Economic Thought in Central Europe

An Interview with Julius Horvath

“I’m a man of the past / and I’m living in the present / and I’m stepping in the future,” sings Peter Tosh in the title track of his “Mystic Man” studio album. I can think of no better definition than this one to describe Julius Horvath’s holistic approach to the field of economics. In his book “An Introduction to the History of Economic Thought in Central Europe,” Horvath starts from old feudal property relations, where myths and stories played an essential role, and then takes us on a journey into the intricacies and development of four present-day countries: the Czech Republic, Hungary, Poland, and the Slovak Republic.

Horvath is a senior professor at the Department of Economics at Central European University (CEU). Unlike far too many university professors, he has a special gift — the ability to defy common sense. Once you start an in-depth exploration of specific topics, it turns out that what you’ve taken for granted so far may not be taken for granted anymore. “An Introduction to the History of Economic Thought in Central Europe” is a perfect antidote against the laziness of common sense. If the European leaders had paid more attention to the economic thinkers examined in the book, who knows, perhaps history would have taken a different course.

Julius, let me start by talking about something that has nothing to do with economics. When I moved to New York in my early twenties, I was subletting in Chinatown for a certain period and was sleeping in the bedroom of the lodger’s daughter, who was away on vacation at the time. There was a map of the world in front of me hanging on the wall that I could look at whenever I went to bed. And this map, something I discovered when I was already 21, didn’t have Europe in the middle; it had the United States. So Europe was east, and Japan and China were west. America was at the center. It makes perfect sense because the world is round, and you can put in the middle whatever you want. But I was used to having Eurocentric maps of the world. For me, it was a huge revelation that completely shattered my worldview. My question is about the title of your book, which refers to Central Europe. Then you speak about Hungary, the Czech Republic, Slovakia, and Poland — all countries I’ve always considered parts of Eastern Europe.

Yes, in the book, I try to support this idea of Central Europe. It does get confusing, I admit it. During communism, these countries were all considered Eastern Europe. Some English and German travellers in the 17th/18th century had differentiated between the West and the rest of Europe. And then, there were differences among the rest of the European countries, but the concept of the West was such that central Europe belonged to the east. The West has been considered more developed in the last 400 years. Traditionally, of course, the emblem of development had been the South. But once the French revolution came, the French began to feel very self-confident, and together with the English, they began to take the core of Europe. England and France became the centre of Europe. One more interesting question is how the Russians, or more precisely how the Soviets, envisaged the East’s borders. No one understands why they left Austria, for example. In 1955 the Soviets controlled Austria, and they just pulled out of the country. From that time onwards, Austria has been a kind of ally of Russia in one way or another. It is not a member of NATO. One can say that the border the communists created was always there; they just basically took the natural border, the natural division line. But others would claim that no, this was just artificial.

The first thing I found pretty surprising in your book is that you consider Ian Hus, Copernicus, and Rosa Luxemburg economic thinkers. I never thought of them that way.

When I teach the history of economic thought in school, I focus a lot on Aristotle because Aristotle has the first definition of money and the functions of money. You can discuss the Old and New Testaments in the history of economic thought because the Bible asks questions about the concept of labor: what is work, and is working something good? Should we work? What does God expect from us?

Work is something bad, let me tell you. In Hebrew, the word for work is avodah and has the same root as avdut, which means slavery. Maybe we should follow the example of Baloo the bear in The Jungle Book movie and content ourselves with “the bare necessities.”

Yes, I have a collection of notes about the different meanings of labor, but I can find you other examples where work is appreciated. I want to say that these could all be seen as economic issues in an inclusive sense, as social issues. Copernicus wrote a lot about money.

Yes, that was a fascinating part of your book.

But other people too. For example, a group of monks in the Spanish city of Navarra first created a so-called quantitative theory of money because they observed that so much gold was coming into Spain. Yet Spain wasn’t getting richer by any means. It was like increased money supply transferred itself to rising prices, and — as we say — money began to chase the goods because the Spaniards were relatively not very productive. Interestingly, the English, who were not so well-off, got ahead of Spain, even though Spain had a lot of gold.

