What was economic thinking like before Keynes

An era of upheaval had begun in the still young Federal Republic of Germany. On June 2, 1967, the policeman Karl-Heinz Kurras (it was not known at the time that he was also a Stasi spy) shot the student Benno Ohnesorg in Berlin during a demonstration against the Shah of Persia. In response, a wave of student protests swept through West Berlin and Germany.

A change also took place in economic policy. The economic miracle experienced its first real - albeit very mild from today's perspective - recession. The gross national product (GNP) shrank by 0.5 percent, the unemployment rate rose from zero to 2.5 percent. After Chancellor Ludwig Erhard, the man of the economic miracle, had been overthrown by his own people, a grand coalition under Chancellor Kurt-Georg Kiesinger (CDU) had ruled Bonn since December 1, 1966.

In his cabinet, the charismatic SPD politician Karl Schiller as Federal Minister of Economics and the controversial CSU prince Franz Josef Strauss were supposed to fight unemployment and crisis with new methods. Strauss, who a few years earlier as Minister of Defense over the mirror-Affair had fallen, had used the time and heard a few lectures in business administration and economics in Munich and Innsbruck. Now he began to lecture in the Bundestag on "Input" and "Output", which led the SPD parliamentary group leader Herbert Wehner to the legendary interjection "Put! Put! Put!" stimulated. Incidentally, Schiller and Strauss worked so well together that they were the mirror titled as "Plisch and Plum" (after the two naughty dogs in Wilhelm Busch's picture story). This became a trademark.

Schiller delighted the television viewers with his word creations like "Mifrifi"

That was Schiller's masterpiece Law to Promote Stability and Growth in the Economy. It was announced on June 8, 1967 and cast the new way of thinking in a legal form: In the first paragraph, the federal and state governments were obliged to "observe the requirements of macroeconomic equilibrium in their economic and financial policy measures". The measures should "within the framework of the market economy order at the same time contribute to the stability of the price level, a high level of employment and external balance with steady and appropriate economic growth".

The sense and nonsense of this "magical square" is still debated today. But there can be no doubt as to the influence of the law on economic policy thinking. Peter Bofinger, Würzburg economics professor and member of the Advisory Council, says: "The Stability Act contains many measures to speed up economic policy decisions. They were hardly needed. Much more important was that the law codified Keynesianism in Germany."

Demand policy in the tradition of John Maynard Keynes, standard in the USA and Great Britain since the end of World War II at the latest, was downright frowned upon by the fathers of the social market economy. The great liberal economist Walter Eucken, head of the Freiburg School, rejected Keynesian economic policy because of his experience with Hitler's economic policy: full employment policy had triggered "a powerful tendency towards central management of the economic process," he wrote. In addition, there was no need at all until 1966, as there was full employment anyway. The problem was rather to prevent the economy from overheating and to "keep moderation", as Erhard called it. He even had the draft of a stability law prepared himself. However, this should only be about the fight against inflation. Ironically, the draft became the model for Schiller's Law, but it completely changed its character.

A "modern dirigism" entered German economic policy, as stated in an editorial in the Süddeutsche Zeitung was called. That was in keeping with the zeitgeist: People believed in the state and in feasibility. Even the majority of the Council of Experts, which later became very critical of Keynes, supported the law. Karl Schiller called it a "synthesis between the Freiburg imperative and the Keynesian message", that is, of the primacy of the market economy, as the Freiburg School demanded, and the claim to stabilize this market economy by the state.

It was also a time when macroeconomics became popular. Schiller delighted the television viewers with his creations such as "Mifrifi" (medium-term financial planning) and "contingent budget". Willy Brandt won the Bundestag election in 1969 - hardly imaginable today - not with the issues of Ostpolitik or social justice, but with the demand for the revaluation of the D-Mark.

A few months after the law was promulgated, one of the reasons for its creation ceased to exist. The recession ended in record time, and in 1968 the West German economy grew again by four percent. In the following year, the federal government created an economic reserve: It set aside tax revenue in order to curb the excessive demand.

But then came the oil shock of 1973/74: the country plunged into a - this time really - severe recession, and mass unemployment returned. Federal Chancellor Helmut Schmidt fought the crisis in accordance with the law with government spending and allowances for private investments. Although he managed to contain the crisis, the return to full employment failed. Hans-Werner Sinn, former President of the Ifo Institute, sees the effect of the law in retrospect very critically: "It led to the debt ratio doubling in the 1970s and inflation rising dramatically. Schmidt used it to to fight a supply crisis, namely the first oil price shock, and also because it was so convenient. "

However, some of the changes in the law still exist today. The annual economic report, which the Federal Minister of Economics regularly submits, was invented in 1967, as well as the Economic Council and the financial plan, in which the Federal Minister of Finance provides a five-year perspective. On the other hand, the "Concerted Action", an ambitious model of Keynesian income policy, failed. The state, employers and employees should coordinate their behavior in such a way that wages neither rise too much nor too little for the stability of the economy. The DGB withdrew from the Concerted Action in 1977, officially in protest because the employers had complained against equal participation, in fact probably because the unions feared that wage guidelines could reduce their influence.

For several decades the law fell silent, and Keynes went out of style. That changed in one fell swoop with the financial crisis of 2007/2008. The International Monetary Fund and the industrialized countries organization OECD again pleaded for Keynesian demand policy. In 2013, the grand coalition in Berlin even decided in its government program to review the law, "in the light of today's challenges - demographic change, internationalization, digitization and scarcity of resources". The project was never implemented.

Rudolf Hickel, co-founder of the left-wing group "Alternative Economic Policy" and long-time critic of official economic policy, wants to actively use the law today and at the same time reinterpret it. It points the way "with the possibility of a public investment and an expansive wage policy". In addition, it is about the goals of "ecological" and "social sustainability".

The four stability goals of the law are not called the "magic square" for nothing

The open question is how the law could specifically be renewed and whether one can do sensible things even when they are not in the law. It is not for nothing that the four goals of the Stability Act are considered a "magic square": in fact, they can never be achieved at the same time. It is the same today. Price stability has been achieved and the level of employment is increasing as desired. Strauss and Schiller would certainly have denied that 1.6 percent growth is "appropriate". And with a current account surplus of 8.3 percent, the external balance is grossly out of order. After the experience of the financial crisis, one can also imagine a magical pentagon or hexagon with the additional goals of financial market stability and budgetary sustainability. Obviously, there are no majorities in favor of such an expansion today.

A historical marginal note is also necessary: ​​Although Keynes actually came to Germany late in 1967, the Stability Act had a forerunner; it's just almost forgotten. In September 1931, a secret conference of the Friedrich List Society met in Berlin to discuss the possible ways out of the global economic crisis. The conference was presented with a plan by a speaker from the Reich Ministry of Economics by the name of Wilhelm Lautenbach. Lautenbach, whom some researchers later called the "German Keynes", was looking for ways in which Germany could take out loans and support demand despite a lack of foreign currency reserves and an impending panic on the financial markets. The task to be solved was: "Can the state ignite and repair the capitalist engine at the same time?", The economic historian Knut Borchardt quotes one of the participants in the conference.

These participants included some of the big names of the time: Walter Eucken, President of the Reichbank Hans Luther, Rudolf Hilferding, SPD finance minister in the last democratically elected government of the Weimar Republic. Wilhelm Röpke, who would later be one of the most important economists in exile, was also there. Röpke later wrote that the decisions of the conference, "if they had been adopted, would probably have given history a different course".