The danger of ideology
By Richard S. Grossman
What do the Irish famine and the euro crisis have in common?
The famine, which afflicted Ireland during 1845-1852, was a humanitarian tragedy of massive proportions. It left roughly one million people—or about 12 percent of Ireland’s population—dead and led an even larger number to emigrate.
The euro crisis, which erupted during the autumn of 2009, has resulted in a virtual standstill in economic growth throughout the Eurozone in the years since then. The crisis has resulted in widespread discontent in countries undergoing severe austerity and in those where taxpayers feel burdened by the fiscal irresponsibility of their Eurozone partners.
Despite these widely differing circumstances, these crises have an important element in common: both were caused by economic policies that were motivated by ideology rather than cold hard economic analysis.
The Irish famine came about when the infestation of a fungus, Phythophthora infestans, led to the decimation of the potato crop. Because the Irish relied so heavily on potatoes for food, this had a devastating effect on the population.
At the time of the famine, Ireland was part of the United Kingdom. Britain’s Conservative government of the time, led by Prime Minister Sir Robert Peel, swiftly undertook several measures aimed at alleviating the crisis, including arranging a large shipment of grain from the United States in order to offer temporary relief to those starving in Ireland.
More importantly, Peel engineered a repeal of the Corn Laws, a set of tariffs that kept grain prices high. Because the Corn Laws benefitted Britain’s landed aristocracy—an important constituency of the Conservative Party, Peel soon lost his job and was replaced as prime minister by the Liberal Party’s Lord John Russell.
Russell and his Liberal Party colleagues were committed to an ideology that opposed any and all government intervention in markets. Although the Liberals had supported the repeal of the Corn Laws, they opposed any other measures that might have alleviated the crisis. Writing of Peel’s decision to import grain, Russell wrote: “It must be thoroughly understood that we cannot feed the people. It was a cruel delusion to pretend to do so.”
Contemporaries and historians have judged Russell’s blind adherence to economic orthodoxy harshly. One of the many coroner’s inquests that followed a famine death recommended that a charge of willful murder be brought against Russell for his refusal to intervene in the famine.
The euro was similarly the result of an ideologically based policy that was not supported by economic analysis.
In the aftermath of two world wars, many statesmen called for closer political and economic ties within Europe, including Winston Churchill, French premiers Edouard Herriot and Aristide Briand, and German statesmen Gustav Stresemann and Konrad Adenauer.
The post-World War II response to this desire for greater European unity was the European Coal and Steel Community, the European Economic Community, and eventually, the European Union each of which brought increasingly closer economic ties between member countries.
By the 1990s, European leaders had decided that the time was right for a monetary union and, with the Treaty of Maastricht (1993), committed themselves to the establishment of the euro by the end of the decade.
The leap from greater trade and commercial integration to a monetary union was based on ideological, rather than economic reasoning. Economists warned that Europe did not constitute an “optimal currency area,” suggesting that such a currency union would not be successful. The late German-American economist Rüdiger Dornbusch classified American economists as falling into one of three camps when it came to the euro: “It can’t happen. It’s a bad idea. It won’t last.”
The historical experience also suggested that monetary unions that precede political unions, such as the Latin Monetary Union (1865-1927) and the Scandinavian Monetary Union (1873-1914), were bound to fail, while those that came after political union, such as those in the United States in 18th century, Germany and Italy in the 19th century, and Germany in the 20th century were more likely to succeed. The various European Monetary System arrangements in the 1970s, none of which lasted very long, also provided evidence that European monetary unification was not likely to be smooth.
Concluding that it was a mistake to adopt the euro in the 1990s is, of course, not the same thing as recommending that the euro should be abandoned in 2014. German taxpayers have every reason to resent the cost of supporting their economically weaker—and frequently financially irresponsible—neighbors. However, Germany’s prosperity rests in large measure on its position as Europe’s most prolific exporter. Should Germany find itself outside the euro-zone, using a new, more expensive German mark, German prosperity would be endangered.
What we can say about the response to the Irish Famine and the decision to adopt the euro is that they were made for ideological, rather than economic reasons. These—and other episodes during the last 200 years—show that economic policy should never be made on the basis of economic ideology, but only on the basis of cold, hard economic analysis.
Richard S. Grossman is a Professor of economics at Wesleyan University in Connecticut, USA and a visiting scholar at Harvard University’s Institute for Quantitative Social Science. His most recent book is WRONG: Nine Economic Policy Disasters and What We Can Learn from Them. His homepage is RichardSGrossman.com, he blogs at UnsettledAccount.com, and you can follow him on Twitter at @RSGrossman. You can also read his previous OUPblog posts.