Alfred M. Mthimkhulu
Remember the movie ‘A beautiful mind’? As brilliant as reviews confirm. It traces the early life of Professor John Nash, an economist and mathematician awarded the Nobel Prize for Economics in 1994 and the Abel Prize (only awarded for Mathematics) in 2015.
The movie is in fact based on a biography by Sylvia Nasar published in 1998. In 2011, she would publish another page-turner titled “Grand Pursuits: the story of the people who made modern economics”.
Reading the works of writers like Sylvia Nasar is refreshing. They present to us yesteryear luminaries as mortals going about their lives, doing their best in circumstances they face.
They, and the luminaries we meet in their books, subtly remind us that Economics at its very core is not so much about laws of this and that, or numbers from here and there, or that equation versus the other but a desire to understand social arrangements and, in so understanding, craft policies to improve livelihoods.
It is not surprising then that she quotes Alfred Marshal, the founder of neo-classical economics, in the preface of her latter book: “the desire to put mankind in the saddle is the mainspring of most economic study” to which his student John Maynard Keynes added that Economics is an “apparatus of the mind”.
In “Grand Pursuits” we meet some of these luminaries who lived in the few decades before and after the First World War. One of them is Joseph Schumpeter. Having received his doctorate in 1906 at 23, he would have a brief stint as Minister of Finance for Austria in 1919 before almost losing his shirt in banking ventures and eventually migrating for an illustrious academic career at Harvard University in the United States.
Zimbabweans of my time may relate to his seven-month tenure as minister.
He was in a coalition government just after of the First World War. Peace talks were still in progress at Versailles. It was not clear if Austria would be vilified along with Germany or welcomed as a victim so becoming the victors’ recovery project. Many Austrians hoped for a recovery project outcome. It would lead to capital inflows from England, France and others, so the thinking went.
In fact, it was Schumpeter professional proximity to London that made his candidacy for the ministerial position acceptable. He had studied and was close to the great English economists. His Jewish descent would ease access to financiers such as the Rothschilds in London.
If on the other hand Austria was vilified, Schumpeter had been to Berlin on the invitation of some Marxists to strategise on how, if at all, socialism could be adopted in post-war Germany. He could therefore work with the Germans. But proximity to Germany at this time risked rousing demand for war reparations. War reparations are a form of economic sanctions with clear cash outflows over a specific period.
As he assumed office, Austria’s finances were in a mess. The krone, Austria’s currency, was as weak as a Zimbabwean would fully comprehend.
Sylvia Nasar shows with reference to a diary of a housewife how similar the housewife’s hustles for survival were to the minister’s. “Because so much of what Austria needed to stay alive had to be imported” writes Sylvia Nasar, “the Austrian finance minister had to find foreign currencies or gold with which to buy it.
If he couldn’t, he had to arrange a foreign loan or hope for a gift. But his principal job was to defend the krone’s value vis-à-vis other currencies … and if he had no gold or foreign currency reserves, he had to use air to keep it afloat”.
In those days, neurologist and pioneer of psychoanalysis Sigmund Freud wrote to a friend that “now we are really eating ourselves up. All four years of war were a joke compared to the bitter gravity of these months …”
As in Vienna, there was chaos in Berlin which physicist Albert Einstein had fled for Switzerland hence his gloat to a friend from Zurich: “glorious reading about events in Berlin here, under sunny skies, eating chocolate.”
So what was Schumpeter’s plan? He was not in favour of a victors’ recovery project nor a union with Germany. His view was that Austria could dig herself out of the mess on her little resources. To that end, entrepreneurship would play a pivotal role. It is him after all who coined “creative destruction”, a phrase that is him immortalised.
For his plan to work, Allies had to let Austria trade with others freely. He also wanted to repay war debts as quickly as possible to improve creditworthiness. He proposed property taxes than income taxes cognisant of the fact that income taxes, being revenue based, would discourage investment, growth and productivity. He wanted to put in place a central bank to take charge of monetary policy.
Unfortunately, he was fired before he could do any of these things. Chancellor Karl Renner, Foreign Minister Otto Bauer and most in cabinet preferred a union with Germany which Schumpeter openly criticised. Bauer confided to a colleague: “I shall do nothing for the time being, but after the conclusion of the peace treaty it will be inevitable to force his resignation”.
The peace treaty was signed in June. Vienna was stunned as parts of the country were dished out to others. Austria was to pay war reparations. Schumpeter was in a fix much worse than his colleagues and citizens.
Without goodwill from the Allies and them being resented nationwide for the Treaty of Versailles’ terms, his plan was toast. He knew he was out and out he was October.
“I held the minister-ship in a time of a revolution, and it was no pleasure”, he would say.
Things got worse after his departure. The krone plunged without mercy. Inflation soared as it did also in the Weimar Republic. Interestingly in 1923, a seeming replica of his recovery plan as minister would be the League of Nations’ blueprint to rescue Austria. But as the blueprint implementation gathered momentum, he was across the Atlantic en route to being one of the most quoted economist of all time. The beautiful mind had proposed exactly what they would seek later. They were not ready.
Alfred M. Mthimkhulu; Senior Lecturer, Graduate School of Business, NUST; Email: [email protected]; Twitter: @mthimz