Chapter XI THE PSYCHOLOGY OF MARK AND PFENNIG

‘IF WE ARE SUCCESSFUL in changing the economic attitude of the population by psychological means, then these psychological changes will themselves become an economic reality, and so serve the same purposes as other measures of economic policy taken so far.’ In this sentence, spoken on behalf of the Federal Government in the first economic debate in the Federal Parliament on October 19, 1955, in Berlin, I expressed a fundamental principle. And it is this which has led me to use psychology as an instrument of equal worth to those well-known methods of traditional economic policy.

From a purely theoretical standpoint, this method of exerting influence on the participants in the market during the boom, at the same time as an attempt to influence prices, may not quite fit into the usual type of market economy. But I can see no reason why I should forgo this aid for purely doctrinaire reasons.

I have often been accused of being too true to a system. Therefore I should not be criticized if, as a political economist, I deviate on occasion from the ‘ideal’ of the economy. In my view, I do not offend against the market economy in its proper sense. It is a simple question of economic psychology: economic events are not guided by mechanical laws. The economy does not lead a life of its own like an automaton, but is fashioned and applied by man. If that is so—and surely it cannot be doubted—then the whole structure of the economy will have to change considerably according to our actions and attitudes. So the consequences of the methods of psychology must not be underestimated.

Against this general background the objections of orthodox liberals, who would work exclusively with classical methods, cannot be entertained. The ultra-liberal critics must not worry over my lack of loyalty. I might even go so far as to state that the methods which I have mentioned here have been neither appreciated nor applied enough in theory and in economic policy.

Modern psychology demands precisely that the national economic process be not merely considered in the technical sense. It is equally important that the human beings who animate this machinery be included in national economic calculations. How we ourselves act is of decisive importance for the trend of the economy. Whether we are optimistic or pessimistic, whether we speculate on a boom or on a slump, whether we want to save or to consume, all this is expressed in economic statistics. In turn, these statistics, in the form of lower, stable or rising prices, colour our actions.

It would be wrong to suppose that the idea of psychological influences had only been discovered in recent times with the boom and full employment. If in recent years I have been criticized by some sceptics because I have left my desk to deliver speeches all over the place in a far from bureaucratic manner, I have done so for just these reasons. Nevertheless these reflections have only in recent times found proper expression or systematic use. I am convinced that the psychological campaign which I have conducted will in future become indispensable as an instrument of economic policy.

It may well be too early to compile a text book of systematic psychological guidance for the economy. In the next ten years, when more experience has been gained, economic science may well produce such a volume. However, I must make the point here and now that the world would react unfavourably to any attempt to appeal to its moral sense.

Naturally in turn this is not meant to imply that I consider the economy and the economic activities of people as perhaps amoral. But there is no sense in appealing to the people if they feel that they are meant to make sacrifices for the sake of a Minister or the Government. Above all, the people must be made to understand that to follow the voice of good common sense and of economic reason will, in the long run, result in their benefit.

Permanent Boom

An appeal must be made to the self-interest of all those who, during the boom, have nothing to gain by selling their labour or goods at a higher price if, in return, all the advantages so gained have to be paid for by higher prices. In this way everyone loses, for this sort of reciprocal climbing of prices on top of wages, and then wages on top of prices, destroys any kind of economic order and the power to compete.

This view once made me declare that I did not intend to put up a roll of honour for those obeying my well-meant recommendations. If in past months workers and trade unions have repeatedly been warned by me to be moderate and disciplined, it was in their own interest. Similarly I also called upon businessmen to oppose wage increases that went beyond the limit of possible progress in productivity, which is not incompatible with keeping prices stable.

I attach importance to relying on people’s understanding and honesty, for we want to enjoy the boom, and not return to the automatic economic cycle with all its disadvantages. Since preventing this danger must be our major task, I have repeatedly demonstrated that, if people deceive themselves by wanting to seize every personal opportunity, they are sure to lose more than they could possibly gain. If, on the other hand, men show themselves to be up to the task of the hour, then I am convinced that the happy position of the boom can be maintained without inflationary trends.

From this it will be clear that I applied, during the boom and the so-called full employment experienced in Germany since about the middle of 1955, the psychological principles that I have advocated. The biggest danger threatening the boom and economic progress does not—as is sometimes said—lie in too great an exuberance of materialism. My belief is that the threat of illusions nourished by demagogues should be taken far more seriously.

Increasing demands which, if they were to be met, would soon lead to a fatal inflationary development are based on a totally unrealistic conception of the nature and function of the national economy. For that reason it has to be said repeatedly that the inner connection between consumption, savings and investment is rarely completely understood.

Apart from political delusions which find expression in the so-called ‘active wages policy’, the connection between wages and prices cannot seriously be denied. The game that has now gone on of first higher wages and then higher prices proves either that this knowledge has not taken proper root, or that it is submerged by political considerations.

