False Hopes: Communism and Fascism

Jesús Fernández-Villaverde1
September 27, 2021
1
University of Pennsylvania
Two alternatives to liberal democracy

• The end of the WWI witnessed the appearance of two alternatives to liberal democracy (market
economies+representative governments):

1. Communism: Russia (Soviet Union), later China.

2. Fascism: Italy, later Germany.

• Both alternatives:

1. Saw liberal democracies as inherently flawed and incompatible with “true” human nature.

2. Proposed a radical departure from the current economic system.

3. Justified the use of violent means to achieve a radical reorganization of society.

• For the first time in history, ideological fights were focused on principles of economic organization and
not on power, income, or religion.
1
Communism: A basic bibliography

• Best general overview: Richard Service, Comrades!: A History of World Communism.

• Marx: David McLellan, Karl Marx: A Biography; Samuel Hollander, The Economics of Karl Marx:
Analysis and Application.

• Lenin, Stalin, Trostky: Richard Service, Lenin, Stalin, Trostky, Stephen Kotkin, Stalin (volumes I and
II).

• Economy: Janos Kornai, The Socialist System: The Political Economy of Communism.

• Soviet Union economic history: Robert Allen, Farm to Factory and Chris Miller, The Struggle to Save
the Soviet Economy: Mikhail Gorbachev and the Collapse of the USSR.

2
Communism

• Karl Marx and Friedrich Engels had surprisingly little to say about how to organize a socialist
economy.

• They were much more concerned with an analysis of capitalist societies, the “exploitation” of labor,
and how the current system would collapse because of its inherent contradictions.

• In their view, at capitalism end, production would have been concentrated on a few large
manufacturing corporations.

• Therefore, taking control of them and using their productivity powers would be an easy task, closer
to engineering than to economics.

• Distributional issues would need to be worked out in some detail during the transition to communism,
but this was not foreseen to be a challenging issue.

3
Revolution in Russia

• However, on the way, something odd happens.

• The revolution instead of happening in the leading industrial country, Great Britain, or in the country
with the strongest social democrat movement, Germany, actually occurs in a backward, peripheral
country: Russia.

• Indeed, it was not really a revolution in the “romantic sense”: on October 25 (November 7,
Gregorian Calendar) 1917, Bolsheviks in Petrograd took over the offices of the Kerensky Provisional
Government.

• This was a coup d’etat that started a civil war.

• Lenin’s theory of party and revolution.

1. He thinks his “capital” will be Berlin, not Moscow.

2. German is the official language of Comintern (Third International).

4
Revolution in Russia

• The “real” revolution was in February (February 23-March 3 / March 8-16, Gregorian Calendar),
which brings the end of the monarchy

• In the November election for a Russian Constituent Assembly, the Bolsheviks only get 24% of the
vote.

• Communists were able to win the civil war (1917-1923) despite long odds.

• Key role of Leon Trotsky.

• Victory is not total: Finland, Estonia, Latvia, Lithuania, and Poland establish independent republics.

5
6
War communism

• Original Lenin’s plan, firmly based on Germany’s economic mobilization during WWI.

• Main features:

1. Collective property of all industry.

2. Centralized control of the economy (Gosplan).

3. Military discipline.

4. State monopoly on foreign trade.

5. Requisition of food from peasants.

6. Role of money minimized.

• By 1921, it is clear that the economy cannot work in this way (production only around half of the
level of 1913).
7
8
New Economic Policy

• In March 1921, a New Economic Policy (NEP) is introduced.

• Main features:

1. Monetary reform (5*107 old rubles for 1 new ruble).

2. Peasants could sell their surpluses to private traders.

3. Artisans and small industry liberalized.

4. Small trade liberalized.

• Main proponent, Nicolai Bukharin.

• Fast growth from 1921 to 1926, when the economy is back to 1913 levels.

9
Stalin takes power

• At Lenin’s death, Stalin takes total control of the party and the Soviet Union.

