A Conversation Between Econophile and Martin Wolf

From The Daily Capitalist

This is a recent conversation I, the not-famous Econophile, had with the famous Martin Wolf, much lauded and awarded dean of economics writers and chief economics correspondent for the Financial Times. This is our second exchange and I have to admit I enjoy them. He drives me nuts, but I very much respect the guy even though he is neo-Keynesian in his world view. He's very bright and articulate. And, usually, he writes very well -- perhaps my finest compliment.

He recently wrote what I thought was a nonsensical article whereby he thought the cure to the southern eurozone's problems was for the Germans to spend more. You can read the article at the Financial Times. You need to register, but they give you 9 articles per month free.

Here's the conversation. I think you will enjoy it.




Dear Mr. Wolf:

I just read your article on "Europe Needs German Consumers." You say, among other things:

So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output. …

What would happen if governments also slashed their spending? In an economy without monetary or exchange-rate offsets to austerity, any reduction in spending is likely to lead to at least an equivalent short-run reduction in output (a “multiplier” of one). …

Germany needs to return the favour. …

If the aim is to avoid disaster, the answer is temporary fiscal support for the struggling countries, robust aggregate demand in the eurozone as a whole and a substantial rebalancing of that demand, led by Germany. The fiscal support would be designed to prevent a short-term confidence collapse from triggering a default. In return, weak countries would need to commit themselves to falling nominal wages and a programme of fiscal retrenchment. …

So, punish Germany for doing well and reward Greece for fiscal insanity?

I cannot make sense of what you are getting at here, Mr. Wolf. We all know that Greece will be bailed out by Germany and France and that Greece won’t structurally change as will be demanded. Why would they if they know their getting bailed out?

In what way does the ECB “tolerate” weak demand? Or, to put it another way: how can they increase demand? I suppose by some Keynesian magic.

According to your Keynesian theory, AD=C+I+G -- [Aggregate Demand (GDP) = consumption + gross investment + government spending]. Are you suggesting that all we have to do is increase C? How? By increasing G? Can you tell me how that works or has ever worked?

If government (G) takes money from the consumer (C) and spends it, how has that helped the economy? Yes I know it increases AD (GDP) but no wealth has been created, no organic growth. You should understand that GDP measures only spending, not the creation of wealth in an economy. Otherwise have G spend everything and see how fine things would be.

Are you suggesting that the good Germans go out and buy stuff from Greece to be Euro-patriotic? And what “favor” are they returning? Germany produces goods the rest of the world wants and Greece doesn’t, not to mention that 25% of Greece’s working population works for the government. There’s a formula for success. What favor have the PIGS done for the Germans other than having nice beaches?

How about letting them fail? Moral hazard and all that. Why drag down the rest of the eurozone so they can suffer along with the PIGS?

With all due respect, you don’t make any sense here at all.





This wasn't about Greece. It was about all of southern Europe. Germans wanted these people in the eurozone. I don't see the sense of using it as a machine for serially bankrupting all their partners.

What is it with this US desire to rerun the Great Depression. Wasn't destroying civilisation once enough for you?

Martin Wolf




I still don’t understand what you are saying. What are you suggesting? How did the Germans bankrupt them?

And why do you attack me for asking? And why attack me the basis of something you apparently know nothing about? Make sense of what you are saying and then we can talk about what’s wrong with the world.

And I don’t recall that we destroyed civilization. I believe we rescued it.

I thought it was the Brits and their desire for world colonial domination who destroyed civilizations. Your mercantilist greed from the All Red Route, to India, the Levant, and North America did a hell of a job. You left them with railroads and socialism and look how well your former minions did.

Of course we shook of colonial domination first and put into practice ideals of the Enlightenment so we’re better off. Before I forget, thanks for Locke, Hume, and Adam Smith. We couldn’t have done it without them. Too bad the UK didn’t follow their ideals.

Come on Mr. Wolf. Be serious.



On the rescuing civilisation thing, I am fascinated that so many Americans believe global history started in 1941 (with the second world war).

The Great Depression, which, of course, began in the US led directly to Hitler's arrival in power. He would never have been elected without it.