Our success in making people aware of the relationship between work and productivity, and between wages and the standard of living, and in acting accordingly, will determine whether we can face the future either with confidence or with apprehension. At this stage of economic development there is no cause for considering our economy as unhealthy. The disturbing influences, in my view, come entirely from inappropriate attitudes to what is economically possible.

For the sake of thoroughness it should also be mentioned that, besides the dangerous overestimation of the real possibilities, the boom is here and there regarded as a suitable platform to acquire economic power by unscrupulous means. In such cases any attempt to influence trends by psychological methods is bound to founder. Here massive counter-attacks will have to be launched.

The Nightwatchman State Belongs to the Past

I have already dealt with those critics who believe that it is impossible to combine modern psychology as one instrument of the contemporary political economist with the conception of the market economy in its classical form. Such a mode of thinking stems from the virtually outmoded Manchester School liberalism. I am unwilling to accept without reservation and in every phase of development the orthodox rules of a market economy according to which only demand and supply determine price, so that the political economist has to refrain altogether from interfering in price matters.

My views on this are fundamentally different; a modern and responsible State cannot afford to return to the role of the night-watchman. It was precisely this wrongly understood freedom which buried freedom and a free order. Such an attitude is all the less justifiable today, since, without a truly free world market and freely convertible currencies, the function of international prices is not in full play, and thus does not act as a healthy regulator in world-wide competition.

If the relationship between the classic method and the new political economic instrument of psychology has to be explained, it can be done very simply. I want to explain it by reference to existing conditions within the Federal Republic.

The Bank Deutscher Länder, as well as the Federal Government, are responsible for securing the stability of the currency. So I wish to achieve exactly the same end as the BDL does through its monetary, credit and currency policies. In reference to the so-called overheating of the boom, I commented at the opening of the German Industrial Exhibition on September 24, 1955, as follows: ‘If you want to put it that way, the Bank Deutscher Länder and I are running a race.‘The usual economic, financial and currency measures aim at influencing the trend of events in a definite direction. If, through psychological methods, I succeed in changing the attitude of people, I shall succeed in re-grouping data and facts in a manner which I regard as economically sensible. Whether people act differently owing perhaps to their being forced to do so by the policy of the Central Bank or whether they do so from a realization of their own interests is in the final instance unimportant. So we are not dealing with a polarity, an enmity between two different methods, but with two complementary means. Those who—as I do—value common sense as the strongest force, will be confident that in the future methods of psychological persuasion will find their place in economic policy as an instrument of freedom.

In this careful evaluation it must be remembered that in the contemporary social economic progress not only individuals but, above all, groups, determine events. To me it thus appears to be all the more necessary to communicate ideas and knowledge, to awaken good will and to appeal to common sense in order to help economic good sense to win through.

I regard it as a special advantage that psychology can be used in an early stage of any danger that might threaten. For example, I was able to state at the beginning of the boom, and the Bank Deutscher Länder agreed, that, so far, not the actual price level, but only the price climate had deteriorated. At that time to have intervened with firm traditional measures would have been precipitate, unless one had wished to slow down in the early stages that favourable economic trend which was rightly called a boom. Clearly we were then dealing with a psychological phenomenon. The danger does not threaten from the boom as such, but from a false evaluation of its chances and possibilities for material gain. It was not the economic trend but man who created difficulties. Nothing has materially changed in this situation since then.

Price Consciousness v. Inflation

In this psychological campaign for economic reasoning I have not limited myself to gaining supporters at large meetings only. I have also tried in many talks with individual branches of the economy to mobilize forces to prevent a too heavy increase in prices. Since the autumn of 1955 I have taken part in several such talks. The public knows only of a few of my efforts— perhaps that of keeping coal prices within reasonable limits or of my attempts to postpone by several months a rise in the price of pig iron.

The aim of such discussions was always the same: I wanted to create an atmosphere in which every purchaser would consider whether the price of the goods he wanted was reasonable, and in which everyone making or offering goods would once more ascertain whether his price really corresponded to the need to keep the price structure stable, and thus the security of our whole economy.

It can be justly doubted whether I have succeeded in achieving this aim completely. But it must be taken as proved that without these many attempts we in Germany, as in all other European countries, would have had a higher level of prices than in fact we have.

In this connection a glimpse at the actual trends of the cost of living will suffice.

Price Index for the Cost of Living
(Average Consumer Group (1950=100))

June 1950	99		June 1954	108
Dec. 1950	101		Dec. 1954	110
June 1951	108		June 1955	109
Dec. 1951	112		Dec. 1955	112
June 1952	109		June 1956	113
Dec. 1952	110		Dec. 1956	114

In brief, my aim is, through constant talks about prices, and through repeated public statements, to prevent the eruption of an economic sickness and to localize any crisis. In such an unstable situation price trends have to be mentioned daily, so that people might become immune to an epidemic of wild price increases. It is not a case of faith-healing for the German economy. Far from it. But I must repeat once more: the attitude of the people is and remains decisive.