• Why? General Secretary.

• Trotsky, who was a much deeper intellectual (although also a murderous one), never really
understood the logic of a totalitarian system.

• Inherent dynamics of revolutions.

• Paranoid psychopaths have a clear comparative advantage at becoming dictators.

• In addition, Stalin had a prodigious memory and worked harder than anyone else.

10
11
A diagnosis

Rosa Luxemburg, The Russian Revolution, 1918

“When all this is eliminated, what really remains? In place of the representative bodies created by
general, popular elections, Lenin and Trotsky have laid down the soviets as the only true representation
of political life in the land as a whole, life in the soviets must also become more and more crippled.
Without general elections, without unrestricted freedom of press and assembly, without a free struggle of
opinion, life dies out in every public institution, becomes a mere semblance of life, in which only the
bureaucracy remains as the active element. Public life gradually falls asleep, a few dozen party leaders of
inexhaustible energy and boundless experience direct and rule. Among them, in reality only a dozen
outstanding heads do the leading and an elite of the working class is invited from time to time to
meetings where they are to applaud the speeches of the leaders, and to approve proposed resolutions
unanimously – at bottom, then, a clique affair – a dictatorship, to be sure, not the dictatorship of the
proletariat but only the dictatorship of a handful of politicians... Yes, we can go even further: such
conditions must inevitably cause a brutalization of public life: attempted assassinations, shooting of
hostages, etc.”

12
Stalinism I: Socialism in one country

Josef Stalin
“We are fifty or a hundred years behind the advanced countries. We must make good this distance in
ten years. Either we do it, or they will crush us.”

• Main pillars:

1. First five-year plan in 1928.

2. Collectivization.

3. Great Purge.

13
14
15
Stalinism II: Collectivization

• Marx thought (wrongly) that “primitive accumulation” of capital that allowed the industrial
revolution was primarily due to the enclosure movement in England in the late 18th century.

• Stalin (and Trotsky, Gomulka, Mao Zedong and many others) thought that they needed to do to
their farmers what Marx had told them English businessmen had done to their farmers.

• First, use of price “scissors”: changes in relative prices. However, peasants were less ready to
exchange grain for luxuries than noblemen.

• Collectivization was the party’s response: by expropriating the rich peasants (Kulaks) and providing
landless peasants with an epsilon more consumption than before through collective farms, the Party
could extract all the agricultural surplus and use it for industrialization.

• Moreover, it destroyed a potential class enemy.

• Collectivization: around 12 million deaths!

16
17
2,200 -i

2,000 -

1,800 -

1,600 -

1,400 -

1,200 -

1,000 -

800 -

600
1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 18
19
Stalinism III: the Great Purge

• At least 750,000 executions and around 2 million died in the Gulag archipelago.

• Armed forces: 3 of 5 marshals, 13 of 15 army commanders, 8 of 9 admirals, 50 of 57 army corps

commanders, 154 out of 186 division commanders, 16 of 16 army commissars, and 25 of 28 army
corps commissars.

1. Poor performance of the Red Army during the first year of the German invasion directly linked to this
purge.

2. It also makes Germans believe they can defeat the Soviet Union.

• Of the 44 German communists that belonged to the Politburo of the KPD, more were killed by Stalin
than by Hitler (Hugo Eberlein, a friend of Rosa Luxemburg, perhaps the most famous).

20
21
22
The Big Push

• Can we make sense of this policy?

• Big push: Murphy, Schleifer, and Vishny (1989).

• Multiple equilibria.

• Why?

• Externalities. Example: who wants to use a phone if you are the only person with one?

• In Soviet Union, Preobrazhensky.

23
WWII

• During WWII, the Soviet Union reaches a level of mobilization perhaps never seen before.

• Thanks to this tremendous mobilization, it can out-produce Germany.

• Human costs are staggering: ≈ 17.000 deaths per day for nearly four years.

