at firstname.lastname@example.org.