I have been trying to explain how I view the world economy over many years. If I have failed to explain it to you in tens of thousands of words, I will be unable to do so now. But my basic view is that mercantilists usually force the rest of the world to accumulate ultimately unpayable debts. That is what is happening in the eurozone.

Martin Wolf


You see, it’s just so hard to get any respect these days in a “what have you done for me lately” world. But you should know, as a journalist no one sits at your feet waiting for the next gem of wisdom. Actually in your situation that may be the case so that must be nice. Sorry for not having read all your opinions.

But … there you go again. You attack rather than discuss. I think I know a bit about history, and I thought you would get my “Enlightenment” thing as very pre-WWII history, not something from Timothy Leary in the ‘60s.

And what’s this constant “you Americans” stuff? So now we are now at fault for Hitler? Didn’t know that. Of course, there was Neville the Stout. Whatever. Sorry if you’re prickly about that. You brought up the “civilization” comment and opened yourself up for the dig which I very much enjoyed.

Just curious. Do you think the Great Depression was caused by “capitalism” rather than Hoover and Roosevelt? Hmmm.

I also don’t understand your comment on mercantilists. I was thinking more of Europe’s colonial history or even China today or perhaps Japan 20 years ago.

Are you saying that it is the policy of say, G-7 governments to force the citizens of Greece to buy foreign products and finance them with foreign lenders? Or by the funding of the IMF, sovereigns are forced to borrow for useless infrastructure? (Actually that may be true in some cases.) Or the Greek government is forced by foreign governments to build useless infrastructure projects such as their $15 billion Olympics fiasco and finance it through foreign lenders? Do you see this as a necessary result of free trade?



I didn't think I had said anything particularly controversial about the link between the Great Depression, the rise of Hitler and WWII. It is well known that the Nazi vote soared as mass unemployment hit Germany shortly after the Great Depression hit the US and then onto the world. There is a far deeper point to discuss about the disastrous US role in the world between 1917 and 1941. But that would take much too long.

My reading of the Great Depression is that certainly policy makers made the situation worse but the impetus came from a breakdown in the co-ordination mechanism in the economy. I understand that there is a huge revisionist literature in the US, which says that government caused the Depression. The most plausible element of this argument, to me, is that the Federal Reserve, in response to the fundamental imbalances in the post-World War I gold standard, pursued too loose a policy in the 1920s.

My point on Germany and the eurozone periphery is quite standard international  macroeconomics. I don't feel I need to lay it out at length. If, as I presume, you think  macroeconomics is junk, I will not persuade you. Then both of us will have wasted our time.

I apologise if this is an unsatisfactory reply but it is the best I can do, in the circumstances. I have to move on to other things.

Martin Wolf


This is the second conversation we’ve had and, like the previous one, it didn’t end well. Too bad.

You did imply that we caused the rise of Hitler, and that is controversial. Don’t be coy. I think the role of the U.S. you call “disastrous” was actually fairly good compared to the rest of the world. With a big exception for Smoot-Hawley and the erection of trade barriers that all countries reciprocated and thus international trade collapsed. But, our semi-isolationist policy was fairly good. I suppose one could argue that we should have gotten into WWII sooner. But perhaps the idiots running the UK and France could have intervened when Hitler re-armed and discarded the Versailles Treaty. While I’m not an isolationist, I think our current foreign policy is a disaster, starting with W. Bush.

You are correct about “revisionist literature” regarding the Great Depression. And I’m assuming you are not using the term “revisionist” in a pejorative sense. The literature isn’t new and it’s quite good. I’ve read a lot of it. I was fed the “FDR saved the world” theory in college. Almost everyone taught Paul Samuelson’s book here. Don’t know what you learned at Oxford.

I don’t think it’s really revisionism, but more countering the myth that Hoover was laissez-faire, capitalism failed, and FDR saved us. A different way to look at things is the crash of 1920 vs. 1929. My favorite president, Harding (no relation) did nothing. Even though the market crashed deeper than ’29 and even though unemployment was greater (initially), the economy recovered in 18 months.

I’m not sure what you mean by the breakdown of the “coordination mechanism in the economy” during the depression. If you are referring to pricing, which is the only real economic coordination mechanism that I know of, then it didn’t break down. What “broke down” were Hoover’s interventionist policies that insisted on high wages to increase purchasing power and stimulate consumption (sound familiar?). That led to massive unemployment and a severe depression. He did much more but this was the worst. FDR then took a swing to fascism and central planning which caused the economy to collapse again.