Which period are you talking about?

When Columbus made his discoveries at the end of the 15th century. In the 16th and 17th centuries, a lot of gold came to Spain from Peru and other places. Spain was obsessed with gold. The Navarra monks were observing an important economic phenomenon.

In the first pages, you seem to argue that there was a lot of reliance on agriculture and superstition in an earlier period. You even quote the Latin poet Virgil as if to say that we shouldn’t rely on superstition. May I suggest that old wisdom is not that bad after all if you cultivate the land and grow crops? In ancient times they used to believe that fields needed a sabbatical, land needed to rest after seven years, and it all makes perfect sense to me.

Maybe you’re correct; I need to reword that because I have a favorable view of superstition. I agree with Friedrich Hayek when he said that the 20th century is as superstitious as anything that came before: for him, Marxism is superstition as well as psychoanalysis.

I remember a quote by the American banker J.P. Morgan who said that “millionaires don’t believe in magic, but billionaires do.”

That’s very precise. You can theoretically explain how somebody gets a million, but nobody can explain how some financiers made billions from nothing. There is no theory for that. That’s a good point, yes.

You write that it took scholars a long time to become fully aware of the modern concept of economy. In your opinion, when does the contemporary idea of the economy start? When does economics become a science?

That’s very interesting. Several scholars have already pointed out that the ancients were writing about mining, money, trade, labor, and agriculture. But nobody thought until maybe the 17th/18th century that all these things together are economics. That’s something new. People explain that there was much less market interdependence before. Things were not connected across a larger territory. Modern economics comes from the 18th century, or maybe a little earlier when people began to write about that as an independent field from politics and other societal studies.

You focus a lot on Michal Baludjansky, who dealt with the issue regarding stocks of grain, and I think this topic has become very relevant nowadays. Currently, we are witnessing a big wheat crisis. Ukraine is considered the granary of the world. But if a non-professional like me looks at FAO statistics, he discovers that Ukraine is not the first producer of grain in the world. Other countries produce larger quantities. Moving slightly away from your book to the current scenario, why is Ukraine so crucial?

Do you remember which countries were ahead of Ukraine in the FAO statistics?

I don’t, honestly. I remember Germany produces almost as much as Ukraine. Maybe before them came the United States and some South American countries too.

The United States for sure. Ukraine and Russia are both vital when it comes to grain. They are big exporters. Lots of countries depend on the import of grain. The U.S most likely produces a considerable portion of it. Still, it can only export a small part, while Ukraine and Russia are supporting some of the populous countries in Africa and Asia.

The fact that Ukraine and Russia have become important exporters is a fantastic success of capitalism because, during communism, the Soviet Union was an importer of grain. And every year, grain was lacking, and then they were selling oil, gas, and nickel to bring grain so that people wouldn’t starve. Now they are big exporters. It means private agriculture in these countries works much better, at least compared to communist agriculture.

While reading about Marton Schwartner and the Austrian empire, I was reminded of a writer I used to like when I was younger: Joseph Roth, author of The Emperor’s Tomb. In his opinion, the collapse of the Austro-Hungarian empire was a catastrophe for Europe. Does that have anything to do with Schwartner?

Schwartner (1759–1823) was much earlier, decades before the collapse. He lived in Budapest and belonged to this super-educated class of scholars. He came from a German family in what is today Slovakia. He was a very great scientist.

I do share the view that the collapse of the Austrian monarchy was a tragedy. Of course, many people would not agree. Hungarians would, but Czechs and Poles wouldn’t because they received independence. And that’s fine. But if you think about the death toll in the 20th century, that would have been unthinkable at the time of the empire. The monarchy was split into small, unimportant countries, and there was nobody anymore to protect them. Europe would be different, in my opinion, had the monarchy survived. The monarchy was comparable in size and population to Germany. It was part of Romania, part of Croatia, even part of Italy, all of Hungary, the Czech Republic, Slovakia, Austria, a large part of Poland, and a part of Ukraine. So, it was a tragedy at the time.

