Wilhelm Röpke’s Political Economy
Wilhelm Röpke’s
Political Economy
Samuel Gregg
Acton Institute, Michigan, USA
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Samuel Gregg 2010
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02
Contents
Acknowledgments
1
2
3
4
5
6
7
8
vi
Introduction
Ruin and reform: the crisis of German economic liberalism
Economics and the economist
Toward a new economic liberalism
Booms, recessions and business cycles
After Keynes: full employment, inflation and the welfare state
A liberal international economy
Between humanism and social science
References
Index
1
17
45
71
94
117
142
165
183
207
v
Acknowledgments
The name and thought of Wilhelm Röpke awakens in me memories of the most
tragic phase of German history, of a time when not a single star seemed to light over
Germany, and the indispensible ultimate values of every human society and practice
– truth, justice, and morality – were trodden under foot. In these inconsolable straits
and in the most disturbing possible environment, I illegally obtained Röpke’s books
. . . which I absorbed as the desert drinks life-giving water.
Ludwig Erhard (1967, p. 22)
These words, spoken by the principal architect of West Germany’s economic resurrection after the abyss of World War II at a memorial service
in 1967, exemplify the regard in which the person and writings of the
German economist, Wilhelm Röpke, was held by many of his contemporaries. Though readers will soon discover that I am critical – sometimes
quite critical – of aspects of Röpke’s thought, even Röpke’s critics find it
difficult not to admire the scope and depth of his political economy. This
went beyond superficial familiarity with subjects outside the realm of economic science, so much so that Röpke often unpretentiously assumed that
others were as familiar with history, philosophy and ancient languages as
himself and was shocked when he discovered that this was not the case
among some of his students (Röpke, 1949f). If ever the much-overused
expression ‘Renaissance man’ was applicable to any individual, Röpke
merited it. He was one of the last great polymaths.
Nor is it possible to underplay Röpke’s courage as a man and a
scholar. Against National Socialist and Communist totalitarianism Röpke
spoke out fearlessly and at considerable personal risk at a time when
many intellectuals proved all too willing to acquiesce with authoritarian
regimes. Though Röpke and another prominent twentieth-century economic liberal, Friedrich von Hayek, had a falling out in the early 1960s,
Hayek did not hesitate to write the following about his erstwhile friend
and colleague: ‘let me emphasize a special gift for which we, his colleagues,
admire him particularly – perhaps because it is so rare among scholars:
his courage, his moral courage’ (Hayek [1959] 1992, p. 197). Similar sentiments were expressed by another well-known liberal economist, Ludwig
von Mises, with whom Röpke had substantial intellectual disagreements:
‘[T]he future historians of our age will have to say that he was not only a
great scholar, a successful teacher and a faithful friend, but first of all a
vi
Acknowledgments
vii
fearless man who was never afraid to profess what he considered to be true
and right’ (Mises, 1966b, p. 200).
To political leaders, Röpke did not hesitate to present hard truths
about their economic policies. This was especially evident during the
post-war period when neo-Keynesian ideas dominated economics and
to question this consensus was to put oneself at odds with most policymakers in the Western world. To the economics profession, Röpke
insisted that economic science did not and could not encapsulate the
whole truth about man and society. He also maintained that any claim
to value-neutrality on the part of economics was itself unscientific, and
stressed that economics should not be reduced to being a poor cousin
of applied mathematics. Not all political leaders and economists react
well to such arguments. But being ‘politically correct’ was never Röpke’s
forte. He set a standard for integrity which, his biographers concur, cost
him a great deal.
Today Röpke continues to be a subject of considerable controversy, with
numerous groups in Europe and the Americas laying claim to his legacy.
This may owe something to Röpke’s conception of political economy,
which harkens back to an older, perhaps richer way of understanding and
doing economics. The number of institutions willing to entertain political
economy in the fuller, more classical sense of this expression is almost
as limited as those which promote the history of economic thought. The
Acton Institute is such a place, and, if one may say so, it is perhaps one of
the few institutions today where Röpke himself might have found a congenial environment in which to pursue political economy as he understood
it. Therefore, I would like to express my gratitude to the Acton Institute
for its support of this book.
There are many individuals whose contributions to this project must
also be acknowledged. As well as the original proposal’s anonymous
referees whose comments substantially improved the text, my thanks
for intellectual input (witting and unwitting) are due to Dennis Bark,
Philip Booth, Alejandro Chafuen, John Finnis, J. Daniel Hammond,
Carlos Hoevel, Kęstutis Kėvalas, Annette Kirk, Kishore Jayabalan,
Kris Mauren, Michael Miller, Michael Novak, Marcelo Resico, Andrea
Schneider, Amity Shlaes, Robert A. Sirico and Jeffrey Tucker. Particular
thanks are extended to William Campbell, Leonard Liggio and Christian
Watrin for their assistance with obtaining difficult-to-find materials relevant to this book.
Then there are the numerous graduate and undergraduate students in
Europe, the United States and Latin America with whom themes of this
book have been tested through the cut-and-thrust of vigorous discussion.
I hope that they benefit from – and vigorously critique – the result. Röpke,
viii
Wilhelm Röpke’s political economy
I have discovered, is one of those rare free-market economists to whom
students quickly warm.
On a personal and intellectual level, my most significant debt is, as
always, to my wife, Ingrid A. Gregg. As a historian of the Scottish
Enlightenment, she was always available for me to ask questions or test
untried notions. As my life’s companion, her moral and personal support
is inestimable.
Finally, a note about sources: this book is for English-speaking audiences. It therefore utilizes as far as possible the extensive body of Englishlanguage translations of Röpke’s writings as the primary sources before
turning to texts published in other languages, most notably German and
French. It is also the case that many of Röpke’s works were published in
several editions. In some instances, Röpke added and modified considerable sections of text in successive editions. In the cases where this occurs
and provides fresh insights into Röpke’s thought, this is noted.
Grand Rapids, Michigan
1 June 2009
1.
Introduction
The current world crisis could never have grown to such proportions, nor proved
as stubborn, if it had not been for the many forces at work to undermine the intellectual and moral foundations of our social system and thereby eventually to cause
the collapse of the economic system indissolubly connected with the social system
as a whole. Not withstanding all the harshness and imperfections of our economic
system, which cry out for reform, it is a miracle of technology and organization;
but it is condemned to waste away if its three cardinal conditions – reason, peace,
and freedom – are no longer thought desirable by the masses ruthlessly reaching
for power.
Wilhelm Röpke, ‘End of an Era’ ([1933d] 1969, p. 80)
When Wilhelm Röpke spoke these words in a public address at Frankfurt
am Main on 8 February 1933, he knew that he was sealing his professional fate. None of his listeners would have doubted who Röpke had
in mind by ‘the masses reaching for power’. Only nine days before,
Weimar Germany’s second and last President, Field-Marshal Paul von
Hindenburg, appointed the leader of the National Socialist German
Workers Party, Adolf Hitler, as Reich Chancellor of Germany. From
Röpke’s perspective, the Nazis’ accession to government office was a
disaster. As a decorated World War I veteran, a young distinguished academic and, importantly, not Jewish, Röpke could have easily conformed
to the new regime’s demands and perhaps risen to high office in the Third
Reich. But Röpke had no illusions about where he believed Hitler would
lead Germany. He also had the fortitude to speak his mind. During
Germany’s 1930 national elections, Röpke distributed a leaflet to voters
that he had written himself. As his wife Eva recorded, it read:
No one who votes for the National Socialists on September 14 should be able
to say he did not know what might come of it. He should know that he is
voting for chaos in place of order, destruction in the place of reconstruction.
He should know that he is voting for war at home and senseless destruction
abroad. Vote, but vote in a way such that you will not feel any complicity in the
catastrophe which may yet erupt upon us. (Röpke, 1977, p. 420)
It followed that on 7 April 1933, no-one was surprised that Röpke was
among the first German professors to lose his position as the National
Socialists purged Germany’s universities of scholars who were outspoken
1
2
Wilhelm Röpke’s political economy
anti-Nazis, Jewish, or both. He also had an angry confrontation with two
SS officers who visited his home to persuade him to alter his opinions
(Kaufmann, 1966; Boarman, 2000, p. 37). Accepting that there was no
place in the Third Reich for someone with his decidedly liberal economic
and political views, Röpke departed into exile in November 1933, initially
taking refuge in Amsterdam. At the invitation of Turkey’s modernizing
president Kemal Atatürk, Röpke joined the large diaspora of German
intellectual refugees from National Socialism in Turkey (Reisman, 2006)
and was appointed to a teaching position at the University of Istanbul.
In 1937, Röpke accepted a post at Geneva’s Graduate Institute of
International Studies, where he taught until his death on 12 February
1966. Röpke never returned to live in Germany.
Exile did not diminish Röpke’s energetic engagement in the world of
ideas. Even his more technical works avoid dry formalism. They betray
the passion that he brought to his work. This may help account for the
fact that, unlike most of his fellow liberal German economists, Röpke
enjoyed an intellectual reputation that extended beyond the frontiers of
the German-speaking world. Over the course of his life, Röpke wrote
prolifically, including several books, dozens of academic pieces and untold
numbers of newspaper articles, penning over 900 publications by the end
of his life.1 He also served as an editor of the journals Kyklos and Studium
Generale, and was a founding editorial board member of the economic
journal Ordo.
While economics remained central to his intellectual concerns, Röpke
did not hesitate to engage other subjects. When Röpke first came to the
attention of another modern economist and social philosopher, Friedrich
von Hayek (1899–1992), it was on the basis that Röpke was ‘one of the few
young German economists seriously interested in theoretical questions
. . . [especially] abstract questions of monetary theory’ (Hayek, 1992, p.
196). But as Hayek wrote in a tribute to mark Röpke’s sixtieth birthday,
‘Röpke realized at an early stage, perhaps earlier than most of his contemporaries, that an economist who is nothing but an economist cannot be a
good economist’ (Hayek [1959] 1992, p. 195). Röpke himself praised those
economists with whom he often disagreed, such as Joseph Schumpeter, for
being willing to engage in multidisciplinary analysis (Röpke, 1948m).
Like most scholars, Röpke’s thought developed and changed over time.
The general orientation of Röpke’s economic thought is itself a matter
of much disagreement. The Chicago school economist Milton Friedman
once described Röpke as ‘something of an agrarian’ (Shlaes, 1996, p. 2).
By contrast, the Oxford historian Anthony Nichols regards Röpke’s later
writings as becoming ‘less and less easy to distinguish from . . . “paeloliberals” ’ such as the economist Ludwig von Mises (1881–1973) (Nichols,
Introduction
3
1994, p. 323). These observations are difficult to reconcile, given that
‘paelo-liberals’ and ‘agrarians’ generally have very different views about
political economy. More commonly, Röpke’s economic thought is often
located in what is usually denoted as the ‘neoliberal’ tradition associated
with twentieth-century figures such as Franz Böhm (1895–1977), Walter
Eucken (1891–1950), Alfred Müller-Armack (1901–78) and Alexander
Rüstow (1885–1963). Yet even here there are difficulties of classification.
Though these economists shared an interest in modifying capitalism in
ways compatible with free competition, there were significant differences
between them. While Eucken and Böhm increasingly focused upon the
relationship between legal institutions and the economy, Müller-Armack
and Rüstow’s economic reflections were more akin to the type of historical
sociology associated with Max Weber.
Despite his prodigious literary output, Röpke’s work is less known
in the English-speaking world than other prominent twentieth-century
free-market economists such as Friedman, Hayek and Mises. Though
Röpke often wrote in English or was quickly translated for the benefit of
English-speaking audiences, there are very few extended English-language
scholarly treatments of Röpke’s thought. Apart from John Zmirak’s
introductory book to Röpke’s life and thought (2001), there is no booklength English-language study of Röpke’s contributions to political–
economic discourse that matches German-language studies of Röpke’s
writings such as S.H. Skwiercz’s lengthy analysis (1988), Helge Peukert’s
two-volume study (1992) and Hans Jörg Hennecke’s biography (2005), or
the Spanish-language analyses authored by Jerónimo Molina Cano (2001)
and Marcelo Resico (2008). As a consequence Röpke often appears in the
eyes of some English-language audiences as a European anti-Fascist, antiCommunist economist who made significant contributions to the midtwentieth-century American effort to integrate classical liberalism and
traditional conservatism into a cohesive political movement commonly
known as ‘fusionism’ (Nash, 1996, pp. 166–8). Others present Röpke
as one of the small group of market-inclined economists who paved the
intellectual path for Ludwig Erhard’s liberalization of West Germany’s
economy in 1948 (Van Hook, 2004, p. 160). As Mises later wrote, ‘For
most of what is reasonable and beneficial in present-day Germany’s monetary and commercial policy, credit is to be attributed to Röpke’s influence.
He – and the late Walter Eucken – are rightly thought of as the intellectual
authors of Germany’s economic resurrection’ (1966, p. 200).
These pictures reflect something of Röpke’s life and work. But they do
not do justice to the breadth, depth, and above all complexity of Röpke’s
work in the area of political economy. Situated as it was in the stream of
nineteenth- and twentieth-century German and European history and the
4
Wilhelm Röpke’s political economy
numerous political, economic and methodological debates that preceded
and developed in these decades, Röpke’s thought is not easily condensed
into contemporary ideological categories. In many respects, Röpke’s
work has more in common with the intellectual agendas pursued by Adam
Smith (1723–90) and Alexis de Tocqueville (1805–59).