• Recovery is slow and painful, 1.5 million deaths in 1946 by famine.

• Stalin returns to his old habits: Doctor’s plot of 1951-1953.

24
Table 1. Soviet GNP by final use, 1940 and 1942 to 1944 (billion rubles at 1937
factor cost and percent)

1940 1942 1943 1944

Gross national product 253.9 166.8 185.4 220.3

Net imports 0.0 7.8 19.0 22.9
Total final demand 253.9 174.5 204.4 243.2
Fixed capital formation 39.9 10.1 9.4 18.4
Inventories 10.2 –10.7 8.1 1.9
Defence 43.9 101.4 113.2 117.2
Government & security 10.1 5.4 6.0 7.9
Communal services 27.0 15.6 17.2 20.7
Household consumption 122.8 52.6 50.5 77.1
— per worker 100% 68% 63% 81%
— per head 100% .. 58% ..

Source: Harrison (1996), 104. Total final demand is the value of domestically produced and
imported goods and services available for household and government consumption and
investment, and equals GNP plus net imports.

Table 2. Soviet GNP by sector of origin, 1940 to 1945 (billion rubles at 1937 factor
cost) 25
Table 5.1. German and Soviet war production, 1940-5 (physical units)
1940 1941 1942 1943 1944 1945 Total
Germany:
Ground and air munitions, thousands
Rifles, carbines 1 352 1 359 1 370 2 275 2 856 665 9 877
Machine pistols 119 325 232 234 229 78 1 217
Machine guns 59 96 117 263 509 111 1 156
Guns 6 22 41 74 148 27 318
Mortars 4.4 4.2 9.8 23.0 33.2 2.8 77.4
Tanks and SPG 2.2 3.8 6.2 10.7 18.3 4.4 45.6
Combat aircraft 6.6 8.4 11.6 19.3 34.1 7.2 87.2
Warships, units
Submarines 40 196 244 270 189 0 939

USSR:
Ground and air munitions, thousands
Rifles, carbines 1 462 2 421 4 049 3 438 2 451 703 14 524
Machine pistols 92 95 570 643 555 272 2 227
Machine guns 96 149 356 458 439 109 1 608
Guns 15 41 128 130 122 77 514
Mortars 38 42 230 69 7 3 390.1
Tanks and SPG 2.8 6.6 24.7 24.0 29.0 22.6 109.7
Combat aircraft 8.3 12.4 21.7 29.9 33.2 20.9 126.4
Warships, units
Major naval vessels 33 62 19 13 23 11 161 26
27
28
Stalinism after Stalin: Stagnation

• Reform attempts during the 1950s and 1960s: Khrushchev.

• Blocked by the elite: Brezhnev.
• Progressive stagnation.
• Why?
1. Logic of neoclassical growth model.
2. Sticks become milder. No more purges.
• Attempts at reform in the 1980s:
1. Fall in the price of oil.
2. Renew military competition by the U.S.
3. Falling productivity.
• System turned out to be unreformable.
• Also, enormous environmental cost.
29
30
31
 thousandsof 1991 US dollars
9

8-

7-

6-

5-

4-

3-

2-

19281 1935 11950 I 1960 I 1 70 1 1980 I

1930 1940 1955 1965 1975 1985
o actual + simulated 32
 5.2
5 - 1989
I-
4.8- 1
4.6 - 00
4.4 - - 1980
4.2- o
4- o
3.8- o
A 3.6- ?"
3.4 - 1970
3.2 -
3-
2.8 -
2.6 -
~2.'~6 %S 1960
2.4 -
2.2-,
2-
1.8 1 1 1 1
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
Labour 33
34
The expansion of communism

• At the end of WWII, Stalin gets control of Eastern Europe.

• The system is exported from East Germany to Bulgaria: popular democracies.

• Strong popular opposition: East Germany (Volksaufstand vom 17. Juni 1953), Hungary (1956),
Prague Spring (1968), Solidarity in Poland (1980).

