Economics is the study of scarcity. People have unlimited wants and needs, but unfortunately, there is a limited supply of goods and services. Economics analyzes the constant cycle of financial disappointments that plague the human race. Using these disappointments to their advantage, political leaders have used economics as a tool to sway the minds of the people and gain public support. Speaking with Professor Michela Giorcelli of the UCLA Economics Department, I had the chance to dig into the relationship between economics and politics and analyze one common pattern: the decline of an economy and the rise of radicalism and authoritarianism.
Whether it be Germany, following the every word of Adolf Hitler, a man who promised the German people that he would restore the country’s economic stability, or Americans voting for Donald Trump because they believe his promises to make prices lower, it can be seen throughout history that when an economy tanks, the people generally tend to follow radical and authoritative leaders. Why is that? Giorcelli told me that “there is a pretty well established literature in economics that shows that economic crises are related to polarization. And the thing that mostly comes from crises is uncertainty. And when there is uncertainty, this is bad for economics from multiple points of view. Markets are less stable, and so there is less certainty about return of investments. People start delaying consumption, in particular durable consumption which is not needed or could require more long term commitment. There is less guarantee about the sources of income and sources of employment in the short and in the long term. So polarization is an extreme response to this increased uncertainty that is created in the economy, and historically, all economic crises, most economic crises have been shown to be associated to more extreme radical views of people.” When the economy begins to slow down, the uncertainty that arises causes people to search for someone with the answers. The public wants someone to fix all of their problems, and this causes people to turn to more extreme, radical political leaders, who showcase their power to make people trust their promises of stability and greatness.
According to Giorcelli, this relationship between the vulnerable public and authoritative leaders is a “a very common pattern, and in particular economics, is a social science. So of course, there is an economic foundation theoretical model that we use to estimate what will happen in the future, but there is also a social component that is very hard to predict and could be different across different settings. Also, another aspect that makes economics subject to different interpretations is that we can think about the direct effects of given policies but there is also an indirect effect. Focusing on just a direct effect may lead to some specific conclusions, but also looking at the indirect effects could bring to very different conclusions. And so in the sense, an economic fact that could be induced by different political parties could be just to show that it is good for the economics, bad for the economics, and of course, also in part related to who has implemented these policies.”
One example of this is Adolf Hitler and Germany. Hitler came to power after World War I and this war left Germany in shambles. According to Giorcelli, “World War II started only 20 years after another huge and destructive war, which was World War I. And the way in which countries that lost the war, and to some extent also countries that won the war, was punitive. Like countries that caused the war had to pay reparations. Also, some countries that won the war didn’t see their victory as complete because the negotiation led to a territories assignment that was not exactly what was agreed upon before the war. So I think in that sense there was a sentiment of anger and the need to find an enemy that was very strong.”
Germany, under the Treaty of Versailles, which ended World War I, had to pay billions in reparations. This left the country very financially weak, and most German citizens did not have a stable income, were experiencing unemployment, and suffered financially. At this point in time, Hitler came in, promising economic reform, political stability, and a restoration in Germany’s global power. His promises were able to convince the German people to support him devotedly. However, did he actually follow through with his promises? Giorcelli said that “Germany, at the eve of World War two, had a substantial economic expansion. I think it’s hard to see if it was the consequence of some political decision versus a recovery after World War I. Like the 20s was a horrible decade for Germany: inflation was rampant, unemployment was extremely high. At some point, the economy started getting better. And there was, for sure, a lot of investment in industry, in expanding the production capacity. GDP per capita started growing, and we can see there is a direct influence of the policies that were implemented on the one end. But on the other end, it is also that the economic situation was so bad in the 20s that we can think that the 30s was just a recovery from the consequences of World War I. And so it’s hard to assess without specific studies or specific models, to what extent this was due to policy, and to what extent it was just recovery that all the economies have after a war. Same thing for the US, at some point, after the great depression, there was a recovery. For sure, the New Deal impacted it. But it is also that the economy readjusts itself to some extent, after all big shocks and big crises.”