A MAN OF HIS TIMES
Röpke’s relatively early death may account for the fact that his writings
did not receive the attention which began to be accorded to free marketorientated economists in the 1970s when Keynesian theories began losing
credibility among important sections of elite opinion in Western Europe
and North America. Much of Röpke’s economic writing involved reflection upon events that directly affected him and his contemporaries. While
historical context cannot explicate everything about any scholar’s work,
Hennecke speculates that Röpke’s happy youth growing up in the village
of Schwarmstedt may help explain his preference for smaller forms of
human association (Hennecke, 2005; Boarman, 2000, pp. 47–8). Like
many other young men of his generation, Röpke’s experience of military
service in World War I cannot be underestimated when attempting to
comprehend the post-war direction of his thought.
Reading Röpke’s reflections on life in the Kaiser’s army in the trenches
of northern France, it is striking to see how much feeling it still aroused
in Röpke over forty years later. At the most basic level, it fostered in him
‘a violent hatred of war’ (Röpke, 1959f, p. 228). War was, to Röpke’s
mind, ‘the expression of a brutal and stupid national pride that fostered
the craving for domination and set its approval on collective immorality’
(ibid.). Though a genuine war hero, Röpke clearly despised military life.
‘Life in the army’, he recorded, ‘had shown what it meant for an individual
to exist as part of an apparatus whose every function assumed lack of
freedom and unconditional obedience’ (ibid., p. 230). It resulted in the
physical and spiritual debasement of the individual’s dignity in the name
of the mass – mass existence, mass armies, even mass feeding (ibid.).
Initially Röpke’s anti-nationalism and anti-war positions translated
into ‘a protest against the prevailing economic and political system, which
was a feudal and capitalist one. The protest and its attendant denial made,
the affirmation followed of itself: socialism’ (ibid., p. 229). But to his
surprise, Röpke’s university studies lead him to conclude that his protest
against war and nationalism mandated ‘a commitment to liberalism in the
sphere of international economic relations; in other words, to free trade’
(ibid.). The same reaction also aroused in Röpke ‘a great wariness about
Introduction
5
the powers of the modern state and, along with this, about the powers of
the various pressure groups within the nation’. ‘The more I looked into
it’, Röpke stated, ‘the more clearly I saw that my indignation over the war
was a protest against the unlimited power of the state’ (ibid., p. 230).
Röpke did not arrive at this realization easily. He was acutely conscious
that the trend of intellectual opinion was heading in a different direction.
But, as Röpke recalled, ‘Not all the pacifist, antimilitarist and freedomdemanding statements of even the most honest socialists could obscure
the fact that socialism, if it was to mean anything at all, meant accepting
the state as Leviathan not only for the emergency of war but also for a
long time to come’ (ibid., p. 231). Having made his choice, Röpke never
recoiled from its consequences. His intellectual abilities and early success
as an economist soon brought him to the attention of those German politicians seeking to stabilize Weimar Germany as its foundations were subject
to relentless attrition from the Communist left and the radical nationalistright. Röpke subsequently found himself asked for advice on the direction of government economic policy, especially when Germany was
engulfed by the Great Depression. His views on the policy implications of
sound political economy, Röpke wrote, ‘meant speaking against most of
the groups and policies that prevailed in the field of economics between
the wars’ (ibid., p. 231). But taking such stands was, Röpke believed, the
intellectual’s non-negotiable moral responsibility. ‘Society’, he wrote, ‘is
in supreme danger if the “Clerks” remain dumb, if they are not allowed to
express themselves freely, or from fear or confusion commit the treachery
of silence, or what is the worst of all, when they speak against their inward
and better conviction’ ([1944b] 1948, p. 72).
Few people can spend long periods of time as one of a small group
of intellectuals opposing the dominant trends in politics and economic
policy without coming to certain conclusions about themselves and their
work. For Röpke, one such realization was that economics had to be
attentive to ‘the nature of man and the sort of existence that was fitting to
that nature’. It was the best way of ensuring that economic science ‘always
had something concrete and real to refer to and was protected from the
tendency of the over-abstract to result in monstrosities when it is brought
into the human realm’ (Röpke, 1959f, pp. 231–2). It took Röpke several
years to integrate this focus into his economic thinking. But his peers’
recognition that this attention to human nature had become central to
Röpke’s economics was one reason, Röpke wrote, why his way of thinking had ‘come with good reason to be called “economic humanism” ’
(ibid., p. 232).
Like many other economists of his generation, much of Röpke’s career
was consumed by the effort to understand the Depression’s causes and
6
Wilhelm Röpke’s political economy
how to overcome it. While the Nazi seizure of power was deeply unsettling for someone of his liberal inclinations, Röpke also saw the rise of
Hitler as part of a wider chain of events, including certain inadequacies
in economic liberalism. Thus, it is hardly surprising that Röpke’s thought
was especially influenced by attempts to save capitalism from its apparent
immolation. This ranged from John Maynard Keynes’s effort to radically
revise the entire science of economics, to Hayek’s struggle to reinvigorate
classical liberalism by emphasizing the need to resist the general movement toward economic planning that gathered apace in North America
and Western Europe after 1945. On several occasions, Hayek (1994, pp.
132–3) acknowledged Röpke’s critical role in helping to realize Hayek’s
objective of establishing an international group of intellectuals – later
called the Mont Pèlerin Society – concerned about the trend to planning
following World War II.2
Röpke is also notable for the fact that he believed that the events which
he was living through were not isolated phenomena. His books reflect his
long-standing interest in Western intellectual history and his conviction
that the seeds of the problems he was attempting to overcome were buried
deep in Europe’s past. One is struck by the number of detailed references to classical, medieval and post-Enlightenment writers on subjects
ranging from international law to political theory. Occasionally Röpke
even drew analogies between the intensity of divisions within economics
as a branch of learning and those prevailing in theology ([1952b] 1969, p.
167). It explains why, for example, Röpke traced a straight line between
France’s Jacobin revolutionaries of the 1790s and the expansive welfare
states that began to characterize Western European democracies from the
1950s onwards. It may also account for Röpke’s barely repressed frustration with members of his own profession who, he held, sought to reduce
economics to a mathematical science of aggregates. Röpke certainly
believed that there were economic laws that societies defied at their own
peril. Nonetheless he also thought that careful reflection on the past provided guidance for the present and future, especially if an economist was
committed to the preservation and extension of particular moral values
(Röpke, 1960i, pp. 20–22, 1961f). This in turn contributed to Röpke’s
insistence upon the limits of economics as a science. Economics, from
Röpke’s standpoint, was not an ideology, philosophy, or religion. Instead
it was a social science capable of providing society with powerful insights
into reality, but also incapable of encapsulating reality in its entirety.
Röpke opposed collectivist policies not simply because economic science
told him they were bound to inflict misery on millions. He also regarded
collectivism as incompatible with authentic human freedom. Summarizing
his view on economics’ relationship to moral concerns, Röpke wrote:
Introduction
7
[W]e need a combination of supreme moral sensitivity and economic knowledge. Economically ignorant moralism is as objectionable as morally callous
economism. Ethics and economics are two equally difficult subjects, and while
the former needs discerning and expert reason, the latter cannot do without
humane values. ([1958f] 1998, p. 104)
Twenty-five years later, a theologian who would later assume the
highest office in the Roman Catholic Church articulated almost identical
thoughts on the same subject:
A morality that believes itself able to dispense with the technical knowledge
of economic laws is not morality but moralism. As such it is the antithesis of
morality. A scientific approach that believes itself capable of managing without
an ethos misunderstands the reality of man. Therefore it is not scientific.
Today we need a maximum of specialized economic understanding, but also a
maximum of ethos so that specialized economic understanding may enter the
service of the right goals. Only in this way will its knowledge be both politically
practicable and socially tolerable. (Ratzinger, 1986, p. 204)
ECONOMICS AND ECONOMIC POLICY
While widely versed in a range of scholarly disciplines, economics
remained Röpke’s intellectual focus throughout his academic career.
Coming from a family that had produced lawyers, doctors, civil servants and Protestant clergy, Röpke studied law and then economics at the
universities of Tübingen and Göttingen. He earned his doctorate under
the supervision of Walter Troeltsch (1866–1933), a specialist in the economics of unemployment, at the University of Marburg in 1921. While
Röpke’s doctoral thesis concerned the very technical subject of German
potash mines (Röpke, 1922a), this happened to be one of the most heavily
cartelized industries in Germany (Eucken, 1951, p. 31). It marked the
beginning of his lifelong interest in curbing cartels and monopolies, a
subject about which Röpke was still writing 33 years later (Röpke, 1955e).
By contrast, Röpke’s habilitation dissertation addressed the economics
of business cycles (Röpke, 1922b), a topic to which he would consistently return in the context of analyzing international trade issues and
business-cycle theory.
Following a year working in the Foreign Office advising the still-fragile
Weimar government on how to pay Germany’s war reparations – an issue
on which he continued to write throughout the 1920s and 1930s (1924d,
1928d, 1929e, 1930e, 1931e) – Röpke was appointed professor at the
University of Jena at the age of 24, thereby becoming Germany’s youngest
professor in 1924. Part of his tenure at Jena was spent in the United States,
8
Wilhelm Röpke’s political economy
where, thanks to funding from the Rockefeller Foundation, he studied the
economic problems of American agriculture (Röpke, 1927a, 1927b). After
spending time at the University of Graz in 1928, Röpke returned to the
University of Marburg the following year to assume a full professorship.
His subsequent appointments in Istanbul and Geneva were to professorships in economics. At different times throughout his career, Röpke provided formal and informal advice on economic policy to various German
governments. This included service on a government commission studying
unemployment in 1930–31, as well as Ludwig Erhard’s currency-reform
council which, between 1947 and 1948, forcefully advocated the German
economy’s liberalization. In 1950, West German Chancellor Konrad
Adenauer commissioned Röpke to write a defense of his government’s
economic policies – a defense which, besides praising Erhard’s liberalizing measures, also criticized emerging trends of government intervention (Röpke [1950e] 1982). Often unwilling to wait for policy-makers to
ask for his opinion, Röpke was unafraid to enter the public square to
advocate or contest different ideas and proposals. The publication of his
book, The German Question ([1945b] 1946, cf. 1946l), has been described
as having similar effects upon post-war German public opinion as Hayek’s
Road to Serfdom (1944) had upon Anglo-American audiences (Schwarz,
1980, pp. 393–401). Likewise, many of Röpke’s newspaper articles had a
profound impact upon informed opinion. One of his more famous pieces
was an article in the Catholic weekly Rheinische Merkur (Röpke, 1947b).
Its critique of Günther Keiser, the foremost economist opposing Erhard’s
plan to abolish wartime economic regulations as quickly as possible, is
regarded as one of the most important pieces that helped prepare German
public opinion for Erhard’s reestablishment of the market economy in
West Germany in 1948.3
Röpke’s periodic involvement in developing government economic
policies and his regular commentaries on contemporary economic developments reflected his conviction that, as one who survived World War
I, he had a responsibility to work for a better future. His efforts to do so
were framed against a background of the crisis of capitalism, especially
German capitalism, in the first half of the twentieth century. The breakdown of free trade, relatively open borders, and rising living standards
that prevailed throughout much of the world between the 1850s and 1914
– ‘that magnificent century’, as Keynes called it – was a shocking experience for his generation of intellectuals. Many of them spent much of the
rest of their lives attempting to comprehend this course of events. Writing
somewhat autobiographically, Röpke stated that upon returning home
from the Western Front in 1918, he had wanted to ‘understand the reasons
for the crisis, to learn what had brought it to the stage of war’. For this
Introduction
9
reason, Röpke commented, ‘I determined to become an economist and
sociologist’ (1959f, p. 228).
Röpke’s description of himself as one who was not just an economist is
revealing. On one level, it reflects the fact that economics in continental
Europe in the 1920s was considered a sub-branch of law and sociology.
Yet it is also reasonable to interpret this description as indicative of an
early conviction on Röpke’s part which became increasingly pronounced
over time: that the nature and purpose of economic science was somewhat
broader than the positivistic character assumed by much mainstream economics, especially after World War II (Röpke, 1964e, pp. 78–87). Röpke’s
willingness to pursue economic science beyond the parameters imposed
by positivistic assumptions was, some of his peers believed, one reason
why broader audiences listened to him. Hayek claimed that Röpke had
achieved an influence that reached beyond circles of professional economists, partly because an economist can be ‘in closer touch with reality
in the social sciences when one does not limit oneself to those facts that
are measurable and quantifiable’. In Hayek’s opinion, Röpke’s ‘special
gifts’ lay in the ‘intermediate realm between “pure” theory and questions
of practical politics where systematic treatment is at least as useful as in
pure theory’. This intermediate realm, Hayek continued, constituted the
essence of ‘political economy’ (1992, p. 197).
