The under-performance of the early-war German economy

Discussions on the economic history of the nations taking part in WW2, from the recovery after the depression until the economy at war.
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TheMarcksPlan
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The under-performance of the early-war German economy

Post by TheMarcksPlan » 06 Oct 2020 13:45

This thread is intended to summarize some takeaways from reading about the German war-time economy, to point out areas for further research/reading, and to ask whether any of you can point me to pieces I've missed in the current literature. Think of it as an amateur literature review and research agenda.

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We're all are familiar with the fact that early-war Germany was massively outproduced in headline weapons stats (tanks, planes, etc.) by smaller economies such as Britain and the Soviet Union.

Most/many of us know of the early historiography on this shortfall:
  • USSBS head economist Kenneth Galbraith remarked, "Germany should never have lost the war."
  • Allen Milward formulated the Blitzkrieg Theory of the German economy, wherein the Nazis failed to mobilize fully due to perceived political weakness.
A first (?) revision of the USSBS/Milward view is the "inefficiency theory," wherein Germany attempted early-war mobilization more than heretofore recognized, but failed to deliver the goods due to an extremely inefficient armaments sector.
  • The "official" German history of Germany in the Second World War, specifically Volume 5-1, advocates elements of the inefficiency theory. Its narrative is a dreadfully boring recap of administrative/political turf wars within the Nazi state - dubbed a "polycracy." In Volume 5-2, Albert Speer and his technocratic gang of dynamic youngsters emerge belatedly to impose rational order on German armaments planning and to harness German entrepreneurship. [this is, inevitably, a simplification of >2,000 pages] As discussed further below, however, GSWW validates some aspects of the old Blitzkrieg/undermobilization theories.
  • Another exponent of the "inefficiency theory" is Richard Overy, whose War and Economy in the Third Reich gives German inefficiency primacy of place in explaining early-war shortfalls.
This century a new school of revisionism has arisen, best represented by Adam Tooze and Jonas Scherner.

Tooze's Wages of Destruction is his most "popular" work; it contains themes explored in previous scholarly articles. Scherner is less well-known as much of his work is only in German, but some of his articles have been published in English.

Here's Scherner's academic page, listing his published work: https://www.ntnu.no/ansatte/jonas.scherner
For Tooze there's his website: https://adamtooze.com/

Both men have written on multiple topics and both seem like good scholars. For the purposes of our discussion, a rough summary of the shape of their revisionism:
  • Both reject the blitzkrieg theory emphatically and explicitly and have produced research calling the inefficiency theory into question as well.
  • Tooze is the most emphatic in rejecting inefficiency theory, calling the apparent early-war decline in German labor productivity a "in large part a statistical illusion." WoD p.667. Tooze's conclusion is based on rejection of the data typically used for German production indices (Wagenfuhr's), preferring an alternate series created by the USSBS but largely ignored up to now (per Tooze).
  • Scherner sees some truth to early-war inefficiency but contextualizes it as normal and expected rather than remarkable. Scherner's work on inefficiency theory has focused on the German aircraft and powder industries. where he has argued that learning curves typical of all industrial production (and well-known even at the time) explain the later-war increases in German productivity. See, e.g., "Fixed-price contracts, learning, and outsourcing: explaining the continuous growth of output and labour productivity in the German aircraft industry during the Second World War," The Economic History Review (2010); also "The End of a Myth: Albert Speer and the so-called Armaments Miracle," Vierteljahrschrift fur Sozial- und Wirtschaftsgeschichte (2006).
  • Both spill a lot of ink debunking the "Speer myth."

I've given short-shrift to many others who are contributing to this field but again I'm not doing a full literature review, just pointing up what seems the general shape of contemporary scholarship on the Nazi wartime economy.

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Now comes some of my own editorializing/analysis...

First, we should note that Tooze and Scherner don't agree on everything of course. There's a pretty big central disagreement, for example, on the role of occupied economies in Germany's war effort. Tooze is very dismissive of their value, repeating the low headline stats for completed armaments around page 410 of WoD and stating, "the main contribution made by the occupied territories directly towards armaments production for the Reich was the conscription of millions of foreign workers for labour in Germany." Tooze thereby misses Europe's enormous contributions of imported intermediate and non-weapons military goods (e.g. all the radar detectors on U-Boats built in France) and civilian goods (which allowed transfer of German production into weapons). Scherner is on the case, emphasizing (along with others) that Germany's imports represented about a quarter of its war production. https://www.degruyter.com/downloadpdf/b ... 85-006.pdf And the imports don't include other massive military boons from occupied countries: French labor and firms built most of the Atlantic Wall and Ukraine fed most of the Ostheer, for example. The high-level analysis of occupied Europe was already laid out in Does Conquest Pay? in 1993; Scherner's scholarship fills in more of the detail.