I also agree that an increased money supply pursued by Coolidge led to ’29, but that the depression didn’t have anything to do with gold. Countries abandoned gold so they could inflate their way out of a depression. Going off gold is not what brought about a recovery as many Keynesians believe. The whole argument against gold is one of those post hoc ergo propter hoc things. I think you are assuming that the gold standard was a quaint barbarous relic. Of course I disagree, but I’m not going to convince you of that, and as you say it’s more complicated than this discussion.

I still don’t understand your conventional wisdom view of the eurozone and Germany. I have yet to figure out what you expect the Germans to do. Sorry, maybe that’s my failing.

I can’t let the dig about macroeconomics go by without comment. I assume by macroeconomics you are referring to neo-Keynesian econometrics. You presume correctly: I reject it. I afraid I adhere to the Mises—Hayek epistemological view of how we know what we know. I believe, perhaps stubbornly, that they were intellectuals and, though Keynes was a very bright man, he was an intellectual poseur. I keep hoping I can persuade you to look deeper, but then Hayek never convinced Keynes.

Thank you for the conversation. I don’t think it was a waste of time.



You are an interesting phenomenon. Where do you find the time for all these exchanges?

As I said, the link between the Great Depression and the rise of Hitler isn't controversial. As to your semi-isolationist policy, unfortunately the US imposed an unsustainable peace after WWI and then withdrew. The results were predictable, as Germany overturned the settlement. Again, the impact of the Great Depression on the world had little to do with Smoot Hawley - a conservative myth. It had to do with the collapse of US demand and US bank financing of key European banks. Basically, the US trashed the gold standard. It really would be a good idea to try to view US history from the point of view of others.

I have a lot of time for Hayek. He was a very important philosopher. But, to me, his view of how the economic system as a whole works is theology, not a science. I understand our methodological differences are unbridgeable.

My point on Europe is quite simple. If one country in the system has a large structural current account surplus, its partners must have deficits. This means that the latter must be spending more than their incomes - i.e. selling claims to the citizens of the surplus countries. That worked while the housing bubbles went on. But now the capital importers suffer a chronic shortage of good claims to sell. The result is a collapse in demand and a very deep structural recession.

I do know how you would answer this.

I hope you don't mind if we leave it at that.

Martin Wolf


Thanks, I take that as a compliment. I don’t watch much TV and I have an unending faith in the reasonableness of my fellow man.

A few last points.

Post WWI: We are not on the same page here. As I recall the U.S. was fairly hands off during Versailles.

As to the Depression, I don’t know where you get your data. The best thing I’ve read is Rothbard’s America’s Great Depression. And the U.K. went off gold before the U.S.

I don’t think I’m a flag-waiving jingoist with an Amero-centric view on everything. But I am an ardent free market advocate. My problem is that most people I discuss economics with have no clue about anything other than what they were spoon fed in college or by the media. So I claim a certain amount of intellectual curiosity to be where I now am philosophically.

The fact you could say that Hayek is “theological” along with the Austrian tradition from whence he came, is, with all due respect, a complete misunderstanding of this school of economics. I have read Keynes’s General Theory, and could say it relies on magic.

The zero sum game of current account deficits/surplus is a meaningless statistic. Since the U.S. has been in deficit since the early ‘80s, one would think our GDP would show terrible negative growth, but we all know that isn’t the case.

We also differ on the circumstances surrounding the current crash and the bubble. The problem was not the collapse of demand, but the malinvestment made during the credit boom which was unsustainable. But it had a lot to do with debt.

Thank you again for the conversation. I’ll cut it off. As a present for being patient, I am sending you a PDF of my current analysis of the US economy, which was serialized in three parts. The PDF contains the entire piece. I have a different take on what is going on if you are interested.



Yes, I agree. We are not making progress.

There was a time when I read a lot of Hayek. 25 years ago I thought myself a Hayekian. I would say that I still  agree with quite a bit of it. But I do not accept that it is a complete and final account of the economic system, as true believers do.



The UK went off gold because the US had trashed the gold-standard system.

Martin Wolf


I’ll respond eventually when I have more time. But you have the last word.



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