The purpose of this book is to provide a descriptive and critical introduction to Röpke’s understanding of political economy. It is an exercise
in historical recovery insofar as it seeks to recapture Röpke’s philosophy of the market economy and how it was shaped by the challenges
of his time. It first outlines the historical and intellectual background
to Röpke’s political economy, before describing and critiquing his particular vision of a reformed economic liberalism. This involves examining the crisis in which German economic liberalism found itself in the
closing years of the late-nineteenth century and the twentieth century’s
first three decades. We then explore Röpke’s understanding of the nature
and purpose of economic science, and his general schema for reforming
economic liberalism. Though it did not achieve mature expression until
the early 1940s, essential elements of Röpke’s neoliberalism were in place
by the mid-1930s as he grappled with the problem of how to salvage the
market economy and the values that he associated with it, as collectivist planning became increasingly the norm. Having considered Röpke’s
political economy in theoretical terms, we then explore how it manifested
itself in his treatment of three particular subjects to which he applied
sustained attention at different periods of his life: the challenge of business cycles; the welfare state, employment and inflation; and international
economic relations.4
10
Wilhelm Röpke’s political economy
REDISCOVERING POLITICAL ECONOMY
Since apparently first coined in 1615 by Antoyne de Montchrétien
(Schumpeter [1954] 1994, p. 167) to describe how monarchs could manage
their kingdoms as landowners organized their estates, the term œconomie
politique has been defined in many ways. Some treat political economy as
the study of economic theories in order to discover their underlying political and social underpinnings (Maier, 1987, pp. 3–6). Others regard political economy as the effort to critically analyze economic policy. Then there
is political economy understood as an interdisciplinary study which integrates economics with other social sciences in order to explore how political and legal institutions shape the economy and vice versa. Prominent
examples are institutional economics and public choice theory.
It was, however, Adam Smith who established the meaning of political
economy in the commonly accepted positive sense of the term by defining
‘what is properly called Political Oeconomy’ as the scientific study of ‘the
nature and causes of the wealth of nations’ (Smith [1776] 1981, IV.ix.38).
As A.M.C. Waterman notes, Smith’s vision of political economy involves
the establishment of scientific (in the positivist sense of the word) theories
to explain economic phenomena. In a broader sense, however, Waterman
observes that Smith’s political economy also embraces the study of the
interrelationship between economic theory and the political ideas and
movements of a given time. This, Waterman argues, is found in Smith’s
attention to the manner in which political ideas and events influence
economic practices and systems as well as the ways that economic theory
simultaneously shapes the rulers’ decisions (Waterman, 2002, pp. 13–40).
Lastly, there is the sense in which Smith understood political economy
in terms of what is known today as economic policy insofar as Smith
regarded political economy as ‘a branch of the science of the statesman or
legislator’ whose objective was ‘to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a
revenue or subsistence for themselves; and secondly, to supply the state
or commonwealth with a revenue sufficient to the public services’ (Smith
[1776] 1981, IV, Introduction).
On one level, Smith’s Wealth of Nations was certainly an exercise in
abstract analysis of economic life. Smith carefully dissected the claims
of prevailing economic thought, presented a fresh approach to understanding how wealth is created, and then elaborated on what should be
done on the policy level if wealth-creation and society’s overall material
enrichment are deemed desirable. But in doing so, Smith also attempted
to develop a powerful normative argument for an economy based around
private property, free competition and limited government over and
Introduction
11
against the mercantilist systems that dominated the West at the time. For
Smith, the move from mercantilist to market economies was not simply
a matter of following the promptings of scientific economic reasoning
focused on wealth-creation. It was also a question of civilizational growth.
Certain elements of commercial order disturbed Smith, most notably what
he considered the dehumanizing effects of the division of labor’s infinite
extension. Nevertheless Smith also regarded market-orientated economies
as superior to previous economic arrangements, on grounds of the greater
efficiency and liberty they accorded to ever-widening numbers of people.
As Emma Rothschild reminds us, Smith saw economic liberty as something to be approved and pursued because of its capacity to free people
from many forms of oppression (Rothschild, 2001, p. 27).
This outlook was not foreign to a number of twentieth-century
economists. Both Hayek and the Chicago economist Frank Knight separately insisted that the study of political economy differs from technical
economic analysis precisely because the former is rooted in a concern
with the impact of values upon economic life and is orientated toward
promoting certain values (Knight, 1960, pp. 131–40; Hayek, 1960, p. vii).
With some notable exceptions, however, this Smithian conception of economics and political economy did not persist after Smith’s death in 1790.
The economic historian Terence Hutchison underlines the differences
between Smith’s sociological economics and post-Ricardian pure economics (Hutchison, 1979a, p. 433). In Hutchison’s view, economic science
became progressively less interested in the question of what facilitated
the social cohesion upon which economic life itself depended. Instead it
increasingly focused upon examining the behavior of homo economicus,
a creature whose nature is far removed from that of the more complex,
not-always rational human being found in Smith’s corpus. The speed of
this transformation was relatively quick. By the first half of the nineteenth
century, John Stuart Mill was stating:
What is now commonly understood by the term ‘Political Economy’ . . . makes
entire abstraction of every other human passion or motive except those which
may be regarded as perpetually antagonizing principles to the desire of wealth,
namely, aversion to labour, and desire of the present enjoyment of costly indulgences . . . Political economy considers mankind as occupied solely in acquiring
and consuming wealth; and aims at showing what is the course of action into
which mankind, living in a state of society, would be impelled, if that motive,
except in the degree in which it is checked by the two perpetual counter-motives
averted to, were the absolute rule of their actions. (Mill, 1844, v.38)
Almost immediately Mill qualified these remarks, claiming that no
investigator of economic science believed that this description captured
12
Wilhelm Röpke’s political economy
the essence of human nature and society. Political economy, understood
in the sense described by Mill, was simply a method for understanding an
important aspect of human existence. It reflected, however, a narrowing of
the parameters of political economy outlined and envisaged by Smith.
POLITICAL ECONOMY, SOCIETY AND VALUES
A crucial argument of this book is that Röpke’s understanding of political economy has a strong ‘Smithian’ or ‘Scottish’ dimension. Like Adam
Smith, Lord Kames, Adam Ferguson, David Hume, Francis Hutcheson
and other Scottish Enlightenment thinkers, Röpke developed a broad
social science agenda. Though Röpke had a clear sense of the boundaries of economic science per se, Röpke’s political economy was deeply
attuned to complex social realities. He believed strongly in what Eucken
called ‘the interdependence of orders’ (Eucken, 1952, p. 332).5 From this
standpoint, economic life was understood to be thoroughly integrated
into interconnected and mutually reinforcing social, political and cultural
orders. Hence there were limits to which economics could abstract from
this context. Röpke was also as convinced as the Scots that it was impossible to separate empirical analysis from normative judgment. His writings,
like those of the Scots, involve sophisticated analysis of human nature and
the institutional settings that promote – or diminish – human flourishing,
alongside careful study of the empirical realities in which humans live. As
Ryan Hanley observes of the Scots, ‘In their social science, the distinction
of the descriptive from the normative is unintelligible; empirical study of
experience, synthesis of empirical data into axioms, and analysis of how
activities guided by such axioms affect human life are equally crucial elements of a single endeavor to promote individual and collective well-being’
(2009, p. 30). In short, both Röpke and the Scots were as much concerned
with promoting freedom and human thriving as they were with maximizing
utility. While modern liberalism in its Rawlsian guise prioritizes the ‘right’
over the ‘good’, the ‘liberalism’ of Röpke and the Scots places questions of
human happiness at the center of their respective inquiries.
Röpke’s consistent effort throughout his life to engage the subject of
political economy in this manner may well have contributed to the attention which his work received from economists and policy-makers during
his lifetime. From the very beginning, Röpke integrated his positive economic analysis with reflection on past and contemporary historical and
intellectual developments, both with an eye to understanding what was
happening, but also with the intention of influencing decision-makers
about future choices. He was both attentive to the economic impact of
Introduction
13
different social movements and ideas, but also conscious that economic
insights can, if presented in persuasive ways, reshape political and intellectual trends. These are quintessentially Smithian methods and priorities.
Another reason for the attention that Röpke garnered outside professional economic circles was his conviction that economics could not eschew
questions of value. Röpke was an unabashed économiste-philosophe. This
was characteristic not only of a good number of his fellow German neoliberals, but also other prominent twentieth-century economic liberals such
as Hayek and the less well-known French economist Jacques Rueff (1896–
1978). Many were beneficiaries of the education received by members of
continental Europe’s upper-middle class that stressed a broad, integrated,
deep and classical approach to learning, which included immersion in
subjects as diverse as poetry and canon law, not to mention classical and
modern languages. This allowed them to write with credibility about many
subjects outside their immediate field of expertise. In Röpke’s case, this
manifested itself in the ease, confidence, and evident authority with which
he ranged far and wide outside the boundaries of economics in his wartime
trilogy – The Social Crisis of Our Time ([1942g] 1992), Civitas Humanas
([1944b] 1948) and International Economic Disintegration (1942h). His
first post-war book, The German Question ([1945b] 1946), barely considers
strict economics as Röpke draws upon history, literature and philosophy
to explain Germany’s mid-twentieth century catastrophe to German and
non-German audiences.
Like Smith’s Wealth of Nations, Röpke’s approach to political economy
was partly an effort to explore economic development in positive-scientific
terms and partly a response to the particular challenges of his age. Yet it
also involved the exposition and development of normative propositions
that, in Röpke’s view, preceded and would outlast contemporary circumstances. These principles, he believed, would enable capitalism to overcome some of the philosophical burdens under which it had labored since
the eighteenth century, limit the state to a small number of clearly defined
economic roles, and prevent interest groups from using state power to
escape the strictures of competition. Röpke’s pursuit of economic knowledge thus formed part of his own effort to articulate a particular normative
vision of the market economy and the type of society in which he desired to
see this economy embedded. The positive dimension of economic science,
Röpke insisted, was subordinate to these normative ends. Nonetheless, we
shall see that Röpke did not regard normative commitments as necessarily
compromising economics’ credentials as a positive science.
Much ‘Röpkean’ political economy thus represents an attempt to
forge a creative synthesis between economic science, and the broader
normative enterprise of influencing economic and social policy toward
14
Wilhelm Röpke’s political economy
the realization and maintenance of particular moral, social and political
goals. In his last book, Röpke identified the nineteenth-century French
economist Jean Charles Léonard Simonde de Sismondi (1773–1842) as
an early precursor of his own approach. In his youth, Sismondi was a
strong advocate of Smithian economics. He was also one of the first to
articulate the concept of business cycles. Röpke stressed, however, that
Sismondi also reminded nineteenth-century audiences in his Nouveaux
Principes d’économique politique (1819) that political economy was not
simply about wealth-accumulation, but rather how to create and use this
wealth for the happiness of all ([1958f] 1998, p. 275). This is not to claim
that Röpke’s project represented an attempt to ‘return’ modern economics to the Aristotelian realm of ethics from which economics originally
emerged. Rather Röpke regarded positive economic science as having its
own worth, but also its limits when it comes to many questions about the
appropriate course of action to follow in given circumstances. It is not just
that Röpke believed that economics ultimately should serve certain values
– most notably liberty and order – but also his sense that the economy, like
all facets of human existence, is not self-sufficient. Its immersion in other
spheres of life required economists to look beyond positive and even normative economics, and consider how the pursuit of particular values, such
as equality, affect the incentives and structures shaping economic activity
and policy over the long and short term. As he wrote in his last major
book, A Humane Economy:
The market economy, and with it social and political freedom, can thrive only
as a part and under the protection of a bourgeois system. This implies the
existence of a society in which certain fundamentals are respected and color
the whole network of social relationships: individual effort and responsibility, absolute norms and values, independence based on ownership, prudence
and daring, calculating and saving, responsibility for planning one’s own life,
proper coherence with the community, family feeling, a sense of tradition
and the succession of generations combined with an open-minded view of the
present and the future, proper tension between individual and community, firm
moral discipline, respect for the value of money, the courage to grapple on one’s
own with life and its uncertainties, a sense of the natural order of things, and a
firm scale of values. ([1958f] 1998, p. 98)
Röpke’s political economy thus embodied a positive-descriptive analysis but also a normative-prescriptive approach which, while distinct, were
mutually reinforcing. He consequently concerned himself with evaluating
different possible economic arrangements and outlining what combination of economic, legal, political and social structures was most likely to
protect and enhance particular values. It was not just the fact that markets
were more efficient from the standpoint of utility that inclined Röpke to
Introduction
15
economic liberalism rather than socialism. It was also that the market
economy allowed people to exercise their natural liberty in ways that
brought a certain type of order to human affairs, while simultaneously
solving the economic problem of scarcity. In part, Röpke’s conclusions are
derived from empirical observation concerning the operations of markets
and planned economies and their respective consequences for political and
social order. Yet it also owes something to his long observation of human
nature and certain conclusions that Röpke reached about the character
of human beings. Humans, he claimed, were driven to a large extent by
the type of enlightened self-interest portrayed by Alexis de Tocqueville
in Democracy in America. But Röpke’s understanding of man – his
philosophical anthropology – is also rooted in what might be called the
tradition of ‘Christian realism’ often associated with St. Augustine.