• Economic performance:

1. Relative good in 1950s and 1960s.

2. Bad 1970s.

3. Awful 1980s.

• A peculiar case: Yugoslavia’s self-management.

35
36
 6

Average annual growth rate in GDP per capita (%)

East

5 Western core

Western periphery
4

0
1950s 1960s 1970s 1980s

Figure 1. Economic growth in Europe, 1950–89

Notes: East: Bulgaria, Czechoslovakia, Germany (East), Hungary, Poland, Romania, the USSR, and Yugoslavia; western core:
Austria, Belgium, Denmark, France, Germany (West), the Netherlands, Norway, Sweden, Switzerland, and the UK; western
periphery: Finland, Ireland, Greece, Italy, Portugal, and Spain.
Source: Own calculations. Data from Conference Board, Total Economy Database (GDP in 1990 Geary–Khamis dollars).
37
38
39
Conclusions

• Karl Marx was one of the greatest social thinkers of all times.

• He saw, perhaps more clearly and earlier than anybody else, the deep changes brought by modern
technology and modern firms.

• Revolutionary power of entrepreneurs.

• He was, however, a prisoner, of the classical economics heritage.

• He never formulated a coherent view of how communism would work.

• Two fundamental problems:

1. Allocation of resources.

2. Incentives.

• For all we know, a socialist system is unlikely ever to work.

40
41
Deep insight

F.A. Hayek, The Problem of Information

“The problem of rational economic order is determined precisely by the fact that the knowledge of the
circumstances of which we must make use never exist in concentrated or integrated form, but solely as
the dispersed bits of incomplete knowledge which all the separate individuals possess...
The problem is thus in no way solved if we can show that all the facts, if they were known to a single
mind (as we hypothetically assume them to be given to the observing economist) would uniquely
determine the solution; instead we must show how a solution is produced by the interactions of people,
each of whom possesses only partial knowledge”

42
Fascism

• Particularly loaded word.

• It is helpful to distinguish between:

1. Italian Fascism.

2. German National Socialism.

• Main differences:
1. Role of racism.

2. Role of imperialism.

3. Corporativism.

• Despite being the first movement, Italian Fascism is a sideshow in comparison with German National
Socialism.

• Other cases: Spain, Hungary,... 43

A basic bibliography

• Best general overview: Richard Evans’ Trilogy, The Coming of the Third Reich, The Third Reich in
Power, and The Third Reich in Power.

• Hitler: Ian Kershaw, Hitler 1889–1936: Hubris and Hitler 1936–1945: Nemesis.

• Economy: Adam Tooze, Wages of Destruction.

• Economic thought: Avraham Barkai, Nazi Economics: Ideology, Theory, and Policy.

• Nazism and the business world: Henry Turner, German Big Business and the Rise of Hitler.

44
The origins

• Cradle of old German nationalism (Pangermanism, anti-Semitism, expansionism).

• After FWW, dozens of small radical right parties (Völkisch movement) appear in Germany.

• The DAP (German Workers’ Party) is one of them.

• Adolf Hitler is sent by the Army to infiltrate the group and report back to headquarters.

• He immediately realizes that he has an acute political instinct and a powerful oratory.

• Soon, the name is changed to NSDAP (National Socialist German Workers’ Party) and Hitler fully
dominates the party (Führerprinzip).

45
The path to power

• First attempt: organize a coalition of völkish and nationalist groups, putsch in Munich in 1923 (why
at that moment?).

• Army, the most powerful institution in the Weimar republic, does not back him.

• After a brief prison term, Hitler and NSDAP opt for an electoral strategy.

• However, after the stabilization of 1924, Germany’s economic growth relegates NSDAP to fringes of
electoral map.

• Decomposition of the economy after the Great Depression of 1929⇒breakthrough in the Federal
election of 1930 (18.3% of votes).

• Presidential election of March/April 1932 and Federal elections of July and November 1932.