The few economic policies that the Third Reich enacted and the natural readjustment of the economy seemingly helped the German people, and riding off of this high, they blindly followed Hitler’s orders. Pursuing a war and being part of World War II caused the German economy to decline again. However, the German people did not see it this way. Professor Giorcelli told me there was vast “destruction caused by the war. And of course, in that dimension, propaganda helped a lot like creating enemies or misreporting information coming to the front, so that the population saw the bombing or issues caused by the war as temporary. They saw a victory coming up at some point.” Germans saw victory as the key to greatness. A war, even though it caused the economy to decline even further and caused millions of deaths, was a way to greater power. Professor Giorcelli said that “there was still at least in Europe a strong imperialistic idea, and Germany convinced its own people that conquering other states was the way to establish power. And this was definitely a mistake because if you look at the long term, like most of the colonization period was coming to an end. In the 20s and the 30s is where most independence movements started originating, and so it was definitely very hard to maintain this situation in Europe. There was not a clear understanding that cooperation could have been much more profitable than the fighting. And this understanding was something that was achieved only after the destruction caused by the war per se.” Winning the war meant that Germans would have greater territorial power, a political concept called Lebensraum. If Lebensraum was achieved, the Germans believed that the economy would grow as raw materials would be more available, employment would increase, and land would not be as scarce. The guiding force behind the war and Lebensraum, Hitler and German economic power were tied together. Germans believed you could not have one without the other, and thus saw Hitler as their savior. Needing to get out of the economic crisis they were in, they followed the every word of a dictator.
Something similar is currently happening in a different European country. In Italy, the current ruling party is the Brothers of Italy, a far right party with neo-fascist roots. The party’s emphasis on traditionalism, fascist-leaning ideals, and Italian nationalism is something that is becoming more and more popular among Italians. As an Italian herself, Giorcelli thinks that “there is a misconception of the role of the European Union and in particular of Europe on the economy. Italy, during the 80s until 1992, had an increasing amount of public debt. That was unfortunately not sustainable, but at the time was seen as something good. Everyone could get a pension, everyone could get money for free from the state. Of course, it was not sustainable, but people back then were happy. And then in the 90s, this changed and in the 2000s and so on. This was due to some requirements that Italy had to meet to enter and stay in the European Union and use the Euro. So there is the idea that it was the European Union that caused these financial hardships. But indeed, it was that the debt was too high, it was not sustainable. Also, relating to the fact that the population was aging, many people weren’t working and most people were retired. And so it’s hard to get the same benefits that used to exist. Additionally, Italy was an exporter. And sometimes, there was a strategic devaluation of the currency, which was Lira at the time, in order to make Italian products relatively cheaper compared to the US one, the German one, or the French one. So this increased exports, at least in the short run, but of course, creating inflation, and controlling inflation was one of the big achievements that Italy got with the Euro. Of course, this kind of strategic evaluation is no longer possible today. But what is often missing from the debate is that if it’s true that it is not possible to deal with exports this way anymore, it also means that we are very well protected in terms of imports if the currency is very weak, as the Italian currency used to be. For instance, Italy is an importer of gas and so an increase in gas prices would have been much larger if the currency was weaker, weaker than the Euro. So there is both an export and import situation, and all the debate focuses on the exports, but not on the imports that benefit from having the Euro. And so I think that this kind of economic reasoning, related to the fact that people see themselves worse off relative to their parents. Their parents got more money from the state, got to retire much younger, and so on, could create this kind of resentment towards the European Union and towards parties and the leaders that worked or, like, reached agreements with the European Union.” Political leaders of the Brothers of Italy have brought up reducing the European Union’s influence on Italy, and making Italy more independent of external control. A value that is not present in the left-leaning groups of Italy, such as the Democratic Party of Italy, many Italians who are concerned about their own economic stability, and not the national debt or the price of imports, will turn to the radical, authoritative Brothers of Italy.
Economics and politics walk hand-in-hand with one another. Something that studies the wants of the people, the standard of living, and the way humans interact with each other, economics is used by politicians and political groups to manipulate and gain support from the public, especially when an economic crisis arises. A crisis means uncertainty, in the words of Professor Giorcelli, and this uncertainty leads people to fall into the hands of authoritative leaders who make outlandish promises of stability and restoration.