Röpke recognized that his concern for certain values and, more particularly, his sense that these were embedded in particular ways of life left
him open to accusations of romanticism. For a German of his generation,
acutely aware of nineteenth- and early twentieth-century romanticism’s
contribution to National Socialism’s rise, this was a serious charge. The
point, however, is that Röpke – like Smith, Hume and Edmund Burke
– did not believe that liberty could be rooted just anywhere. There is a
‘conservative’ dimension to the Scottish Enlightenment tradition insofar
as it acknowledged that there were a whole range of un-designed customs,
institutions and moral codes that underpinned the market economy (Sally,
1998, p. 33). Without these, Röpke believed that there was considerable
risk that the void would be filled by artificial constructs that could inhibit
and suffocate liberty. It was not that Röpke thought that everything
about the pre-Enlightenment, pre-modern world was good. He had seen,
however, what happened when particular habits and institutions decayed
or were swept away by revolutions seeking to create a new man or new
society, be it the Third Reich or utopian Marxist visions of social change.
Phrases like ‘conservative’ and ‘liberal’ are wonderfully pliant terms.
They are regularly used to label a range of political, philosophical, economic, and even religious positions, many of which have little in common
with each other. They are also terminologically inexact descriptions and
have arguably proved insufficiently stable to convey particular meanings
over long periods of time. Yet for all these problems, the normative vision
underlying Röpke’s political economy might perhaps be accurately called
one of ‘conservative liberalism’ insofar as it sought to combine the ‘conservative’ value of order with the ‘liberal’ underscoring of human liberty.
An inevitable subsequent question is whether there is a tension between
Röpke’s ‘liberal’ focus upon freedom and his ‘conservative’ interest in
order. This may simply be an irresolvable tension in the ‘grand liberal
16
Wilhelm Röpke’s political economy
tradition’ to which Röpke regarded himself as belonging. Perhaps it is
unavoidable precisely because while they often grate at each other, order
and liberty are both necessary for social life and individual flourishing. As
we shall see, it is not clear that Röpke was always able to reconcile these
values and their associated set of priorities, expectations and institutional
expressions. What is not in doubt, however, is the manner in which the
effort at synthesis underlying Röpke’s political economy challenges not
only the direction of much post-1945 economic science, but also those who
question the market economy’s moral and economic benefits.
NOTES
1. This figure includes the translation of some of Röpke’s writings into multiple languages.
Röpke also re-published many articles as chapters or sections in books. Many of the
chapters in Röpke’s Mass und Mitt, for instance, were previously published as standalone articles.
2. Hayek and Röpke corresponded on a regular basis before and during World War II.
After the war, Röpke attempted to establish an international journal for liberal thought
while Hayek wanted to create an international academy. Röpke, however, was unable
to raise sufficient funds for such a journal, but, with the cooperation of Albert Hunold,
persuaded the Swiss businessmen who had provided some resources for the journal to
allow the money to be spent on the first meeting of Hayek’s academy in 1947 (Hartwell,
1995, pp. 22–31).
3. For other vital contributions by Röpke to the case for post-war Germany economic
liberalization in this period, see Röpke (1946b, 1947a, 1947c, 1947e, 1947g, 1947h, 1947i,
1948f).
4. These are only a select number of the economic subjects addressed by Röpke throughout
his career. But, as this book is not intended to provide a comprehensive study of every
aspect of Röpke’s economics, the subjects considered here have been chosen on the basis
that they allow a thorough exploration of Röpke’s political economy.
5. To this extent, this book substantially agrees with Hutchison’s argument that the
German neoliberals who began rising to prominence in the early 1930s had more in
common with the Scottish Enlightenment than with more contemporary movements
such as the Chicago school insofar as the Germans were willing to extend their inquiries
beyond positive economic analysis to encompass the cultural, historical and political
context in which economies operated over long periods of time (Hutchison, 1979b, pp.
167–8).
2.
Ruin and reform: the crisis of
German economic liberalism
In the beerhall brawls and street fights of the Weimar Republic, National Socialists
gradually gained the upper hand over Communists. But it was an intimate struggle with many conversions to and fro and evident family resemblances: National
Socialism adopted the negative, brutal, and cynically subversive tendencies of
Communism and also its technocratic-totalitarian enthusiasm for a centrally
planned economy. This last similarity lent some justification to the claim that the
Nazis were a National ‘Socialist’ movement. But to the street brawler, this bit of
Marxian economic doctrine meant little, and he readily replaced Marxian internationalism with nationalism.
Alexander Rüstow (1980, p. 644)
For understandable reasons, analysis of National Socialism’s economic
dimension often takes second place to study of the regime’s foreign, military and racial policies. In part, this reflects the immensity of its crimes.
It may, however, also proceed from the fact that many Nazi economic
policies met with approval from large segments of European and North
American opinion, even from individuals who otherwise detested Hitler’s
creed. The regime’s success in reducing unemployment, its willingness to
adopt expansionist fiscal policies, its extensive welfare programs, its protectionist agricultural policies, and its goal of an autarkic economy were
praised by many politicians and economists throughout the 1930s.
But for some German economists in the 1930s, the Nazis’ economic policies reflected their totalitarian inclinations as much as their nullification
of basic civil liberties via the 1933 Enabling Act. In Wilhelm Röpke’s view,
the Nazis’ increasingly interventionist economic policies, culminating in
the extensive regulation and price controls associated with Germany’s
war economy, were not incidental effects of the Nazis’ desire to wage war.
The regime’s gradual collectivization of the economy, while never as thorough as that of the USSR, represented the logical conclusion of Germany
distancing itself from liberal economic and political priorities.
The reasons for Germany’s slide from the 1834 customs union
(Zollverein), which removed internal customs barriers between 38 states
of the German Confederation, towards Nazi Germany’s autarkic policies puzzled many German economists. Röpke focused on this in his two
books addressing German issues: German Commercial Policy (1934a) and
17
18
Wilhelm Röpke’s political economy
The German Question ([1945b] 1946). Röpke and other German economic
liberals were deeply conscious that the shift had occurred against the
backdrop of intense argument within the emerging economics profession of late-nineteenth-century Germany and Austria-Hungary about
the nature of economic science. On one level this dispute (known as the
Methodenstreit) concerned epistemological and methodological issues.
Yet it also reflected intense differences concerning political economy,
specifically between the ‘Austrian school’ who generally favored market
policies and the ‘historical school’ who encouraged interventionist positions (Mises [1969] 1984; Caldwell, 2004, pp. 64–130). Thus while the
Methodenstreit had profound implications for the teaching of economics in the early twentieth century, it also intersected with debates about
German political economy from 1879 onwards (Hamerow, 1972; Rüstow,
1980).
What follows is a sketch of the intellectual and historical developments
which precipitated and contextualized Röpke’s efforts to articulate a new
liberal vision of political economy in the wake of capitalism’s travails
in the twentieth century’s first decades. First, we consider the formation
assumed by German capitalism in the late-nineteenth and early-twentieth
centuries before outlining key intellectual developments during the same
period that were especially consequential for German economic liberalism. We then examine the different approaches to reforming economic
liberalism associated with figures such as Walter Eucken, Franz Böhm,
Alexander Rüstow and Alfred Müller-Armack that began emerging in
the 1920s and 1930s. Often described as ‘neoliberals’,1 this term does
reflect their common effort to produce a revised version of liberal political
economy. The term, however, also masks important differences. It is possible, for instance, to distinguish between a Cologne-based school associated with Müller-Armack and another school linked with the University
of Freiburg (Vanberg, 1988), especially Eucken and Böhm. Röpke himself
did not like the expression ‘neoliberalism’ (neoliberalismus), though he
sometimes used it to describe his approach (1953d, 1962d). He also
believed that the term ‘liberal’ had become associated with so many, often
contradictory positions that its usefulness as a stand-alone description was
questionable. Hence, he preferred expressions such as neuen Liberalismus
and neuen Liberalen because they underlined the break that Röpke and
others sought with what he often called nineteenth-century historical
liberalism (historischen Liberalismus des 19 Jahrhundert) (Röpke, 1947d).
Röpke also thought that these terms captured the fact that the attention of
figures such as Eucken to the role of law (Recht) in economic life marked
a genuinely new development in liberal thought rather than an evolution
from preexisting liberal positions (Röpke, 1950f, pp. 141–4).
Ruin and reform
19
FREE MARKETS IN CRISIS
On 31 December 1833, the internal customs barriers between most
German states were removed. Trade began flowing freely across borders
and smugglers found themselves without employment. In what now
seems ironic in light of subsequent developments, the initial impetus for
economic liberalization came from Prussia when government officials,
much influenced by reading Smith’s Wealth of Nations, established what
amounted to free trade between Prussia’s provinces. This marked a prominent break from the mercantilist, cameralist and interventionist policies
hitherto pursued by Prussia’s Hohenzollern rulers in the seventeenth and
eighteenth centuries. After the 1834 Zollverein, the next liberalizing step
was a tariff-reducing commercial treaty between Prussia and France in
1862. There was, it seems, widespread support for these policies, including
from the export-orientated Prussian agricultural sector.
Ten years later, the newly united Germany adopted a different
approach. Indeed the trajectory of German capitalism in the last half of
the nineteenth century differed significantly from the Anglo-American
world. During this period, Germany experienced a rapid transition from
a post-feudal, hierarchical society to one in which commercial bonds
were increasingly dominant. This produced significant tensions, which
were complicated by the concurrent emergence of German nationalism
during the same period, the 1848 liberal revolution’s failure to reshape the
German political landscape in favor of parliamentary democracy, and the
rise of the world’s largest Social Democrat party.
In these circumstances, Germans of a liberal political and economic
disposition increasingly found themselves in an invidious position. Their
primary political expression, the National Liberal Party, applauded the
liberalization of trade and industry regulations throughout the North
German Confederation in 1869. But they also viewed the emergence of the
Social Democratic party and its associated trade union movement with
alarm, especially given that many German Social Democrats were strongly
influenced by Marxism. By 1912, the Social Democrats had emerged as the
largest party in the German Reichstag. The National Liberals also allowed
their domestic agenda of political and economic liberalization to be subordinated to Otto von Bismarck’s successful effort to establish German unity
under the Prussian monarchy – a unity forged through Bismarck’s ruthless
realpolitik and the victories of the Prussian army and its decidedly antiliberal officer-corps over Austria-Hungary in 1866 and France in 1871.
The emergence of a German unity animated by nationalist sentiment
and underpinned by a relatively weak national legislature and a strong
monarchically focused executive contributed to German capitalism’s
20
Wilhelm Röpke’s political economy
increasingly state-orientated nature. This economic trend was exacerbated
by the new German Empire’s financial and commercial crash in 1873. This
was followed by a severe industrial recession and a downturn in German
agriculture’s profitability in the wake of competition from American
farmers. Many economists, politicians and business leaders subsequently
became skeptical of the benefits of competition and free trade.
Thus when Bismarck introduced customs duties on iron and grain
imports in 1879, he was taking advantage of growing dissatisfaction
throughout Germany with economic liberalization (Hamerow, 1972).
Though the level of duties – one mark per hundred kilos of wheat or rye –
was small by twentieth-century standards, it had tripled by 1890, a figure
which itself had doubled by 1906 (Nicholls, 1994, p. 17). This protectionist
shift was accompanied by attempts to establish a council of corporatist
organizations designed to represent the interests of a range of business and
occupational interests to the government (Abelshauser, 1984). Bismarck’s
intention was to facilitate a greater centralization of power and to marginalize the Reichstag as a rival source of authority. Though Bismarck’s
initiative failed, it embodied for many economic liberals the connection
between the reduction of economic liberty and the weakening of political liberty. Though a brief period of economic liberalization followed
Germany’s accession to a series of Central European commercial treaties in the 1890s, the economic downturn of the early 1900s gave further
impetus to interventionist policies.
Increasing doubts about free trade and other policies popularly associated with laissez-faire economics also contributed to the gradual cartelization of much of the German economy. As C.E. Fischer observes, this was
partly a reaction of German manufacturers to the economic decline of the
1870s, as they sought to protect themselves against the subsequent price
deflation. These arrangements consisted of businesses in the same industry privately agreeing to divide the market for their goods and services
among themselves and committing themselves to sell their products at
a non-market-determined price (Fischer, 1954, p. 441). As Eucken later
observed, ‘it meant that the right of freedom of contract could be used
to eliminate competition and to restrict the freedom of others by means
of sanctions, boycotts, etc. The principle of freedom of contract had thus
come into open conflict with the competitive principle’ (Eucken, 1951, p.
31). Upon receiving the legal seal of approval from the German Supreme
Court on 4 February 1897, cartelization quickly spread throughout the
German economy. According to Eucken, the increase in tariffs in this
period exacerbated the problem insofar as it helped German industry to
isolate the German market from foreign competition and then monopolize
it (ibid., p. 50).
Ruin and reform
21
These moves towards dirigiste policies were largely accepted across
Germany’s much-fractured political spectrum. Extension of the electoral
franchise had meant that millions of industrial workers gained the right to
vote. Few were inclined to appreciate the often-counterintuitive arguments
concerning the positive benefits of free trade and competition. Many voted
for the market-hostile Social Democrats. After the Social Democrats,
the Catholic Center party was the second largest group in the Reichstag.
