Saturday, September 10, 2011

Nasar on Schumpeter and Keynes

Via Paul Krugman, Sylvia Nasar on Schumpeter and Keynes in 1919.

They were on the same side, economically:

“Starvation means Bolshevism,” a British general warned. The word in Paris was that Vienna, flanked by two Red capitals, would be the next to succumb. In April, thousands of gaunt and ragged men -- unemployed factory workers, paid agitators, demobbed soldiers, many with missing limbs -- descended on Vienna’s Ringstrasse, setting the Parliament building ablaze and attacking the police. The militia finally restored order, but not before a horse was shot out from under a policeman. As the animal lay dead in the street, a hungry mob tore it to pieces and carried off hunks of bloody meat. For ordinary Viennese, who adored the emperor’s white show horses the way Americans loved boxing champions, the incident was a sign that civilization was reverting inexorably to barbarism.

While the street battle raged a mile away, the bankrupt government of a dismembered Austrian Republic -- surrounded by hostile states, threatened by revolution, awaiting the Allied peace terms being decided in Paris -- met in the freezing chancellery. Its youngest member was the new finance minister, Joseph Schumpeter. The urbane, clever, ambitious Wunderkind of the defunct Austro-Hungarian Empire had opposed the war, avoided the draft and advised the now-exiled emperor to make a separate peace with the Allies.

The war's victors wanted revenge and reparations. Schumpeter and Keynes wanted restoration of trade and the economies. Naturally, their advice was largely ignored.

In the terrible years immediately after the war, Germany and Austria succumbed to economic chaos, hyperinflation and a catastrophic loss of faith in democracy by their middle classes. The victorious Allies too suffered disillusioning economic setbacks -- not exactly the heroes’ welcome that returning troops were promised. Bruised from their losing battles, eager for success on new fronts, Schumpeter became a banker and Keynes went to work in the City, London’s Wall Street. For Schumpeter, the most creative part of his career was over. For Keynes, the rush of inspiration that led to his “economics of the whole” -- rooted in his experiences in the aftermath of the Great War -- still lay ahead.