• Who voted for Hitler?

46
Figure 1 Monetary Base and Wholesale Price Index

Notes: Data normalized with 1913 equal to 1. Observations are the natural logarithm.
The figure uses the data in Diagram 4 in Holtfrerich (1986). The monetary base is cash
in circulation plus commercial bank deposits at the Reichsbank. 47
Figure 2 Industrial Production

Notes: Data normalized with 1928 equal to 100. Observations are the natural logarithm.
The figure reproduces Diagram 4 in Holtfrerich (1986). 48
Table 2 German Historical Data

Year Money∗ Unemploy- Real GNP- WPI CPI Unemploy-

ment GNP Deflator ment Rate

1924 978 137.3 130.8

1925 17106 636 59.7 117.9 141.8 141.8
1926 19683 2010 61.4 120.0 134.4 142.1
1927 21438 1327 67.5 121.9 137.6 147.9
1928 22369 1391 70.5 125.0 140.0 151.7 6.7
1929 22694 1899 70.2 125.9 137.2 154.0 9.0
1930 21304 3076 69.2 119.1 124.6 148.1 14.6
1931 18042 4520 63.9 108.0 110.9 136.1 22.3
1932 16288 5575 59.1 95.9 96.5 120.6 28.1
1933 16608 4804 62.8 93.0 93.3 118.0 24.4
1934 17897 2718 68.2 96.0 98.4 121.1 13.8
1935 20001 2151 74.6 98.0 101.8 123.0 10.7
1936 21609 1593 81.2 100.0 104.1 124.5 7.6
1937 23309 912 90.0 101.0 105.9 125.1 4.2
1938 28490 429 99.2 101.0 105.7 125.6 1.9
1939 37910 119 107.2 102.0 106.9 126.2 0.5
1940 48640 52 110.0 130.1 0.2

∗ Equals the sum of currency and demand and time deposits.

Notes: Deutsche Bundesbank, ed. Geld und Bankwesen 1876–1975 (1976). The unem-
ployment rate is from Bundesarbeitsblatt 7–8 (1997), Bundesanstalt fur Arbeit, Bundes-
ministerium fur Arbeit und Sozialordnung.
49
Figure 4 GNP Deflator

Notes: See Table 2. 50

Conservatives and Nationalsocialists

• Traditional conservative elites (Army, Big Business, Junkers, German Nationals-DNVP...) thought
little of the NSDAP.

• No economic support of big business to the NSDAP until much later in the game.

• Share many policy goals (anti-communism, antilabor, expansionism in the East, eliminate Treaty of
Versailles)=⇒conservative revolution during the Weimar years.

• NSDAP as a solution to the paralysis of Weimar institutions:

• Radical parties: KPD (Communist), NSDAP.
• Weimar coalition: SPD (Socialdemocrats), Zentrum (Catholics).
• Liberal and Conservative parties: DNVP (German Nationals), DVP (Conservative Liberals), DDP
(Centrist Liberals).

• However, conservative politicians did not fully understand the radicalism of the NSDAP agenda.

51
Opening the gates of hell

• A small group of conservatives convinces Hindenburg to appoint Hitler chancellor on January 30,
1933, as the premier of a coalition government with the DNVP and independent conservatives.
• Why? They (Von Papen, Hugenberg, Schacht,...) think:
1. They can control him.
2. They can use him to smash out the KPD and SPD.
3. The Army will always back them up.

• They are deeply mistaken.

• However they are not the only ones:
1. KPD reads National Socialism as the “the open terrorist dictatorship of the most reactionary, most
chauvinistic and most imperialist elements of finance capital” and Social democrats as “social-fascists.”
2. Zentrum decides to achieve a modus vivendi (the fascist hare and the catholic turtle).
3. SPD is left alone and does not opt for violence.

52
53
54
55
The plan

• Coarse, simplistic, and deeply confused view of the world. For instance, Gottfried Feder’s economic
thinking.