Though firmly anti-Marxist and anti-socialist, many German Catholics
had mixed views of business and free markets, not least because of the solidarist and corporatist thinking that many late-nineteenth-century German
Catholic intellectuals applied to economic questions (Koslowski, 2000).
Given that many industrial cartels were based in the heavily Catholic
regions of the Rhineland and Silesia, the Center party had no strong
incentives to agitate for more market-inclined policies.
Nor did the German conservative–nationalist parties have any desire to
challenge the status quo. They relied heavily upon the votes of the heavily
protected, subsidized and often Junker–associated East Elbian farmers.
Moreover, like the National Liberals, German conservative–nationalists
generally approved of the social welfare programs instituted by Bismarck’s
government, beginning with a state-supported universal social insurance
scheme, which were expanded by successive Imperial and Weimar governments. Many German politicians regarded such measures as a means of
pacifying industrial workers tempted to embrace left-wing political movements (Fay, 1950). The National Liberal party itself slowly evolved into
two distinct groupings. One sought an opening to the left, while the other
aligned itself closely with the Imperial government, including its protectionist policies. Neither faction was especially interested in reinvigorating
economic liberalism, not least because much of their financial support
came from the highly cartelized iron and steel industry.
WORLD WAR, WAR ECONOMY AND ITS
AFTERMATH
By 1914, Germany’s economy had become characterized by a high
degree of regulation and cartelization and also deeply integrated into
Germany’s prevailing political order. Writing almost thirty years later,
Röpke observed:
Berlin became the magnetic pole of German economic life; here the threads
that bound together industry and politics were concentrated . . . here the great
associations had their syndics and their central offices, and no less the trade
22
Wilhelm Röpke’s political economy
union organizations . . . here, too, the whole German credit system was soon
centralized . . . ([1945b] 1946, p. 169)
Not surprisingly, Röpke commented (1938c, 1938e), these trends accelerated upon Germany’s entry into World War I. Just as the Imperial
Government’s foreign policy slowly became subordinated to the German
General Staff’s military objectives, so too much of the economy was
militarized. Germany’s war economy was directed by Walter Rathenau, a
German-Jewish industrialist who founded one of Germany’s biggest electricity companies, the Allgemeine Elektrizitäts-Gesellschaf, in the pre-war
period. Rathenau was opposed to socialist and nationalization schemes.
He did, however, favor close cooperation between the German civil
service, industrialists and union leaders in managing the economy. To this
extent, Rathenau represented what Eucken called ‘a new type of economic
politician . . . the experimentor’ (Eucken, 1951, p. 30).
Germany’s November 1918 revolution did little to change the situation.
Though the political order experienced democratization, there was no
corresponding economic liberalization. Dirigisme remained the primary
framework for economic policy. This was reinforced by the creation of a
Reich Ministry of Economics. Though it had some success in transitioning
Germany away from its war-economy arrangements, neither the economics ministry nor Germany’s central bank, the Reichsbank, was able to
contain the inflation that resulted from the decision to expand Germany’s
money supply to reduce unemployment. Monetary stabilization only
occurred in 1924.
The anti-liberal trend in economic policy was exacerbated by articles
264–75 of the Treaty of Versailles. These imposed a free-trade regime
upon Germany when it came to economic relations with the victorious
Allied powers. Free trade thus became indelibly associated with what most
Germans regarded as an unjust treaty. This made it unlikely that many
German economists, politicians, or business leaders could be persuaded
to advocate free-trade solutions to Germany’s economic problems once
these provisions of Versailles expired in 1925.2 Apart from the unpatriotic
overtones involuntarily acquired by free trade, the economic consequences
of defeat in 1918 also resulted in many German businesses actively lobbying for subsidies and, after 1925, outright protectionism. Despite growing
complaints about the level of government subsidies for industry, virtually
all segments of interwar German industry sought some type of government assistance in the 1920s, even in periods of relative prosperity (James,
1990). When Germany regained control of its economic policy in 1925, a
renewed spate of cartelization almost immediately ensued.
Given the seemingly irresistible tide of illiberal economic policies,
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23
economic liberalism experienced great difficulty in finding a political base
in Germany through which to present and argue its case. The two main
liberal parties that emerged from the ashes of the National Liberals – the
German People’s Party (DVP) led by Gustav Stresemann and the German
Democratic Party (DDP) associated with Rathenau – were opposed to
socialism, but ambiguous about competition and free trade. Like other
political parties, it was hard for them to resist the rising tide of economic
nationalism. Given the intensity of lobbying from business interests and
cartels, their own internal divisions, and their subsequent inability to forge
a cohesive economic program beyond opposition to outright socialism,
neither liberal party could present a clear market-based alternative to
the dirigisme of the socialist left and nationalist right (Maier, 1975, pp.
444–57). Cartels and protectionism became accepted as simply immovable
parts of Germany’s post-war economic landscape (Sheehan, 1978, pp.
256–7). The onset of severe recession in 1929 did not lead to any public
questioning by politicians of dirigiste economic policies. The situation
was exacerbated by the passage of the 1930 Smoot-Hawley Tariff Act in
the United States which locked many German industries out of foreign
markets. Even the deleterious effects of this protectionist measure on the
German economy did not persuade Germany’s political class to revisit the
fundamental settings of economic policy. If anything, it confirmed them in
their dirigiste ways.
AUSTRIAN THEORISTS VERSUS GERMAN
HISTORICISTS
The consolidation of anti-economic liberal trends in Germany from
the last quarter of the nineteenth century onwards did not deter a good
number of German economists from taking a dim view of these developments. During much of the same period, however, economists in Germany
and Austria-Hungary were embroiled in a serious methodological dispute.
Far from being confined to the realm of abstract economic theory, this
debate affected the direction of German economic policy before World
War II and influenced the efforts of some German economists to produce
revised theories of economic liberalism.
Economic liberalism had always enjoyed support within the Germanspeaking lands. Prussia’s trade liberalization of 1818 occurred almost three
decades before Britain’s formal embrace of free trade in 1846. Writing
over one hundred years later, Röpke observed that the Prussian officials
implementing the program of 1818 were ‘eager followers of Adam Smith’
and noted that Prussia’s experiment in economic liberalism was studied by
24
Wilhelm Röpke’s political economy
many wishing to see their own nations follow a similar path ([1945b] 1946,
p. 159). Economic liberalism’s true intellectual epicenter in nineteenthcentury Central Europe was not, however, to be found in Prussia.
In 1871, the Vienna-based scholar Carl Menger (1840–1921) published
his Principles of Economics. The effect was to re-invigorate the study of
political economy as a theoretical science capable of revealing economic
laws prevailing in all times and places. Central to Menger’s approach was
the identification of empirically verifiable dimensions of economic life,
including the time, needs and knowledge of individual persons. Menger
demonstrated how these manifest themselves in the multifarious but
observable facts of economic life, such as prices. Among other things, this
empirical method led to Menger pioneering the marginalist revolution in
economics against the production and labor theory of value associated
with Smith and David Ricardo. The latter held that the relative prices of
two or more goods mirrored the different proportions of labor invested in
the goods. Menger took a different view:
There is no necessary and direct connection between the value of a good and
whether, or in what quantities, labor and other goods of higher order were
applied to its production . . . In general, no one in practical life asks for the
history of the origin of a good in estimating its value, but considers solely the
services that the good will render him and which he would have to forgo if he
did not have it at his command . . . The quantities of labor or of other means
of production applied to its production cannot, therefore, be the determining
factor in the value of a good. ([1871] 2007, p. 145)
Menger’s subjectivist theory of value thus grounds the price of anything
– services, loans, labor, objects – in people’s subjective estimation of its
ability to meet a particular need relative to all the other goods available to
them to meet other needs.
Menger’s search for empirical laws that governed the economy’s
workings spawned the ‘Austrian school’ of economics. Its leading lights
included Eugen von Böhm-Bawerk (1851–1914), Friedrich von Wieser
(1851–1926), as well as Mises and Hayek. While this school was not free
of internal disagreements, their method of inquiry led them to conclusions that placed them very much in the free-market camp when it came
to economic policy. Another pronounced commonality was their resistance to the claims of ‘historicism’ – the view that any apparent regularity
in economic trends should be treated as historical laws that reflected the
peculiarities of a given historical period. This brought them directly into
conflict with the ‘historical school’ of economics.
As the name implies, the historical school owed much to the effort in
nineteenth-century German historical circles to resist Enlightenment and
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pre-Enlightenment natural law claims that there were certain characteristics common to all societies which can be revealed by reason. Under the
influence of figures such as Georg Hegel, many German historians argued
that all societies reflected a different developmental history and even possessed their own distinct characters (Caldwell, 2004, p. 43). Forerunners
of the German historical school such as Friedrich List (1789–1846) and
Wilhelm Roscher (1817–94) held that Smithian free-trade arguments
largely reflected particular British circumstances which could not be uniformly applied to other nations. Economists, in Roscher’s view, should
focus upon uncovering laws of general historical development. This meant
that the proper study of political economy involved placing the workings
of economic phenomena such as prices in the context of everything else
changing in Germany over a period of time. This would allow economists
to determine what stage of economic development had been reached by
different nations. On this basis, Roscher concluded, governments would
be able to adopt economic policies suited to a given country’s economic
development stage.
It was, however, Gustav von Schmoller (1838–1917) who sharpened
the emerging tensions between the ‘Austrian’ and ‘historical’ schools, not
least by penning a critical review of Menger’s Principles. Praising Roscher
for his willingness to distance economics from excessively abstract theorizing, Schmoller insisted on a deductive approach to economic phenomena
and stressed the historical–cultural conditioning of economic reflection.
Though he agreed with Menger that the labor theory of value was erroneous and accepted that the workings of self-interest should be studied in
seeking to understand economic life, Schmoller believed that classical and
Austrian economics had succumbed to the temptation of excessive theorizing. Both had consequently erected what Schmoller regarded as their
own historically conditioned insights and precepts into universal dogmas.
As Joseph Schumpeter described the views of Schmoller and his followers,
‘It looked as if theory had been no more than an interlude in the history
of ideas, an attempted foundation for the economic policies of a particular
fleeting period’ (1965, p. 82). Schmoller consequently encouraged economists to immerse themselves in the empirical collection and study of historical data and statistics, believing that the assembled facts would speak
for themselves.
From a sociological and normative standpoint, Schmoller welcomed the
manner in which the market economy linked people while simultaneously
keeping them freer by virtue of its reduction of compulsion (Schmoller,
1900/1904, vol. 2, p. 100). But he also held that free markets had potentially disintegrative effects upon social bonds. Unless a society possessed
a common sense of morality, laws and customs, Schmoller did not believe
26
Wilhelm Röpke’s political economy
that a cohesive economy could survive (ibid., vol. 1, p. 5). A student of
Prussia’s rise from Northern European obscurity to world power status,
Schmoller was convinced that the Prussian state’s intervention in economic
life, most notably under Frederick William I (1688–40) and Frederick the
Great (1712–86), had brought about faster economic development than
could possibly have occurred with laissez-faire economic policies. This,
Schmoller argued, was the pattern established in Prussian – and now –
German society for economic growth. It constituted, in Schmoller’s view,
strong grounds for similar policies to be pursued in the present. The economic liberalization that characterized Prussia between 1818 and 1873,
Schmoller argued, should be regarded as an aberration from the more
general historical pattern.
The most glaring methodological weakness in the historical school’s
approach is that while empirical studies can provide some historically
contingent information about aspects of the outcomes produced by reallife social processes, empirical studies cannot provide information about
the structures of those processes. Theoretical knowledge cannot therefore
be derived from empirical studies and statistics (Huerta de Soto, 2008, p.
15). The historical school’s strength, however, was its consciousness of the
importance of historical differences. In this regard, Schmoller’s approach
marks less of a departure from previous approaches to economics than
is often supposed inasmuch as Smith’s Theory of Moral Sentiments and
his Wealth of Nations involve far more sociological reflection than, for
instance, the more abstract economics associated with Ricardo and John
Stuart Mill. Schmoller’s insistence on placing economics into a broader
social science agenda thus had more in common with Smith’s approach
than that of Smith’s nineteenth-century English successors.
Schmoller’s views and those of the historical school were castigated
as culturally relativist by a number of Austrian school scholars. A
common historical school response to such critiques was to insist that
their approach to economics was not just historical but also an ethical
approach insofar as the historical school claimed to take the ‘social question’ seriously. By ‘the social question’, the historical school meant the
social upheavals associated with the Industrial Revolution, especially
what Röpke was to describe as the ‘proletarization’ of much of society
in the form of a large urban working class. This situation, according to
Schmoller and other members of the historical school – most notably
Gustav Wagner (1835–1917) – was the result of economically liberal policies. Classical Smithian economics, they argued, had reduced the ethical
to the pursuit of self-interest narrowly construed. It was therefore unable
to respond adequately to what the historical school regarded as the gross
inequalities and injustices released by laissez-faire. In 1873, key members
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of the historical school created an association of economists, the Verein
für Socialpolitik – the very year that the German economy lurched into
recession – which stressed that necessity and morality demanded that
the state play a central role in shaping social and economic life. By this,
they did not mean a ‘night-watchman’ state, but rather the government’s
benevolent and regular intervention into economic life to reduce social
tensions and tame untrammelled economic individualism. This helps to
explain, as Schumpeter observes, why many members of the historical
school were interested in the development of institutions and how they
shaped economic activity ([1954] 1994, pp. 811–13).