What is the difference between the modern concept of economics and the concept of political economy?

The word economics appeared for the first time around 1880. People liked that it sounded like physics, mathematics, and so on. Before that, it was known either as the national economy or as the science of political economy. Except for very small schools, at universities today, you don’t have a department of political economy. You have political science and economic science as independent fields that basically speak almost about the same things. University life has brought about a subdivision of social sciences. You have sociology, political science, economics, anthropology, and other fields. The unified field of social science has been divided into different parts. The big thinkers, however, disregarded barriers. They were sociologists, economists, and much more because they spoke about society as a whole. Political economy is a very national thing.

After talking about grain and agriculture, the turning point probably comes with Gyula Kautz, who first introduced a strong emphasis on industry. Is there a turning point there?

Today if an economist in Central Europe dies, it doesn’t get mentioned much in the leading economic newspapers of the world, maybe only Kornai made a difference. When Kautz died in 1909, people wrote extensive obituaries in England and elsewhere. He comes from the golden era of Hungary following the creation of the Austrian-Hungarian monarchy in 1867, which generated a fantastic boom in Hungary, mainly in Budapest. That’s why Budapest is so beautiful even today. Budapest began to be very liberal, very open to business. It got Jewish immigrants from different places. That was the golden era of Central Europe before WWI. There’s a footnote in my book about Professor Judt, who says that all this talk today about Central Europe is nonsense because central Europe was great in the past. It was great primarily thanks to the Jewish and German populations, which were both kicked out of these lands; for him, it’s not very interesting anymore. He says that all this talk about Central Europe is bogus. It indeed used to be a more vital place. Some people would argue that between 1880 and 1920, everything important in the world was created in Budapest and Vienna, from art to science. Lots of great American scientists were born here. Many emigres from these lands contributed in fields like physics, mathematics, and economics.

The people from Prague inaugurated the first Lennon Wall, didn’t they? A long wall filled with graffiti inspired by the Beatle John Lennon. During the communist era, it was a place where people could protest anonymously with paintings and messages. More Lennon Walls have appeared in other cities as well, such as Hong Kong and Toronto.

Yes, I remember it because I was working there in the 1980s, and for a while lived at Kampa. The communist party kind of controlled the Wall, but they allowed it. There were some very astute observations there. Jan Werich made one of them a part of the Czech language culture. It goes something like this: “look how similar these two twins are, particularly one of them!” These John Lennon songs against war — “Imagine” and “Give Peace a Chance” — had a considerable influence.

Please allow me a brief excursus into rock music and literature. In 1963 the Soviet-dominated Czechoslovakian regime had briefly allowed the release of The Freewheelin’ by Bob Dylan, an album that openly spoke about freedom. The state secret police, however, immediately rectified matters by imposing a withdrawal of the record from the market. Too late. Secret copies started to circulate among fans of Western music and local bands who played the songs in dark and dingy clubs across the city, recounts Leigh Banks in an article about Jan Sestak, the DJ from Prague who had translated Dylan’s lyrics for the benefit of the dissident community (the article is called “A Hard Reign Was A-Gonna Fall After Dylan Cost Music Bosses Their Job”). And perhaps not everybody knows that Philip Roth did a lot for the Czechoslovakian struggle against their oppressive regime. His first visit to Prague had only cultural connotations. He just wanted to visit the place where Franz Kafka had lived. Little by little, however, he started to feel at home in Prague. His stays became more frequent as he increasingly got in touch with dissident artists. He met Milan Kundera, Ivan Klima, and even Václav Havel, who then wrote absurdist plays with political overtones for the theatre. They say that novelists are good with words but not particularly inclined to act concretely. Roth belied this banal stereotype by creating in the United States two influential fundraising initiatives called “Ad Hoc Czech Fund” and “Writers from the Other Europe.” Amid countless difficulties, the latter remained up and running until Havel’s victory in 1989. That same year, Lou Reed published “Dime Store Mystery,” a song dedicated to his mentor of Slovakian origin, Andy Warhol, who had recently passed away. In that fateful year, 1989, Václav Havel’s movement had finally liberated his country from the Soviet dictatorship with a peaceful overthrow known as the “Velvet Revolution,” whose name had been inspired by the rock band The Velvet Underground founded by Lou Reed and John Cale in the ’60s, under the auspices of Andy Warhol’s Factory. Havel had already served five years in prison for dissent and made it through thanks to his daily reading of Lou Reed’s lyrics while biding his time in jail. This was a momentous occasion in the history of rock’n’roll. In 1989 Lou Reed suddenly became aware that his songs dedicated to social outcasts — prostitutes, transvestites, freaks, and junkies on the verge of suicide — had helped change the world. From that enlightening moment on, he made it his mission never to allow anyone to underestimate or discredit the literary importance of rock lyrics. He decided it was high time he took himself and his audience with the seriousness they both deserved. Pop music was never meant to be mere entertainment. After his presidential appointment, Václav Havel invited Lou Reed on an official visit to Prague to reiterate how much his art had contributed to the success of the Velvet Revolution. Julius, economics and sometimes even music can change the world, don’t you think?