Tooze and Scherner know each other's work of course; WoD's Acknowledgments section thanks Scherner as a manuscript-reader (but doesn't cite any of his work).

What's Tooze up to, then, in minimizing the usefulness of Germany's conquests? A hint may be in the jacket-blurb to WoD:
The idea that Nazi Germany was an unstoppable juggernaut,
backed up by a highly industrialized economy, has been central
to all accounts of the Second World War. But what if this was
not the case? What if the tragedy of twentieth-century Europe
had its roots in Germany's weakness, rather than in its
strength?
Also in his 2005 article "No Room for Miracles," Tooze states:
we must reject not only the Blitzkrieg thesis. We should also reject any talk of a "lost economic opportunity" for Nazi Germany early in the war
WoD's over-arching theme is that the Nazis were Stupid and Bad; I suspect that he minimizes Germany's economic resources to reinforce how foolish and inevitably doomed Hitler's project always was. Hopefully we all agree that Nazism was Stupid and Bad but hopefully we don't need to diminish the threat Hitler posed and the effort necessary to kill him. While I agree that WW2's tragedy stemmed from German weakness rather than strength; I locate that weakness in her politics, in her insecurity about German culture versus France and Britain's, and in shame and humiliation over WW1. We must be able to say that there are forms of human weakness and badness that battlefields and economics do not address.

Another point of disagreement between Jonas and Adam - albeit one of rhetoric and degree - involves the specifics of German productivity in WW2. While Tooze calls the supposed early-war inefficiency "in large part a statistical illusion," Scherner's treatment of the Speer myth concludes:
Revised macroeconomic data indicate that
labour productivity displayed a rather u-shaped development
during World War II, decreasing between
1939 and 1941 and increasing from 1941 onwards.
In our opinion, the initial decrease in productivity
was caused by start-up problems resulting from the
astonishing growth of both the capital stock and the
work force of traditional and newly founded armament firms.
The increase in productivity after 1941
then resulted mainly from learning-by doing. "End of a Myth"
So where Tooze sees mostly illusion, Scherner sees a real decline in early-war productivity explained by temporary shocks (draft, factory conversions/foundings), followed by predictable learning effects and increased productivity. ["End of a Myth" cites and refines Tooze's critique of the Wagenfuhr data, btw, so Scherner isn't using data that Tooze would say is deficient].

Scherner has dug deeper into the characteristics of German productivity increases - primarily in the aircraft industry (see linked article above) and in a study of powder producers. "Wissenstransfer, Lerneffekte oder Kapazitätsausbau?" ["Knowledge transfer, learning effects, or capital accumulation?] in Zeitschrift für Unternehmensgeschichte / Journal of Business History (2008).

The aircraft-focused article concludes that knowledge transfer between aviation firms worked and happened long before Speer mandated it; the powder-focused article concludes that Speer's mandatory inter-firm knowledge transfers failed to increase productivity - higher productivity came from "learning by doing" and greater capital intensity instead.

In seeking to reconcile these divergent results, Scherner comes up with a plausible part-explanation: The complexity of aircraft production enables more division of labor (i.e. more distribution of production to subcomponent suppliers), which enables more learning-by-doing on specific tasks that can be shared between more producers up and down the production chain. Powder production, by contrast, is a relatively simple industrial process. Plant Manager A can't develop - and therefore can't share - many new insights into production refinement with Plant Manager B. Instead, labor productivity increases come from individual workers becoming more familiar with their using own tools (and managers/technicians more familiar with maintaining these tools).

To return, under Scherner's framework, to macro from micro, we would expect all industries - even the simplest - to have suffered a productivity shock in the early-war period when millions of workers were drafted, millions were compelled to move to new jobs, and millions of foreigners/PoW's were being integrated into the economy. In later years some integration of new workers and some drafts continued, but the workforce had more stability than in '39-'41 [e.g. call ups of working adults - non-18yo recruits - declined as a % of workforce, Germany's sources of foreign labor dried up or were tapped out].

I find Scherner's framework - a "U - shaped" German productivity curve - far more convincing that Tooze's "in large part illusion."