Historians continue to debate whether the historical school’s emergence
encouraged Bismarck’s government to implement a number of social
welfare programs or whether Bismarck regarded them as providing useful
intellectual cover for policies he had already decided to pursue. There is,
however, little question that the historical school’s rise was providential
for Bismarck’s gradual shift of German economic policy away from economic liberalism. Not only did the historical school oppose socialism and
social democracy, but their unswerving loyalty to what they regarded as
the House of Hohenzollern’s nation-building project made them convenient academic allies for the government. In 1874, for instance, Schmoller
presented a paper in which he attacked economic liberalism and lamented
the failure of Germany’s liberal middle class to address the social problems
unleashed by capitalism, while simultaneously underscoring how previous
Hohenzollern monarchs had not hesitated to use state power to preempt
or correct potentially disastrous social developments (Small, 1924, pp.
249–53).
The differences between the historical and Austrian schools over the
nature of economic science – or, as Mises claims, ‘whether there could
even be such a thing as a science, other than history, dealing with aspects
of human action’ (1969, p. 12) – was bound to produce intellectual conflict. Over time, the Methodenstreit became increasingly bitter. With
each school attacking the other’s methodology, they became locked into
antagonistic positions. Yet the differences between the schools should not
be exaggerated. Schmoller acknowledged and approved of the market’s
ability to facilitate connections between millions of previously disassociated people, and noted how this left individuals freer by diminishing
many constraints that were unjustifiable on moral or economic grounds
(Schmoller [1900/1904] 1919, vol. 2, p. 100). Likewise prominent Austrians
such as Mises and Hayek moved beyond strict economics in their later
years, having become convinced that some of the reasons for the drift
toward collectivism lay in the extra-economic realm. Moreover, there
were, as Caldwell observes (2004, pp. 77–8), some similarities between the
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Wilhelm Röpke’s political economy
two schools. This included their mutual antagonism toward positivism
and Marxism and a wariness about mass movements, especially as democratization spread throughout Western, Central and Northern Europe. The
most disappointing aspect of the historical–theoretical dispute, Caldwell
notes, is that it obscured the fact that both the study of history and the
exposition of theory had a role in comprehending social developments
(ibid., p. 404). From this standpoint, the Methodenstreit might be regarded
as a polemic between theory (the Austrians) and empiricism (the historical
school).
Whatever the Austrian and historical schools’ respective merits, there
is no question that Schmoller and the historical school won the battle for
supremacy when it came to securing chairs of political economy throughout Imperial Germany. Writing several decades later, Mises claimed that
Schmoller enjoyed a close friendship with Friedrich Althoff, who controlled academic appointments on behalf of the Prussian education ministry,
and that Althoff relied heavily upon Schmoller for advice on suitable
appointments (Mises, 1969). This facilitated the spread of what its detractors called Kathedersozialisten (socialism of the chair) throughout German
universities, whose adherents invariably agitated for more Bismarckian
social programs.
EUCKEN, BÖHM AND FREIBURG
ORDOLIBERALISM
Eventually the historical school declined in relevance and importance
throughout Germany. This resulted partly from inner dissension, especially after Max Weber’s critique of historicist methodology. Even more
damaging was Imperial Germany’s defeat in 1918, which discredited those
intellectual schools associated with the Hohenzollern–Bismarckian state.
It remains, however, that the combination of the historical school’s long
intellectual ascendency, Bismarckian dirigiste policies, and the economic
arrangements imposed on defeated Germany between 1919 and 1925,
continued to incline many German economists toward economic nationalist policies and against economic liberalism. Moreover, after World
War I, the German confidence in progress – especially as expressed in
liberal thought – was severely undermined and replaced by a pessimism
which regarded the nineteenth-century faith in progress through liberty
and free exchange as naive, even dangerous. Hence by the 1920s, German
economics was at the crossroads. Though economic liberalism seemed
widely discredited, the historical school was also in decline. Many German
economists responded by effectively embracing economic nationalism or
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Marxist theories. How did those who still considered themselves economic
liberals respond to this situation?
While economic liberalism managed to survive in Weimar Germany,
it differed from the program articulated in post-war Austria by Mises, by
far the most penetrating exponent of Austrian economics following World
War I. A self-described ‘paleo-liberal’, Mises articulated powerful critiques of the socialist, dirigiste and corporatist economic policies pursued
by successive Austrian governments. Mises’ economic thought is invariably denoted as laissez-faire (a label accepted by Mises), though Mises
himself always stressed that his conclusions were derived from the strictly
scientific approach to economics pioneered by Menger. Mises’ Socialism
([1922] 1932) held that socialist economies would ultimately fail because
no amount of government planning could possibly substitute for the free
price mechanism’s unique ability to transmit information about the supply
and demands of goods. This economic calculation argument formed a
crucial part of Mises’ ongoing advocacy for strong anti-inflationary policies and the radical liberalization of economic life throughout the 1920s
and 1930s. According to Mises, the tendency of governments to accord
legal privileges to trade unions, to provide unemployment benefits, to
legislate minimum wage laws, to generate artificially low-interest rates
through manipulation of the money supply, and to denigrate the importance of a sound currency backed by an irrevocable commitment to the
gold standard had all contributed to Germany and Austria’s post-war
economic problems.
Though challenged by many, Mises’ critique of socialism proved influential in convincing some economists that socialism was bound to flounder on the reefs of sound economic science. Reading Mises’ early works,
Röpke later stated, rendered him forever ‘immune’ from ‘the virus of
socialism’ (1961c, p. 6). Still, economic liberalism’s path in Germany was
different from that advocated by Mises, and ultimately to be more influential on Röpke’s economic thought. Crucial figures in this regard were
Eucken, Rüstow, Böhm and Müller-Armack.3 For all their reservations
about the historical school, these thinkers showed relatively early in their
careers that their agenda went beyond economics as a positive science.
The son of the philosopher Rudolf Eucken (1846–1926), winner of the
1908 Nobel Prize for Literature for his work on Kantian ethical theory,
Walter Eucken’s thought and writings appear to have reflected something
of his father’s anti-positivism, anti-utilitarianism, anti-socialism (Eucken,
1921a, p. 126, 1921b, p.186), as well as the influence of the phenomenological philosopher Edmund Husserl (1859–1938) who taught at the
University of Freiburg. Like his father, Eucken was a believing Protestant
Christian. However, he pursued a different academic career. Eucken began
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Wilhelm Röpke’s political economy
his doctorate in economics at the University of Bonn first under the supervision of Heinrich Dietzel, one of the few German economists with a university position who did not belong to the historical school (Bilger, 1964,
pp. 40–44). Eucken then worked as an assistant to Hermann Schumacher,
a noted adherent of the historical school (Wendt, 1956), completing his
doctorate in 1914.
Although exposed to both theoretical and historical approaches to economics, Eucken was critical of what he viewed as many German economists’ tendency to adopt a position of historical relativism and to view
economics as the study of specific economic questions in a given set of
historically contingent conditions. Eucken observed, for example, that the
historical school had justified the German economy’s cartelization in terms
of a necessary process of historical evolution (1951, p. 84). He also argued
that economic science had been deformed by ‘the relativist conception of
truth brought about by the historical school, pragmatism, positivism, and
other intellectual movements of the previous century’ (Eucken [1940] 1992,
p. 305). Adam Smith, he noted, had indeed worked out his economic principles in the context of an economy shifting from mercantilist conditions
towards freer economic arrangements. This, however, did not invalidate
Smith’s theoretical insights. For Eucken, the theoretical truths remained
valid, regardless of historical circumstances, just as the truths discerned
through the natural sciences were of a permanent significance, no matter
what the historical period in which they had been discerned. Rejecting
historicism was, Eucken held, essential if economists were to pursue their
central task, which was to discover the truths of economic science and
then defend them, especially against those anxious to exempt themselves
from market disciplines (1938, pp. 63–86). He thus sought to break free of
the historical school’s anti-theoretical empiricism and to return German
economics to the realm of theory from which it had been cut off during the
historical school’s long period of dominance.
Eucken’s conviction that economic science was capable of discerning
universally valid positive truths did not mean that he was disinterested in
normative questions. Indeed, his concern for free markets was not primarily based on utilitarian arguments but rather upon the notion that humans
were ends in themselves. The overall purpose of intellectual activity across
the centuries was, Eucken held, to be found in the concept of ordo, in the
sense of ‘the meaningful bringing together of diversity to a whole’, an idea
which first found exemplary expression in medieval scholastic thought
(1952, p. 372). In his Grundlagen der Nationalökonomie, Eucken focused
upon the study of economic systems in concrete historical situations, but
underscored that he thought there was an order of things that transcended
immediate historical circumstances. He even went so far as to contend
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that the essence of capitalism’s crisis lay in the moral and spiritual realm.
This required a return to a ‘comprehensive spiritual order of life’ (Eucken,
1926, pp. 15–16), because human life could ‘only be given a comprehensive
meaning again by religion, by the belief in God’ (Eucken, 1932a, p. 87).
Liberalism, Eucken claimed in a letter to Rüstow, decayed ‘as soon as it
lost its religious and metaphysical content’ (cited in Lenel, 1991, p. 13).
Eucken was especially concerned with the issue of how to preserve
freedom in complex social orders based primarily upon voluntary cooperation. He worried about the accumulation of power and was less
convinced than laissez-faire thinkers that the spontaneous interaction of
people usually sufficed to produce a stable and flourishing social order.
The pursuit of self-interest, Eucken thought, was not always beneficial,
especially when private parties enlisted state power to conspire against
others to nullify the freedom of market transactions. This collusion of
private and public power undermined essential market mechanisms such
as free prices and paved the way for extensive economic intervention
and, eventually, centrally planned economies. Again and again, Eucken
emphasized that economic reality cannot be understood without considering the fact of economic power. From Eucken’s standpoint, the essential
problem of economics was therefore how to overcome scarcity without
destroying liberty (1952, p. 300). Eucken’s vision of political economy was
thus shaped by his commitment to the rather Kantian normative goal of a
social, political and legal order in which each individual’s liberty from all
other individuals and the state was preserved (ibid., pp. 181–99).
Pursuing an intellectual project of such magnitude required, in Eucken’s
view, ‘a very dispassionate analysis’ (ibid., p. 300) and a division of labor
among intellectuals. Hence Eucken was not initially inclined to accept
the historical school’s attempt to embed the pursuit of economic truth
in the study of history and sociology. This may explain why Eucken did
not address these more normative concerns in great detail in his primary
economic works. It also suggests that Eucken generally adhered to his
original decision to limit his theoretical work to a defined set of parameters. He seems to have resigned himself to accepting that no individual
could produce a comprehensive explanation of all spheres of social existence as Smith himself had tried but failed to complete. Yet despite his
efforts to focus on a specific field, Eucken’s approach to economics grew
increasingly synthetic over time.
Eucken’s first forays into public policy debates underlined his skepticism about the efficacy of state economic intervention. Eucken’s work
on monetary theory, for instance, challenged the notion that inflation
was caused by currency speculation,4 a negative balance of payments and
excessive imports. Inflation in post-war Germany, he insisted, was caused
32
Wilhelm Röpke’s political economy
by government deficit-spending and the Reichsbank’s loose interest-rate
policy (Eucken, 1923). Like Mises, Eucken argued that inflation was a
monetary phenomenon that proceeded from loose monetary and credit
policy (ibid., p. 80). Indeed at a 1924 Verein conference, Eucken supported Mises when the latter critiqued balance-of-payments explanations
for inflation (Nicholls, 1994, p. 34). Throughout the rest of the 1920s and
early 1930s, Eucken broadened his critique of economic nationalism. He
argued, for example, for Germany’s return to the gold standard (1925, pp.
79–81), maintaining that this would limit the state’s ability to pursue monetary policy according to the desires of powerful interest groups. Eucken
also stressed the economic advantages of German businessmen borrowing
capital from abroad at cheaper interest rates (1928, pp. 120–23), an argument that reflected his commitment to free international capital markets at
a time when autarkic policies were becoming popular in Germany.
After his appointment as professor of economics at the University of
Freiburg im Breisgau in 1927, Eucken’s work began to integrate insights
from history and law that shaped his approach to political economy in a
decisive way. In 1932, Eucken outlined a type of historical–institutional
stage-theory explanation of the development of the relationship between
the economy, the state and society. Mercantilism, Eucken maintained,
involved sovereigns building up economic enterprises and structures
that boosted the state’s power. The age of liberal capitalism reflected the
dismantling of such structures and the state’s withdrawal from much of
the economy. But, Eucken held, the period following Bismarck marked a
reversion to the state’s extensive intervention in economic life. This form
of interventionism, however, differed from mercantilism inasmuch as the
state itself was no longer in charge (Eucken, 1932b, p. 304). For Eucken,
a state that constantly expanded its functions became, paradoxically
enough, weak and unable to perform its limited but essential roles (ibid.,
p. 307, 1952, pp. 300–301). While entrepreneurial activity continued in the
sense of technical innovation, government economic policy became virtually indistinguishable from the particular interests of established businesses and politically connected entrepreneurs (Eucken, 1932b, p. 304).