You are correct; art generally is forceful. I was, for example, influenced much in my thought by the artists such as Czech Jan Werich or Hungarian Hofi Géza, who could be seen as humorists, but they were kind of applied philosophers and commentators on life. Also, recently I was at a lecture by Peruvian Mario Vargas Llosa, another great artist, who explained to students the power of literature in forming and changing societies.

Let’s move on. In the book, you deal with the problem of hyperinflation by mentioning Weimar and what led to WWII. Let’s talk about contemporary stuff; we’re facing a new type of inflation nowadays. What is the difference between now and then, and what are the dangers? Do you see any similarities?

For hyperinflation, you need societal upheavals, at least a civil war or a war between countries. Hyperinflation happened in the early 1920s, after the war. During wars, prices are frozen. Of course, there is always some black market, but officially prices stay the same. Germany fixed the prices around 1937/1938 and remained that way until 1946.

Very interesting.

When you go to war, there will be a lot of pressure on the people, so one of the things the leaders do is print a lot of money which would trigger inflation, but they freeze the prices. With that money, they pay the soldiers and the military costs.

When you say they print the money, is it similar to what Mario Draghi did with the quantitative easing, printing lots of money?

Something similar, but Draghi had the credibility and belief that he would protect us from inflation while no central banker coming out of WWI had this credibility. Regarding timing, “whatever it takes” was a remarkable statement; it will make him eternally famous. This sentence will be in textbooks a hundred years from now.

It will.

But WWI was a shock to our civilization. Isn’t it puzzling? We teach that from 1870 to 1914, it was a golden period for almost all of Europe, especially Central Europe. Then during this golden period, they all begin to wage war against each other. In July and August 1914, there were celebrations about the beginning of the war in every city. Then the Ottoman Empire collapsed, the Austrian empire collapsed, the Prussian empire collapsed, and the Russian empire collapsed too. The world changed completely.

But there are some similarities with today.

The ideological differences between the left and right in every country, especially in the U.S., are so extreme that some people believe it’s almost like a civil war. If it were something like that, then hyperinflation would come. Hyperinflation reflects uncertainty in society, where everybody who sells protects themself by increasing prices. But first, you need considerable uncertainty. And now it is not like that.

You talk about Alois Rašin, who believed in gold as the standard. My question has nothing to do with gold. I keep hearing about people who believe in bitcoins and claim that gold is obsolete; it belongs to the past and should be replaced by bitcoins as the new standard. What do you make of it?

First, a few words about Rašin: he created the stability of the Czechs. Since 1918 the Czech currency has been the most stable currency in Central Europe, comparable to the Swiss Franc and the Deutsche Mark. When hyperinflation came after WWI in Warsaw, Berlin, Vienna, and Budapest, it didn’t come to Prague.

A sort of miracle.