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I agree with both men, btw, that the "Speer myth" should be discarded. Debunking Speer is important to show that German industry was moving towards efficiency in ways that Speer's propagandizing obscures.
I disagree, however, with the amount of ink both spill on this project. Show the industry trends and focus less on Speer. I wish we could all agree that Speer should have been hanged and leave it at that. He was a terrible architect too.
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Just as Scherner goes beyond Tooze's mere myth-debunking to recover hidden trends in the productivity data, I suspect there are hidden trends to recover in some of other "myths" that have been "debunked" by Overy, Tooze, et. al. Here's some potential avenues for research:

The Closure Campaign
As boring as are GSWW's long narratives about Nazi polycracy and in-fighting, they contain nuggets of information that cry out for quantitative research a la Scherner's work. Volume 5-1, for example, discusses the cessation of the "closure campaign" after the defeat of France. Tooze cavalierly - and unjustifiably - says the campaign was "abandoned as a waste of administrative effort." (WoD p.360). Tooze provides no citation for this claim, which contradicts GSWW's narrative. In GSWW, the resistance of Gauleiters and influential party members temporarily ended the closure campaign, which Speer/Milch resumed in 1942.

As the CC sought to close small, inefficient firms and/or consolidate them with larger, the expected efficiency gains fit well within Scherner's broader narrative of productivity increases through increased division of labor, knowledge transfers, and learning-by-doing.

Early-war use of foreign labor

In the into to Paying for Hitler's War, Scherner returns to occupied economies and notes "Only recently [2002] was a first attempt made to estimate the numbers of foreigners who worked for the German war machine within Germany’s borders." Elsewhere on this forum I have extensively cited Herbert's Hitler's Foreign Workers, but good as that work is it only scratches the surface. viewtopic.php?f=11&t=243557&start=45#p2216965 Herbert points to several factors that impeded more and earlier recruitment, including (1) a post-France perception that the war would soon end, (2) innate German resistance to foreigners and regime apprehension of political consequences, (3) a decline in German war fortunes, leading to more passive resistance such as absenteeism, and (4) German provision of generous welfare benefits to occupied Western Europe. Empirical research could tell us more about these trends. For example, did firms offered long-term armaments contracts show more willingness to hire foreigners?

The German clearing account and exports

We know that Germany's clearing account deficits rose throughout the war and that occupied countries - faced with little other choice - generally continued to finance these deficits. Yet we know also that Germany exported 8mil tons of steel in 1940, just ahead of the Barbarossa campaign and in the midst of an army program to enable it. What tangible trade impacts did Germany see from going deeper in arrears on its clearing accounts in the early war period? How do these stack up against 8mil tons of steel? [aside from obvious strategic necessities - e.g. Swedish ore and Romanian oil]

All of the foregoing sound in something like the old Blitzkrieg or under-mobilization theory - Germany wasn't trying hard enough. As with Scherner's revision of Tooze's revision of the inefficiency thesis, however, I expect that there are subtleties to uncover lying somewhere between the simplistic Milward/Galbraith view of a "peace-like war economy" and a view that Germany was maximally exerting itself in 1940. This is especially true after the Fall of France when the Nazi regime's political capital was basically unlimited, thereby removing political constraints that had earlier restrained certain economic measures.

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Re: The under-performance of the early-war German economy

Post by TheMarcksPlan » 06 Oct 2020 15:07

TheMarcksPlan wrote:productivity shock in the early-war period when millions of workers were drafted, millions were compelled to move to new jobs,
In other threads I'm trying to remind folks of the economic implications of large land armies when comparing production statistics. viewtopic.php?f=76&t=251476 viewtopic.php?f=76&t=250292
That this dynamic was greater for Germany than for Britain is clear from the fact that Germany drafted a far greater proportion of her population in the early-war years. Same goes for U.S.


This is an embarrassing revelation of ignorance and sets my thesis up for easy destruction but can anyone recommend a book treating France's transition to a war economy? I'd expect France to have experienced problems similar to Germany in '39-'40. These would have been mitigated by a few factors:
  • Much more slack in France's pre-war labor market
  • Much greater availability of imports to alleviate transition difficulties
Nonetheless I'd expect France, with its huge draft, to have been somewhere on the downslope of Scherner's productivity U-curve.

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Re: The under-performance of the early-war German economy

Post by wm » 07 Oct 2020 07:40

TheMarcksPlan wrote:
06 Oct 2020 13:45
USSBS head economist Kenneth Galbraith remarked, "Germany should never have lost the war."
Wasn't Galbraith that guy who prophesized (in the eighties) a bright future of the Soviet economy too? It seems he liked the command economy a lot.

Hitler's endgame was a power-sharing deal with Britain, and that entirely depended on British leaders - without their cooperation Nazi Germany couldn't win the war.
It wasn't quite reasonable to base your endgame on what your enemy would do for you.

That the early-war German economy underperformed is neatly illustrated by the fact that 80% of their entire military transport was equestrian.