The situation was exacerbated by the fact that the state was no longer
subject to an absolutist monarch or small powerful executive. Instead it
was highly susceptible to the dynamics created by the emergence of mass
movements who exerted increasing power as a consequence of the steady
democratization of political life. In these circumstances, state power had
‘no unifying thought or will’ (ibid., p. 307). It was subsequently unable to
resist the pressures of interest groups and the masses. Economic liberty
was consequently diminished. When competition was restricted, the question of power became unavoidable (Eucken [1940] 1992, p. 202). The
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solution, in Eucken’s view, was to work toward a separation of the political and economic realms that was as unambiguous as possible (1932b,
p. 302).
Eucken’s work in the 1920s and early 1930s thus focused upon theoretical argumentation supplemented with some historical analysis in order
to shed light on Germany’s particular economic and political problems.
Gradually, however, Eucken became persuaded that neither Menger’s
theoretical approach nor Schmoller’s historical–empiricism were adequate
for his purposes. Neither Menger’s insistence on separating theory and
history nor Schmoller’s ‘pure empiricism’ did ‘justice to economic reality’.
Consequently, Eucken concluded, ‘a new start is necessary’ ([1940] 1992,
p. 324). ‘Economic science’, he claimed, ‘is compelled to do justice to the
historical diversity of economic forms and yet, at the same time, to treat
problems in a theoretical and general way’ (1951, p. 87). A major reason
for this development in Eucken’s thought was the influence of the legal
theorist, Franz Böhm, whom Eucken encountered after taking up his chair
at Freiburg. Böhm was especially interested in the role of law in shaping
economic conditions. Having served in Germany’s economics ministry
in the 1920s, Böhm witnessed at first hand how farmers and industrialists worked closely with politicians to ensure that the German economy
remained on a dirigiste path. ‘The experience of the last decades has
shown’, Böhm contended, ‘that business associations and interest groups
have mastered the art of turning every politically influential ideology to
their own purpose in a most effective manner’ (1933, p. xi).
Among the many restraints on competition created though business
collusion with politicians, Böhm was especially attentive to cartelization.
This was a prime example of law, he noted, being shaped to justify preexisting anti-competitive economic practices. From Böhm’s standpoint,
the critical problem was not simply that it undermined competition. It
also eroded crucial distinctions between the public and private spheres
when it came to the subject of power. As Knut Wollgang Nörr observes,
‘Public power over public matters, i.e., government, was accepted, as was
private power in the private sphere . . . but not private power transcending the private sphere and spreading out into the public’ (2000, p. 155).
This was to become a central concern of the emerging Freiburg school of
ordoliberalism. As Böhm commented retrospectively:
The question which preoccupied us all was . . . the question of private power in
a free society. This leads by necessity to the further question of what an order of
a free economy is made of. From there one arrives at the question, what kinds
and possibilities of economic power are at all feasible, what role is played by
power in each, in fact the power of government as well as the power of private
persons and groups, and what obstructions of order arise if a distribution of
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power emerges within state and society which differs from that which conforms
to the respective economic system. (1957, p. 162)
In 1933, Böhm produced his magnum opus Wettbewerb und
Monopolkampf (Competition and the Struggle against Monopolism).
Apart from representing the most powerful critique of cartelization and
protectionist policies of the early 1930s, this text was an early exercise in
what later came to be called ‘economic constitutionalism’. As summarized in the famous Ordo Manifesto composed by Böhm, Eucken and the
lesser-known Hans Grossman-Doerth, this project consisted ‘of viewing
individual economic questions as constituent parts of a greater whole. The
treatment of all practical political–legal and political–economic questions
must be keyed to the idea of the economic constitution . . . The economic
constitution must be understood as a general political decision as to how
the economic life of the nation is to be structured’ (Eucken, Böhm and
Grossman-Doerth [1936] 1989, pp. 23–4). Normatively speaking, economic constitutionality was concerned with an equality of rights, personal
liberty and protecting the liberty of action of the individual and the state
against established economic power (Möschel, 2001, p. 157).
Other economic liberals working outside the emerging Freiburg school
arrived at similar conclusions in the same time period. In 1935, Hayek
claimed that ‘The question as to which is the most appropriate permanent
framework which will secure the smoothest and most efficient working of
competition is of the greatest importance and one which must be admitted has been sadly neglected by economics’ ([1935] 1948, p. 135). Part of
Böhm’s reason for writing his 1932 book was to demonstrate that, from
a legal perspective, the free market was by no means ‘unfettered’. Market
economies, he argued, embodied a distinct order based on the idea of
competition. Competition, Böhm held, possessed the characteristics of an
institution because it was predicated upon certain political and legal decisions that allowed it to emerge. Once competition existed, the legal system
was responsible for protecting its foundations from rent-seeking interest
groups.
This was consistent with law’s purposes, Böhm maintained, precisely
because the role of law was to serve the common good rather than the
sectional interests of any one group – including civil servants. The moment
that law begins serving vested interests, reverence for law is bound to
decline and competition as the organizing principle of economic life
gradually disappears (Böhm, 1933, p. 323). Instead the effort of private
businesses shifts from entrepreneurship and wealth-creation to political
manipulation and bureaucratic lobbying. In this scenario, consumers lose
out to the organized efforts of well-organized businesses, industries and
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unions who essentially manipulate markets for their own benefit. Part of
the moral value of the ordoliberal vision of the economy lay precisely in
the fact that it sought to make the market as free of privileges as possible.
Though Böhm did explore how different historical ideas, such as
Rousseau’s theory of the General Will, had contributed to the state
succumbing to powerful interests (Böhm [1966] 1989), his approach to
economics was primarily theoretical. In Wettbewerb und Monopolkampf,
Böhm specified that he was seeking to translate the language of classical
political economy into the parlance of legal discourse. In doing so, he
facilitated something of a mini-revolution in much German economically
liberal opinion by underscoring the importance of institutions – something highlighted by the historical school – but without embracing the
historicist error. Böhm’s conclusion was that free exchange required the
formal definition of property rights and the specification of a set of rules
which allowed people of equal legal status to freely associate with each
other through private contracts. Cartels, to Böhm’s mind, exemplified
how private contracts, often with the support of the legal system and government, were used to shelter sections of the economy from competition.
Hence it was necessary for the law to ensure that markets remained open
to competition, not least because competition helped limit consolidation
of political and economic power. In this sense, legal guarantees of competition indirectly protected the economic and political liberty of individuals.
As Streit and Wohlgemuth observe, this is one of Freiburg ordoliberalism’s most important insights (2000, p. 231). They were not prepared to
allow people to freely decide among themselves to restrain the economic
freedom of others, especially consumers, which, as Viktor Vanberg
stresses, is a central emphasis of Smithian political economy (2004, p. 12).
Under Böhm’s influence, Eucken’s attention began shifting toward
developing a policy of order to realize and maintain a free-market
economy. In 1961, Röpke recalled that at the second Mont Pèlerin
meeting in 1949, Eucken and Mises had engaged in a major dispute about
how to address monopolies which in turn led to a wider argument about
the organizing concept of the market economy. For Mises, it was the
unhampered market. Eucken by contrast believed that it was a competitive and constitutional order (Röpke, 1961a, p. 10; Vanberg, 2004, p. 16).
One of Eucken’s criticisms of nineteenth-century liberalism was that it left
the rules governing economic life up to uncontrolled development and
seemed to deny that law – especially rule of law – had a role in improving
social conditions in the sense of promoting justice, especially in the sense
of contractual equity. Instead of simply waiting for economic problems to
resolve themselves, Eucken claimed that there had to be a ‘general political
decision’ to create and protect an economy characterized by freedom and
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Wilhelm Röpke’s political economy
complete competition, by which, as Hans Willgerodt observes, Eucken
did not mean ‘perfect competition’ but rather the minimization of arbitrary coercive power (Willgerodt, 1975). Once this basic framework was
in place, the state was responsible for maintaining the legal and institutional framework of a free economy, but should not meddle in the process
of market competition, especially the price mechanism (Eucken, 1951,
p. 96).
Undergirding Eucken’s ordo framework were one ‘fundamental’, seven
‘constitutive’ and four ‘regulative’ principles. The fundamental principle required for free competition, Eucken specified, was an efficient and
free price system. This ruled out policies such as exchange controls and
monopolies. The constitutive principles were a commitment to a stable
anti-inflationary monetary system; open markets and free trade; protection of private property; freedom to contract (without allowing people to
contract in ways that diminish others’ freedom to contract); liabilities for
people’s formal commitments and choices (thereby tying risk to responsibility); constancy of economic policy (in the sense of avoiding decisions
that create uncertainty); and, lastly, acknowledging the interdependence
of all the aforementioned constitutive principles (Eucken, 1952, p. 254ff).
When it came to government interventions in the economy, Eucken sought
to limit these to what he called ‘regulative principles’ consistent with maintaining a free market, such as prohibiting the establishment of monopolies
(ibid., pp. 291–4). An economy controlled by monopolies and cartels
effectively destroyed the liberty of other market participants, thus rendering meaningless the rule of law (ibid., pp. 41–55). The second principle
was ‘incomes policy’, by which he meant redistributive measures (such as
progressive taxation) when market outcomes were socially unacceptable.
Third, under the heading of ‘economic calculation’, Eucken identified
the internalization of external costs of the technological development
associated with economic progress, such as environmental protection.
Eucken’s fourth regulative principle concerned the labor market. Here
he was willing to countenance the setting of a minimum wage as well as
trade unions, provided that they respected the limits established by market
competition.
According to Eucken, these principles required the existence of a state
strong enough to resist interest-group pressures, but whose own authority was strictly limited by the same principles. This necessitated a political
constitution that protected the economic constitution while itself being
rendered immune from the machinations of power-seekers. For Eucken
and Böhm, the political order thus had a twofold task. First, it had to
articulate a highly developed system of checks and balances that inhibited the potential for arbitrary uses of state power. Its second task was to
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secure the independence of those with the legitimate authority to make
laws from pressures exerted by interest groups (Streit and Wohlgemuth,
2000, p. 231).
ECONOMICS AND HISTORICAL SOCIOLOGY:
RÜSTOW AND MÜLLER-ARMACK
While Eucken and Böhm focused on developing a type of economic–legal
constitutionalism, their fellow economic liberals, Alexander Rüstow and
Alfred Müller-Armack, sought to integrate the study of economics with
insights derived from historical sociology. Unlike Eucken and Böhm,
Rüstow returned from World War I a convinced socialist. Like Böhm,
Rüstow worked in the economics ministry in the immediate post-war
period, and was responsible for plans to nationalize Germany’s Ruhr coal
industry. The ongoing instability of Weimar governments in the 1920s
made implementation of such plans increasingly improbable, so much
so that Rüstow resigned from the ministry in 1924 to become research
director for the German tool and dye industry association (VDMA). This
industry was negatively affected by the coal and steel cartels’ price-fixing
practices and the protection extended by the state to East Elbian agricultural interests in the form of import duties on grain and direct financial
assistance. These experiences facilitated Rüstow’s disillusionment with
socialism (Rüstow, 1980, pp. xiii–xxix) and turned him into a prominent
and vocal anti-dirigisite.
Rüstow’s substantial intellectual contribution to German neoliberalism
began in 1932, when, during a presentation at the Verein, he insisted that
liberating the state and law from the influence of rent-seeking pressure
groups, cartels and legally sanctioned monopolies had to be central to any
new program of economic liberalism ([1932] 1982, pp. 185–6). Rüstow also
argued that the state’s economic role should primarily be one of protecting competition from any interest group seeking legal privileges (ibid., p.
186). This meant that while the state’s power should be limited, it should
also be strong enough to defend the market economy from private actors.
Rüstow’s subsequent call for a strong state in the interests of a liberal economic policy was to be immensely influential on those Germans rethinking
economic liberalism in the post-Depression era.
Rüstow’s concerns about the social question led him to advocate particular redistributionist policies, such as inheritance taxes (Rüstow, 1950, p.
98), to reduce economic inequities in society. More significantly, Rüstow
held – like Schmoller – that markets tended to undermine social cohesion:
‘competition as such’, he wrote, ‘appealing as it does solely to selfishness
38
Wilhelm Röpke’s political economy
as a motivating force, can neither improve the morals of individuals nor
assist social integration; it is for this reason all the more dependent upon
other ethical and sociological forces of coherence’ (Rüstow in Röpke,
1942, p. 272). Rüstow chose to invest much of his energy in explaining
why this was the case. Throughout the 1930s, most of which he spent as
an exile in Turkey, Rüstow began connecting his economic liberalism with
his growing interest in the history of ideas. In a series of reviews and essays
which gradually turned into books, Rüstow sought to explain why economic liberalism, which dominated much of nineteenth-century Western
Europe, had become discredited by 1919. He eventually concluded that
the problem was ultimately one of the intellectual and religious culture
associated with laissez-faire, an argument he articulated at great length at
the end of World War II (Rüstow, 1945) but later expanded upon in his
own opus, Freedom and Domination.
