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It Wasn’t Capitalism: Mises Explains Nazi Economics

Many readers will already know that Ludwig von Mises considers the Nazi economy to be a form of socialism. In the Nazi system, private property in production goods existed in name only. The ostensible owners were merely managers bound to follow the government’s directives. Rainer Zitelmann, the foremost authority on Adolf Hitler’s economic policies, has fully confirmed Mises’s analysis in Hitler’s National Socialism, which will be published next month. (The book is a revision and expansion of Zitelmann’s earlier book Hitler: The Politics of Seduction). Zitelmann also points out that Hitler admired Joseph Stalin’s economic planning and viewed him as a fellow exponent of a centrally planned economy.

In this week’s column, I’d like to discuss a letter that Mises wrote to the New York Times in June 1942 in which he discusses the Nazi wartime economy in substantial detail, making points about it that he doesn’t mention elsewhere.

Mises first sets forward his conception of the Nazi economy:

The German pattern of socialism (Zwangswirtschaft) [“compulsory economy”] is characterized by the fact that it maintains, although only nominally, some institutions of capitalism. Labor is, of course, no longer a “commodity”; the labor market has been solemnly abolished; the government fixes wage rates and assigns every worker the place where he must work. Private ownership has been nominally untouched. In fact, however, the former entrepreneurs have been reduced to the status of shop managers (Betriebsfuehrer). The government tells them what and how to produce, at what prices and from whom to buy, at what prices and from whom to sell. Business may remonstrate against inconvenient injunctions, but the final decision rests with the authorities.

Mises now develops his analysis in a way that will be new to most of his readers. The Nazi system, as so far explained, does not eliminate conflicts between business and the government. Businessmen, even under Nazi orders, remain eager to make a profit and would like to have as much opportunity as they can to use their entrepreneurial judgment. This conflict leads the government to bring more enterprises under its direct control. There is pressure to change the system to one of government ownership of the means of production—i.e., what Mises calls the “Russian pattern” of socialism.

If Mises is right, this raises a further question. Even if pressure exists to change the German pattern into the Russian pattern, why did Germany and Russia start out with these different patterns? Mises’s answer is that Germany is much more dependent on foreign trade than is Russia and that it is difficult to conduct foreign trade entirely under the government’s direct management. “It is not an accident that Russia adopted the bureaucratic pattern and Germany the Zwangswirtschaft pattern. Russia, the world’s largest country, is thinly inhabited. It has the richest resources and is better endowed by nature than any other country. It can, without too great harm to its people, abandon foreign trade and live in almost complete economic self-sufficiency.”

By contrast, “It is different with Germany. Germany can neither f[e]ed nor clothe its population out of domestic products. It has to import foodstuffs and raw materials, and to pay for these badly needed imports through the export of manufactures, most of which have to be produced out of imported raw materials. In 1937 roughly 92 percent of its imports were food and raw materials and roughly 80 percent of its exports were manufactures.”

How does this difference between Germany’s and Russia’s reliance on foreign trade explain why Germany adopted the German pattern? Mises’s answer is that a government-operated system can’t manage foreign trade.

Imitating the Russian example would have immediately knocked to pieces the apparatus of German export trade and would suddenly have plunged into misery a nation whose standard of living has been very successfully raised by capitalism. Bureaucrats cannot successfully compete in foreign markets. They do not know how to serve the consumers best. Their subjects have no choice; they must take what the bureaucracy gives them. But citizens of foreign countries are free to prefer the better and cheaper goods offered by foreign tradesmen. Thus the collaboration of the former entrepreneurs as shop managers was deemed indispensable in Germany.

It’s important to avoid a misunderstanding. Mises isn’t saying that because bureaucrats can’t run foreign trade, the Nazi government had to exempt businesses engaged in foreign trade from the German brand of socialism. It did not allow a free market in this area. Mises’s argument is that the “shop managers,” because they are former entrepreneurs, can manage the German pattern better than bureaucrats. Even the shackles imposed by the government’s regulations allow some room for entrepreneurial judgment.

Given the incompetence of the bureaucracy, why does Mises think nevertheless that there is pressure to move closer to the Russian pattern? Mises’s answer depends on a premise that can be challenged, but it is supported by Mises’s own assessment of the sources open to him about the German economy. He maintains that the shop managers believe Germany will lose the war—remember, Mises wrote his letter in June 1942—and as a result try to avoid cooperating with the government. “The shop managers are now fully aware that the war will result in defeat and in the fall of the present rulers, and they inveigh against the pretensions of incompetent Nazi officialdom. They rely on their indispensability and are no longer so subservient and accommodating as they used to be. Their behavior is a nuisance to the godlike part magnates.” The government tried to suppress this resistance by using force. “The Nazis have applied their panacea, brutality. A short time ago the execution of two eminent shop managers was reported.”

This was not sufficient to get the system back to where the government wanted it, and the way the government reacted was to take away the limited discretion the shop managers had retained. In this way it moved closer to the Russian pattern of bureaucratic control, although it cannot be said that the German pattern had been abandoned, as the form of private property remained for the most part in place. The way in which the government did this is of interest in that it is sometimes reported that Mises said that the test of whether an economy counts as socialist is the presence of a stock market. In fact, though, the German economy did have a stock market, yet, contrary to the statement attributed to Mises, he considers it socialist. In an effort to exert more control, though, the government tightened regulations and increased the role of the bureaucracy. The reports of a new decree of the Nazi government in 1942, Mises says, “are ambiguous.”

According to one version all holders of stock and corporate bonds are required to turn over their holdings to the Reichsbank. According to a second version only the sale of such securities to any purchaser but the Reich treasury is prohibited…. In addition, all corporation officers will in the future depend directly on the civil servants operating the Reichsbank. As Germany no longer exports goods to countries which are free to patronize other purveyors, the skill and experience of the former entrepreneurs are no longer needed. The Reich trusts that it can in a bureaucratic way manage the whole apparatus of production. Thus it has ventured a first step toward bureaucratic socialism of the Russian style.

Mises’s letter is an indispensable filling out of his account of the Nazi economy, and as the research of Rainer Zitelmann and others has shown, what we have learned about the Nazi economy since Mises wrote supports his contemporary analysis of it.