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Re: The under-performance of the early-war German economy

Post by TheMarcksPlan » 07 Oct 2020 07:48

wm wrote:Wasn't Galbraith that guy who prophesized (in the eighties) a bright future of the Soviet economy too?
Galbraith is the bete noir of my post and of all the authors cited except Milward so...

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Re: The under-performance of the early-war German economy

Post by TheMarcksPlan » 07 Oct 2020 10:03

TheMarcksPlan wrote:Early-war use of foreign labor
A bit more detail on Tooze's views on the subject...

Here's Tooze's WoD on foreign labor:
In the most basic sense, therefore, the Third Reich's immediate
response to the winter crisis of 1941-2 was 'rational'. Germany was
short of labour. By any Western standard, there was no way of increasing
the mobilization of the native labour force. So Gauleiter Sauckel and his
staff sallied forth and brought literally millions of additional foreign
workers to Germany. The result was that, by the final stages of the war,
the Third Reich was a society playing host to at least as many foreigners
as the 'multi-cultural' Germany of today. p.517-18
So Tooze sees increased use of foreign labor as motivated by the '41-'42 Winter Crisis, by which he means the defeat at Moscow, US entry, and simultaneous economic difficulties.

Tooze's 2005 article, however, rejects "any talk of a 'lost economic opportunity' for Nazi Germany early in the war." Nothing but political will prevented Germany from ramping up foreign labor earlier in the war so WoD's analysis seems in tension with "No Room for Miracles."
TheMarcksplan wrote:The Closure Campaign

Tooze cavalierly - and unjustifiably - says the campaign was "abandoned as a waste of administrative effort." (WoD p.360).
Here's what GSWW v.5-1 actually says about the first closure campaign of 1940:
Heinrich Hunke, the Party’s
most influential economic theorist, economic adviser to Gauleiter Goebbels
of Berlin and thus a spokesman for Germany’s principal arms-manufacturing
centre, had already backed Funk in a memorandum vehemently opposing the
continuation of the closure campaign.
...
When reviewing the wholly unsatisfactory results of the previous spring’s
closure campaign on 29 July 1940, General Thomas and State Secretary Syrup
of the ministry of labour jointly concluded that, in view of the resistance
offered by industry itself, it might be better to abandon the whole venture.6 p.592
After abandoning the first campaign due to political/business resistance, Germany embarked on a second closure campaign in Spring '41 as Barbarossa approached and its armaments goals had not been met. GSWW v.5-1, ch.V-2.

So not only is Tooze wrong about the reasons for abandoning the first closure campaign, Germany also viewed it as sufficiently promising to reinstate when perceived armaments needs once more increased.

Again, this is a topic where fine-grained empirical research is needed, not unjustified hand-waives such as Tooze provides.

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GSWW also provides hints of specific governmental and private actions taken in expectation of swift victory:
Even though Hitler quickly revoked his [post-France] call for a bigger output of
consumer goods, it would take considerable time to reapply the resources thus
released to the war economy. p.569
Companies such as the Bochumer Verein, which had largely gone over to
Wehrmacht production and had thereby lost some of its civilian customers,
were especially quick to restore severed contacts and adapt their manufacturing range to peacetime needs.13
...just to list a few.

That there was at least some slack in German civilian production is clear from the macroeconomic statistics compiled by modern economists like Mark Harrison:

Image

Had Germany spent as great a portion of her national wealth on military as the UK, her outlays would have increased by 10% in 1940.
As at least half of German military spending was on salaries instead of procurement, Germany would have produced 20% more war goods in 1940.

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To the extent that the revisionist historians/economists address counterfactual claims about a missed early-war German economic opportunity, they seem to have in mind a counterfactual wherein Germany mobilizes hard and early, matching its 1944 peak production levels in 1940 or so. Tooze specifically aims at this counterfactual and uses his debunking of it to show us that the Nazi project was always doomed.

What Tooze et. al. fail to consider, however, is whether the naive "Blitzkrieg" theory they rightly discard may be a strawman in their counterfactual analysis: What if Germany didn't need 1944 production levels early in the war; what if it missed some version of victory by a production margin measured in only a few percentage points of GDP? It is not my intent to discuss specific counterfactuals here; I'll just note that I propose one version of the parsimonious counterfactual.

Rather, I'd like to consider the meta-question of to what use have historians/economists employed implicit or explicit counterfactual logic regarding Hitler and WW2? What ideological or historical claims do their embedded counterfactuals address?

...for forthcoming posts. Also will continue discussion of non-counterfactual analysis of the German economy.

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