Many top English-speaking economists are either alarmed or aghast over Europe's handling of the crisis in Greece. Several Nobel Prize winners say it has been exacerbated, time and again, by an unnecessarily rigid approach by Germany, Europe's economic powerhouse and decision-maker. Greece simply cannot repay its debts, economists argue, no matter how much the country slashes public services or raises taxes. So by insisting it keep on trying, the thinking goes, Germany seems to be intent on punishing Greece.
The Germans see it differently, saying what they are doing may be painful, but necessary, to get the country on a sustainable footing for the long term. To understand the massive gap in opinion, it might help to watch a Monty Python sketch from 1974 about a soccer match between Germany and Greece.
In the match, the two countries are represented by their foremost philosophers. For much of the game, the two sides do nothing but talk. Then, in the final minute, there is movement. Socrates scores on the German goalie Gottfried Wilhelm Leibniz, who lived from 1646 to 1716, to win. The German philosophers G.W.F. Hegel, Immanuel Kant and Karl Marx then dispute the goal with the referee, Confucius.
"Hegel is arguing that the reality is merely an a priori adjunct of non-naturalistic ethics. Kant via the categorical imperative is holding that ontologically it exists only in the imagination," the announcer says. "Marx is claiming it was offside."
Here, watch for yourself:
It isn't clear whether these lines actually make any sense (although on the replay, Socrates does seem to have been offside). And it would be risky to infer too much symbolism from the sketch. Broadly speaking, though, Monty Python's writers suggest some of the larger concepts in German philosophy over the past three centuries — concepts which, in some ways, continue to influence German thinking about economic policy.
The basic question for all these thinkers is whether the patterns we see in the world around us really reflect patterns that exist in nature or are simply attempts by our minds to structure what we see. For many German philosophers, a key effort was to understand the principles governing societies.
This is a particular issue for economists, who seek patterns in the mass of statistics coming out of stock markets and labor surveys. It's not always enough, though, to look at how markets and prices behave and describe the mathematical patterns they seem to follow. In practice, there always seem to be exceptions to the rules, sometimes catastrophic ones, which suggest that those maybe patterns have more to do with our minds than the natural world itself.
"Anglo-Saxon economists are guided by the utilitarian philosophy of John Stuart Mill or Jeremy Bentham, asking merely if a policy works," The Economist recently wrote. "Germans side with Immanuel Kant, believing that nothing works except through law, and are horrified when the [European Central Bank] strays from its narrow mandate."
(It's worth noting that the Greeks have tried to appropriate the German philosopher, employing Kant's writings about doing what's right to argue against paying back unfair debts.)
Later German philosophers built on Kant's views. Hegel was concerned with the relationship between events, facts and history and the principles that guide them — what we'd call them the laws of economics and social science. Marx took up this debate in a way that contemporary readers might be more familiar with. For Marx, economics was what gave history purpose and direction. He believed that capitalism was a kind of a intrinsic idea that was shaping history — but one with internal contradictions that would inevitably result in a worldwide socialist revolution.
One of the key economic ideas in German philosophy — and, to be fair, that of other cultures as well — was that there was something unnatural about debt, indeed immoral. The German word schuld means both debt and guilt. As Foreign Affairs pointed out this year, one of Nietzsche's big works looked at the relationship between shame and debt. "In On the Genealogy of Morals, Nietzsche looked back to the 'oldest and most primitive' personal relationship between creditor and debtor as the origin of how 'one person first measured himself against another,'" author Kenneth Dyson wrote.
Later in the 20th century, German thinkers refined these ideas. Walter Eucken (1891-1950), an opponent of the Nazis and an economist who has been enormously influential in Germany since the Second World War, wanted to develop a comprehensive economic theory that could describe prices, investments, debts, monopolies and more in a comprehensive way — instead of as just a sequence of apparently random facts.
In particular, he took issue with the work of John Maynard Keynes (1883-1946) — the famous British economist who long dominated economic thinking in the English-speaking world — about how the government should respond to crises. Keynes believed that the government had to aggressively deal with each crisis as it happened by filling in the gap left by the private sector. It could so by reducing interest rates to stimulate economic activity or spending money directly to get the economy moving again.
"Thus economics is without a firm basis, always trying to catch up with events and always moving from one crisis to another," Eucken wrote in The Foundations of Economics, a 1940 book.
It was a direct echo of the differences between Kant and Mill.
Eucken saw markets as systems of rules and guiding principles and believed that government's responsibility was to establish these principles and to follow them. Those rules, he believed, should be designed to adjust the economy automatically to a crisis, so that policymakers could adhere to them even when things got bad.
In that respect, Eucken's thinking was similar to the American economist Milton Friedman's, who also believed that central banks should follow rules established in advance during times of crisis. Agreed-upon rules would limit the chance that policymakers would misjudge and set interest rates too high or too low as they tried to straighten out a wobbling economy. Both thinkers also felt that giving too much leeway to government officials limited citizens' liberty, and it was better to go by a system of clear, well-known rules.
Eucken's views are now known as ordoliberalism, and they're still very popular among German economists. A skepticism of debt is central to the philosophy, which many see influencing German policy today. As The Economist has explained in a brief history of ordoliberalism:
This is an offshoot of classical liberalism that sprouted during the Nazi period, when dissidents around Walter Eucken, an economist in Freiburg, dreamed of a better economic system. They reacted against the planned economies of Nazi Germany and the Soviet Union. But they also rejected both pure laissez-faire and Keynesian demand management.
The result was a school that was close both in personal contacts and in its content to the Austrian school associated with Friedrich Hayek. The two shared a view that deficit spending for demand management was foolish. Ordoliberalism differed, however, in believing that capitalism requires a strong government to create a framework of rules which provide the order (ordo in Latin) that free markets need to function most efficiently.
From the original ordoliberals sprang one big idea for state intervention when cartels dominated the economy: a muscular antitrust policy. A second was a strict monetary policy that focused rigidly and exclusively on price stability. A third was the enforcement of Haftung, which means not just liability but also responsibility. Germany has tougher insolvency laws than America or Britain, for instance.
This showed up after the financial crisis of 2008. The Germans wrote a "debt brake" in their constitution, the Economist noted, that seeks to balance state and federal budgets, and they have tried to bring the philosophy to other European nations as well.
- The Economist explores ordoliberalism in Germany today.
- Martin Wolf calls ordoliberalism a "wacky ideology" in The Financial Times.
- For a defense of Eucken and the German approach to Greece, read this paper by Lars P. Feld, Ekkehard A. Koehler and Daniel Nientedt of the Walter Eucken Institute in Freiburg.