Now, in my opinion, bitcoin is a bubble. Until now, money has always been controlled by power. Bitcoin would decentralize that. Today the aristocrats of the world are in charge of commercial banks who can go to the central bank and get the best loan possible. That’s aristocracy. They give the money to others as credit with a higher interest rate to have profit. I would be happy to go to the central bank to get one million euros and then give it to other people for credit, but the central bank will never give it to me. It would help if you had a commercial bank. So, bitcoin would kill these arrangements, and there would be many advantages because people would transfer the money immediately. But power does not belong to the bitcoin people; that’s the most important thing. And since there is too much liquidity in the world, people with free liquidity can invest it in different ways — old manuscripts, nice cars, you name it, and bitcoin. At a particular point, bitcoin was going up and up, but that was mostly speculation. I feel that the central banks, the ministers of finance, and the influential people until now don’t vote for bitcoin.

There’s no way bitcoin can replace gold, you mean.

Nor replace the dollars. Of course, I know that in El Salvador, they tried to introduce it.

It didn’t go well, as far as I know.

It wouldn’t have gone well with bitcoin and without bitcoin. It is a fantastic thing, but it has one weakness, like gold, which is that there is supposedly a limited amount of bitcoins.

I think they can only mine up to a certain point.

That was one of the reasons why we abandoned gold because there was never enough gold to support the economy. We left gold in 1970. We haven’t had gold in the last 50 years, no golden currency anywhere, and one of the reasons was that there was not enough gold while trade was growing, say, by 10% per year, and gold supply was growing a half percent every year. There was not enough money.

Do you need unlimited access to this source to find a new standard?

Not unlimited but such that it would not put any restraint on trade.

Elemér Hantos believed in the importance of Central European institutes. Did he imply only the central European nations, or did he have a broader perspective regarding the whole of Europe?

Hantos lived after WWI when the Central European countries had utterly closed their borders. There was almost no trade between Czechs and Hungarians, very little, especially from 1921/1922. They hated each other. If you look at the humor at the time, they were all making fun of each other, the Czechs of the Austrians, the Slovaks of the Hungarians. The monarchy had collapsed. Before, satire was not allowed because they had to respect the rulers, i.e., Austria. Now they didn’t have this pressure any longer. There was a strong wave of super nationalism after the breakup of the monarchy. Hantos was a person who tried to say no, let’s have independent states but let’s try again to make some political cooperation. We’ll be together, trading together. Otherwise, Germany will lead us, or Russia. And he was right. First came Germany, then Russia.

His target was what I call Eastern European countries, not Europe in its entirety?

He was part of this Kalergi organization led by the Austrian aristocrats who wanted European integration. This is complicated as there was a period, after WWII, when integration was not good to mention because Germany wanted to integrate all of Europe under Germany.

I’m going to put together two people now. One is Ota Šik, the other one is János Kornai. It’s as if these economists understood that socialism and communism were limited. Šik talks about the “third way.” Kornai tries a reform without abandoning the socialist order. This gets very interesting because you cannot go against the empire, against the USSR, but you understand that things need to change. You need to be diplomatic and have a consistent economic policy, and these two people, from what you write, actually managed to achieve that challenging goal.

Yes, they were highly gifted people. Ota Šik was a Czech. He was in a concentration camp with the future leaders of communist Czechoslovakia. He joined the communist party. When he began the reform, the orthodox communists did not stop him because they had complete confidence in him as a good communist. He had been with them in the camp; they had helped each other in dire circumstances where it was a question of life and death. He became extremely popular in the Czech Republic. He was invited to television shows and spoke about socialism being better than capitalism but advocated a type of socialism different from the Soviet model: the “third way.” He did not say it explicitly, but his message was that the Czechs are an industrial nation. Until 1966/1967, Moscow endorsed him. But in 1968, many artists such as Havel and Kundera, and others, began to speak against communism. The communists got scared. When the Russians invaded, Šik ran away from Czechoslovakia. He went to Tito, asking for protection. After that, he settled, lived, and died in Switzerland. János Kornai, on the other hand, is an intellectual superstar. He died last year.

You knew him personally?