• However, rather clear structure relying on three assumptions:

1. Life is a struggle among races. Only the strongest will survive (why do they think Jews and Communists
are particularly dangerous?).

2. There is the need of achieving a large land/population ratio (Lebensraum).

3. Returns to scale are huge (image of America).

56
57
The plan

• The only path open to Germany is to:

1. Conquer an empire in the East (Poland, Ukraine, ...).

2. Populate it with German settlers (a herrenvolk).

3. Eliminate or reduce Slavic and Jewish original populations.

4. Create an autarkic and self-sufficient economic block.

5. Eventual war with the U.S. for world dominance (but in a distant future).

58
The consequences

• Therefore, war and genocide are not accidents, but the structural outcome of the regime.

• Discussion in historiography between functionalism and intentionalism. Working Towards the Führer
concept.

• Re-organizing the society and the economy for aggression is the first and fundamental task after the
Machtergreifung:
1. Coordination of society, Gleichschaltun (relatively small degree of violence).
2. Cultural and social revolution (People’s Community, Volksgemeinschaft).
3. Nuremberg laws (avoid another stab-in-the-back, Dolchstoß).
4. Expansion of the army while keeping (basically) traditional officers in charge.
5. Undo Treaty of Versailles Treaty.

• Policracy: Franz Neumann, Behemoth, and Martin Broszat, The Hitler State.

59
60
The economy

• National socialist took the “socialist” part of their name rather seriously.

• They allowed private enterprise because:

1. They could alienate too early many of their conservative supporters.

2. They thought they could force the arm of entrepreneurs to do everything they needed anyway.

• Four-years plan run by Hermann Göring.

• Creating a People’s community:

1. German Labour Front (Deutsche Arbeitsfront).

2. A People’s car (Volkswagen), a People’s radio, a People’s fridge, ...

3. Strength through Joy (Kraft durch Freude).

4. Health, environmental, and animal protections.

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62
63
The economy

• Program of expansionary fiscal policy:

1. Road construction (Autobahns). Much less important than usually argued.

2. Weapons.

3. Autarky, barter trade agreements with East European countries.

• Accommodative monetary policy (Mefo bills).

• Tight control on wages and consumption.

• Financial repression.

• Employment recovers quickly.

• However, soon, the economy reaches its capacity limits and runs out of foreign reserves. Primary
reason behind taking over Austria and Czechoslovakia.
64
65
Figure 6 Real GNP

Notes: See Table 2. 66

The war

• Both offensive in the West and the East largely influenced by economic computations.

• Thorough yet inefficient exploitation of conquered territories:

1. France, Belgium, Netherlands→transfers.

2. East Europe→plunder.

• Biggest use of slave labor since Roman times: around 12 million laborers.

• First years of the war, 1939-1942 were years of substantial capital accumulation.

• Only after 1943, war production reaches its peak and stays high until surprisingly late in 1945.

67
3 and 1944, another partial year of occupation.
Table 1
French Payments to Germany, 1940-1944

French GDP Occupation Costs Costs as a

(FF billions) (FF Billions) Share of GDP
(percent)
1939 433
1940 419 81.6 19.5
1941 392 144.3 36.8
1942 424 156.7 36.9
1943 493 273.6 55.5
1944 739 206.3 27.9
Source: Carré, Dubois and Malinvaud (1972) provide the GDP data, Milward
(1970), p. 271 gives the French payments to Germany.
68
Conclusions

• National Socialism was a road to nowhere.

• Insane combination of Darwinism and Malthusianism.

• Based on the need of constant aggression and cumulative radicalization.

• Even if they had won WWII (and they were rather close to doing it in 1941), it is unclear how the
regime would have evolved.

• Economic view of the world based on a fundamental misunderstanding of how modern societies work.

• Probably, this is the reason why, outside small fringe group of lunatics, national socialism and its
economic doctrines have been relegated to the dustbin of history.

69