In the Shadow of the Old Bundestag

At least on the surface, Germany is the last place you’d go to think about the economics of global integration. The nation seems hung-over from its miraculous reunification a decade ago, diminished by the growth in the membership of the European Union (ten new members on May 1), and, according to both the national and international press, feeling generally blue after a decade of slow growth.

There has been a rash critical of self-appraisals. Earlier this month, former Chancellor Helmut Schmidt told the weekly Die Zeit, “There is almost no area where Germany stands out in its achievements.”

A small but interesting signal of Germany’s desire to change was the appointment earlier this month of an American, Dennis Snower, to head the Institute for World Economics in the little Baltic port city of Kiel.

Snower, 53, a labor economist, is best-known for his body of work with Stockholm University’s Assar Lindbeck on the distinction between insiders and outsiders in job markets. Since 1980, he has taught at Birkbeck College of the University of London.

Kiel is perhaps the proudest of six German economics institutes, each of them working in a slightly different tradition of applied economics going back, in Kiel’s case, as far as 1913. The United States’ National Bureau of Economic Research, which now dominates applied economic research, was founded, in part, in imitation of its success. And in the years before World War II, Kiel enjoyed a global reputation, playing host to the mathematical economist Wassily Leontief in his flight from the Soviet Union, among others.

Economist Herbert Giersch was Kiel’s best-known figure in the years following Germany’s post-war Wirtschaftwunder. After 1968, he helped devise its Ordnungspolitik, when growth could no longer be taken for granted. He retired in 1989. In recent years, however, the Kiel Institute has been eclipsed by a torrent of high-quality work from the University of Munich’s Center for Economic Studies, much of in organized by the public finance economist Hans Werner Sinn. Snower visited Kiel last week and pledged to restore the Institute’s lost luster.

Less noticed was Martin Hellwig’s decision in February to sign on as co-director of the Max Planck Institute on Collective Goods in Bonn, leaving the University of Mannheim. The project had been without an economics section since its inception eight years ago.

Hellwig, 55, learned his economics in the early 1970s at the Massachusetts Institute of Technology, and taught at Princeton, Bonn and Basel. He is serving his second four-year term as chairman of the Monopolies Commission, a part-time antitrust commission that advises the government. He is the current president of the Verein für Socialpoitik, the German-speaking economics association, having served as president of the European Association a dozen years ago.

Along with Giersch, Nobel laureate Reinhold Selten and mathematical economist Werner Hildenbrand (both of the University of Bonn), he is one of four Germans among the honorary foreign members of the American Economic Association, a group traditionally limited to forty. Sinn presumably will be the next. (Fourteen from the United Kingdom, six from France, four from Israel and Japan; two Indians, and single representatives from Australia, Belgium, Hungary, Spain, Sweden and Switzerland, in case you wondered.)

In his office in Mannheim last week, Hellwig nursed a cold and talked about the difficulty of gaining respect for economic analysis in the German policy debate. “German politicians and German media have always been proud of not understanding economics,” he said. They regard economists as “a kind of neo-liberal sect,” he said.

An “underlying schizophrenia” afflicts the public understanding of the mission of the traditional research institutes, he continued — forecasting, collecting facts, documenting and describing regulations and institutions on the one hand; attempting to perform mind-changing research on the other, but financing much of it with consulting activities that don’t leave enough room for investments in competence and reputation.

And because the institutes have concentrated mainly on policy advice in internal matters, the more important achievements of German economics since World War II — in macro-economic model-building, the analysis of labor markets, in game theory and experimental economics — have all emanated from the universities, under-funded though they are.

Meanwhile, the Wissenschftsrat, the council that periodically evaluates and guides German science, periodically laments the distance between the “real economics” of the institutes and the “academic economics” of the universities.

The Max Planck Institutes are supposed to be one remedy against a tendency to rigid stratification. Originally established in 1910 as the Kaiser Wilhelm-Society, the deep-pocketed public private collaboration between government and German industry was designed to quickly create academic centers of excellence in science wherever economic opportunity was greatest.

It was the Kaiser-Wilhelm-Institute that brought Albert Einstein to Berlin, for example; which financed path-breaking work in chemistry and medicine between the wars as well. The Nazis systematically disabled it, chasing most of the best scientists out of the country. But after World War II it was re-established and renamed for Planck, the physicist who for many painful years was its president.

The new Institute on Collective Goods had operated in a provisional way since 1996, staffed by lawyers and political scientists, before being upgraded to a full-fledged Institute last year. The addition of an economics section with a dozen professional positions for economists is a welcome step.

New work on the provision of collective goods — a spectrum of economic activity that ranges from basic science to the design of electricity grids (or software or pharmaceuticals, for that matter), from public safety to financial stability and natural language networks — is one of the most vibrant research frontiers in all of economics.

Hellwig’s ambitions? The Collective Goods Institute is to set up shop in an office building in Bonn, a ten-minute walk from the university and a block from the former Bundestag (the legislative assembly building), left empty when the government moved to Berlin.

The idea is to demonstrate that top-flight economics is relevant, he says; relevant even to the German policy debate. Following the designs of institutions such as the Center for Operations Research and Econometrics at the University of Louvain, or the Center for Economic Research at Tilburg, he aims to turn his program into a meeting place for specialists from all over the world.

It is not easy for Germany to understand that, in economics, it must strive to bring itself to the level of Belgium or the Netherlands. But that is so. The Universities in Bonn, Mannheim, Munich and now even Berlin are doing well enough compared to the rest of continental Europe. But they are no match for the top US universities, for Hebrew University in Jerusalem, the cluster of schools in Oxford, Cambridge and London, or even the French centers in Paris and Toulouse.

Auctioning off the gold in basement vaults is the easy part. (The governments of both Germany and France earlier this year promised sell much of their central banks’ hoards in order to plow the proceeds into research.) Picking paths of promising opportunities and managing their pursuit is much harder.

Germany’s biggest advantage may be all that empty office space. In the modern world, economic activity begins in the universities. The new Institute in the shadow of the old Bundestag is a hopeful symbol.