Yes, I did. He used to come to the school. He was pure talent. He got a professorship at Harvard University without having a Ph.D. He just wrote a paper and sent it in, they read it, and that was it. He created this concept of a shortage economy which had some influence here but had a considerable impact in China. The Chinese communists began to invite Kornai when the Soviets began to do some propaganda claiming there were no shortages in communism. In a certain way, there were no shortages. Take dresses, for instance. The Soviets would say, “okay, we will produce this year 300 million dresses, and we have 100 million people.” This means there is no shortage. But people didn’t like those dresses. They probably wanted more sophisticated, nicer, dresses.

Communist countries produced more cement, steel, and things than the West. But not as consumer goods. The Chinese got that, and they began to invite Kornai. Kornai is one of the distant fathers of Chinese reform. He went to visit the top leaders of China. Chinese just went down with the price at the beginning. How would you otherwise go to the Western markets and begin to sell consumer goods? They needed to have cheap products. And after twenty years of being cheap, they started to improve the quality.

Serendipitously, my next question was going to be about China. Oskar Lange gets mentioned in your work as the introducer of the concept of government planning. While reading your chapter, I was thinking about China. I never really understood how you could explain the Chinese system. Is it both capitalist and communist?

This is a challenging question to answer. The success of China shows that maybe the understanding of communism was not correct in the West or even here in Central Europe. Soviet communism did not work. But the Chinese began communism later, in 1949. In the beginning, they were as brutal as the Soviets used to be under Stalin, but then what maybe had a significant influence on the Chinese leadership was that in Hong Kong, Taiwan, Singapore, and Malaysia, the Chinese were able everywhere to create very successful economies. Not in the People’s Republic, though. So, the communists observed that. Deng Xiao Ping indeed detected a sort of supremacy of the Chinese people. And then, he created a reform that did not follow the textbook of what we teach. He used a completely different approach. His reform was based on agriculture, where he thought the capitalist spirit exists, in the villages, not among the working class. The ideological working class was supposed to be pro-communist, while the agricultural people were supposed to be backward. He changed that. He gave farmers a kind of freedom. I have just read a study from Harvard comparing China with the U.S., and today China is ahead already of the U.S. technologically. Where China is lagging behind is that the talents of the world go to America, they don’t go to China. China has only thousands of people who were not born in China. Today the U.S. has a dozen million Americans who were not born in the U.S. A lot of them, of course, are ordinary people. Still, many are engineers, mathematicians, and business talents, especially Indians, Pakistani, Russians, Brazilians, South Africans, and others who leave their country for the U.S. to create companies and do excellent work. If you think about the big companies, most of them were founded by foreign-born. The U.S. attracts people, and China is still unprepared to attract foreigners.

Last question. I have an anecdote to tell you. Before Covid, I was asked to be an interpreter for an agency in Rome that created business opportunities for Italians who wanted to start a company in Poland. They considered Poland the new El Dorado, the new source of success. I remember there was a long queue of entrepreneurs and each one came to speak with this Polish agency, one guy who wanted to open a hospital, another who wanted to print credit cards, another who wanted to export wood, and so on. I had to translate all these ideas simultaneously. It looked like Poland was the new emerging market. Is it still that way? Why is it so? Is it because the EU injects money into Poland, or is it because the U.S. is gambling on Poland like they were gambling on Italy at the beginning of the Cold War? Is this Polish boom something stable, or is it just a fashion? Why is Poland so much the new star?

Maybe Poland is not the new star, but Poland is a big country, with 40 million people. Poland is the only country in Central Europe investing a lot to attract tourism. Poland is also important in the U.S., with large Polish communities. The Chicago community is the most famous. Of course, they are Americans but keep a certain kind of Polishness. They may even be third-generation immigrants. If you go to a Polish cemetery in London, you will notice in the tombs that they keep their letters and spelling according to proper Polish grammar. Czechs, Slovaks, or Romanian change their name to an English spelling version. The Poles keep a strong national sentiment. Their economy is growing dynamically, but they have a considerable anti-Russianness and anti-Germanness due to historical reasons, which is less typical of other Central Europeans. The other countries don’t have such a strong sense of belonging.