Rüstow’s argument was that classical Smithian economics was born at a
period in which the late-Enlightenment Deistic confidence in natural harmonies dominated much eighteenth-century intellectual life. According
to Rüstow, ‘Eighteenth-century deism . . . was permeated with the religious belief that the laws of the market are effluences of divine world
reason’ (1980, p. 455). This led to economic liberalism absorbing a type of
‘sociologic blindness’ (ibid.) to the political, social and legal preconditions
that allow markets to work in the first place. The mistake of laissez-faire
advocates, Rüstow maintained, was their failure to realize that only ‘so
long as the unrelenting market police of a strong and independent state
excludes every private formation of monopoly and every obstacle to competition [will] the market economy produce an automatic harmonization
of self-interest and public weal’ (ibid.). The absence of such an authority
‘above’ the market allowed established businesses to diminish competition through cartels and state-sponsored policies of tariffs, subsidies
and regulation. In this light, Rüstow suggested, one could hardly blame
Western Europe’s working classes for adopting similar strategies. The
most obvious such maneuver was the efforts of trade unions to establish
labor monopolies and request state assistance in doing so (ibid., p. 456).
On these grounds, Rüstow sought to distinguish between ‘the freemarket economy of perfect competition, which constitutes the normal
object of liberal economic theory’ and its impure historical expression,
‘the subsidy-ridden, monopolistic, protectionist, pluralist economy of the
nineteenth and twentieth centuries that resulted in a quasi-theological
perversion of laissez-faire’ (ibid., p. 459). The latter, Rüstow added, was
properly designated as ‘capitalism’ (ibid.). Rüstow conceded that this
distinction meant that he agreed with Marx’s proposition that ‘this “capitalist” economy, carried further, must perforce lead to communism and
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collectivism’ (ibid., p. 458). But Rüstow insisted that what he considered
to be the true market economy did not necessarily lead to ‘capitalism’.
Nineteenth- and early-twentieth-century ‘capitalism’ was a phenomenon
of the market economy’s corruption from its gradual association with
non-economic elements ‘inimical’ to the market economy.
A crucial part of Rüstow’s Schmoller-like attention to history was
his growing conviction that the market economy’s degeneration into
‘capitalism’ formed part of a historical stream going back to Antiquity in
which societies had struggled, usually unsuccessfully, to preserve freedom
against the forces of domination. Rüstow celebrated the High Middle
Ages as a period in which, for all its faults, freedom had achieved an
eminence that had since proved difficult to replicate. However, he viewed
the Enlightenment more ambivalently and the French Revolution as a
positively regressive step. Similar sentiments are found in the writings of
another German economic liberal – Alfred Müller-Armack.
Müller-Armack’s path toward economic liberalism was more complicated than that of Eucken, Böhm and Rüstow. A committed Christian
and intensely interested in Catholic social teaching, Müller-Armack
obtained his doctorate at the University of Cologne in 1932, and became
an established professor on the Cologne faculty in 1939 (Watrin, 2000, p.
193). Müller-Armack spent much of the 1920s working on business-cycle
theory. While he opposed price controls as a way to dampen business-cycle
fluctuations, Müller-Armack also held that allowing wage levels to fluctuate in an unhampered manner was ineffective. Far better, he argued, were
restrictive credit policies, preferably implemented by banks, which should
be used early in the upswing of the business cycle rather than in the boom’s
later stages as its momentum began declining (Müller-Armack, 1929).
Business-cycle theory was an important component of Müller-Armack’s
overall economic vision, not least because it reflected the reality of the
market system as a dynamic and open economic phenomenon whose
future could not be predicted (Müller-Armack, 1932). This contradicted
the Marxist position that capitalism’s very nature would lead it in the very
predictable direction of socialism and eventually communism (Watrin,
2000, pp. 196–7). Müller-Armack, however, perceived a greater threat to
the market’s open nature as emanating from the sphere of politics. Politics
was, in his view, inevitable because there was no ‘end of history’ in which,
for example, peaceful trade universally prevailed. The persistence of historical contingencies and human error meant that politics understood as
‘the artificial regulation of human relations’ could not be avoided. The
political order always had the ability to expand beyond the boundaries
set by laissez-faire policies, and was always susceptible to being captured
by pressure groups. Both of these potentialities, Müller-Armack held, had
40
Wilhelm Röpke’s political economy
been realized in Germany through the growth of cartels, successful lobbying by industry for economically illiberal policies, and the breakdown
of the constitutional distinction between state and society, exemplified by
government economic interventionism.
Like Eucken, Rüstow and Böhm, much of Müller-Armack’s subsequent theoretical research was not concerned with trying to restore
laissez-faire arrangements. It was, he believed, a ‘disastrous mistake to
expect that the mechanism of the market itself will create the ultimately
worthwhile social order’ (1947, p. 85). Given the inevitability of the
market being subject to political pressures, Müller-Armack suggested
that the most optimal approach was to design socially and economically interventionist policies that did not damage the competitive order’s
fundamental institutions, but which also met modern industrial mass
society’s peculiar social needs (1971, p. 51). He was looking for a way
to allow interventions which did not undermine a price system capable
of adapting to changing consumer preferences, the coordination of economic life through competition, and a system of rules that encouraged
entrepreneurship. Interventions that did not violate these vital prerequisites for markets, Müller-Armack believed, allowed economic freedom to
be integrated with measures that provided some degree of social security.
Security, he argued, did not require nullifying the rules underlying the
market. That, Müller-Armack argued, was the mistake of measures such
as price controls (1947, p. 107). Yet Müller-Armack had no objection in
principle to ‘open direct subsidies’ because he regarded these as preferable to barring access to markets or hidden subsidies. Direct subsidies
were subject to scrutiny and therefore, he maintained, more likely to go
to those truly in need (ibid., p. 109).
Müller-Armack’s willingness to permit government interventions in the
economy went far beyond what Eucken and Böhm thought permissible,
and even exceeded Rüstow’s parameters. Müller-Armack was thus closer
to Schmoller than others commonly identified with ordoliberalism and
sociological neoliberalism – something that Müller-Armack acknowledged
later in life ([1973] 1974, p. 83). On several occasions, he noted that his economic philosophy was grounded ‘in dynamic theory and in philosophical
anthropology, both of which were developed in the twenties, in a different
view of the state and the further development of the idea of style, which
is usually rejected by neoliberalism’ ([1962] 1974, pp. 148–9). By ‘style’,
Müller-Armack meant a ‘stylistic coordination between the spheres of life
of the market, the state and societal groups’ (ibid., p. 149). To this extent,
he agreed with the historical school that the economy’s formal direction
towards realization of specific political and social ends was achievable and
desirable (Müller-Armack [1973] 1974, p. 248).
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Müller-Armack also shared Schmoller and Rüstow’s interest in theories
of historical development (Müller-Armack [1948b] 1974, p. 108). This may
explain why, as Christian Watrin notes, Müller-Armack’s ‘publications
on political economy were permeated with social-philosophical reflections’ (2000, p. 214). These thoughts also reflected a central conclusion of
Müller-Armack’s research: that economic, social, and political institutions
are powerfully shaped by different religious convictions (Müller-Armack,
1944, p. 110). Müller-Armack was not inclined to determinist positions,
but, following the line of inquiry outlined in Weber’s Protestant Ethic
and the Spirit of Capitalism, looked carefully at the intellectual and spiritual roots of different economic arrangements and concluded that different religious convictions explained many variations between Catholic,
Protestant and Orthodox Europe.
The close links, Müller-Armack argued, between Eastern Orthodoxy
and the state had meant that it was harder for any significant non-familial,
non-state forms of association, such as market economies, to emerge
in Orthodox countries. By contrast, Catholicism had helped facilitate
Western Europe’s feudal culture in the Middle Ages. This made it difficult for national boundaries to take root, thereby encouraging relatively
free trade throughout Western Europe. Looking at Protestant-influenced
areas, Müller-Armack noted that Calvinist regions had quickly developed
the basics of a liberal economic system, while Lutheranism’s bolstering
of royal power in the post-Reformation period helped foster absolutism,
strong state bureaucracies, and less-liberal economic arrangements. In
later works, Müller-Armack argued that the Enlightenment had given rise
to a particular understanding of reason that facilitated economic progress,
but which also helped spawn totalitarian-inclined movements, ranging
from French Jacobinism to Marxism–Leninism (1948a).
The point of these historical excursions was Müller-Armack’s desire to
reconcile apparently opposing forces, ranging from Catholic social teaching and Protestant social ethics, to classical liberalism and corporatism.
Following World War II, he focused on balancing the need for social protections with the requirements of a market economy. Here Müller-Armack
differed from Eucken, Böhm and even Rüstow who generally regarded the
market economy’s ‘social’ aspect as ensuring that the market embraced as
many people as possible, rather than attempting to balance the outcomes
of market transactions, or synthesize corporatist-like arrangements with
the market. Müller-Armack was thus prepared to contemplate codetermination arrangements in businesses that exceeded a certain number of
employees, government subsidies for small business, and even policies
aimed at eliminating business cycles in the name of full employment
(Müller-Armack [1960] 1982, pp. 53–61). Without the active promotion
42
Wilhelm Röpke’s political economy
of social cohesion, Müller-Armack believed, it was questionable how long
the market economy could sustain itself.
RÖPKE AND THE NEW ECONOMIC LIBERALISM
After World War II, Eucken, Böhm, Rüstow and Müller-Armack
exerted considerable influence upon West German economic policy.
Böhm was a prominent member of the Bundestag, while MüllerArmack served as State Secretary in the Ministry of Economics, and
was thus close to Ludwig Erhard. This does not mean, however, that
they promoted identical policies. As Razeen Sally observes, ‘there are
some differences in emphasis, and some differences in content, between
the Freiburg School and the “sociological neoliberalism” of the others’
(1998, p. 106). Though not inattentive to history, Eucken and Böhm
focused upon the intersection between the legal and economic realms
whereas Rüstow and Müller-Armack incorporated stronger sociological, historical and religious emphases into their writings. Rüstow and
Müller-Armack were also more willing to permit state intervention in
the economy than Eucken and Böhm, and more explicit about their
ambition to develop a ‘third way’ which retained laissez-faire’s benefits
and avoided socialism.
Nevertheless the similarities should not be downplayed. Like Keynes,
the German new liberals were prepared to consider significant changes to
capitalism in order to ‘save’ the best of the market economy. Apart from
their common conviction that a return to laissez-faire was neither possible
nor desirable, both the ordoliberals and sociological neoliberals sought,
in their own ways, to overcome the theory–history division. Whereas the
historical school took the view that history was theory, Eucken, Böhm,
Rüstow and Müller-Armack’s writings reflect a keen interest in theoretical
questions on their own terms. But none, however, was prepared to consider these matters as ahistorical phenomena. Ordoliberals and sociological neoliberals also had a common interest in maintaining a social order
that upheld liberty over the long term. They did not regard economic efficiency or free markets as ends in themselves. It was about realizing certain
normative goals.
Likewise these economists’ diagnoses of Germany’s economic and
political problems had much in common. All placed a premium on preventing the state’s capture by interest groups and wanted to elevate the
state to a position whereby its powers were clear, limited and immune to
being co-opted to serve sectional ends. Finally, all were driven by a sense
that Germany’s economic problems were not simply the result of mistaken
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economic theories, but also moral and political errors. From a Hayekian
perspective, some of their ideas may seem somewhat constructivist. But in
the context of a society as traumatized as Germany after 1918 and 1945,
such policies are understandable.
For a brief period after World War I, Röpke adopted mildly socialist
views. It was, he commented retrospectively, the natural position of ‘those
who wished to make a radical protest against the Prussian system’ (1959f,
p. 229). But Röpke soon concluded that a great deal of the ‘Prussian
mentality lay hidden in this same socialism’ (ibid.). Röpke’s conversion
to economic liberalism was not instantaneous. While his 1922 doctoral
thesis sharply criticized nationalization schemes, it also suggested that
high wages would incentivize more productivity by wage-earners, while
low wages decreased productivity. In the same text, Röpke advocated
some degree of worker participation in the management of companies,
arguing that it would ease industrial tensions (1922a, pp. 69–70). Röpke
later became deeply skeptical of codetermination arrangements, arguing
that they were often used by unions to extend their power and invariably
placed people in positions of responsibility for which they were simply
unqualified ([1958f] 1998, pp. 299–300).
By the mid-1920s, Röpke had become familiar with Eucken and
Rüstow, most notably through regular attendance at conferences of the
Verein, meetings of the Friedrich-List-Gesellschaft, and gatherings of the
German League for Free Economic Policy (Nicholls, 1994, pp. 49–57).
They regularly corresponded with each other as individuals with whom
they need not dissemble. This was especially true in the case of Rüstow and
Röpke, particularly after they went into exile in 1933.
Many elements of Röpke’s understanding of political economy were
already in place by the time he left Germany. While it is an exaggeration
to claim that his thought changed radically during his time in Turkey
and Switzerland, it did undergo significant development. In reviewing
Eucken’s Die Grundlagen der Nationalökonomie, Röpke argued that
Eucken’s focus on a narrow data-set contributed to the book’s ‘excessively narrow’ examination of its subject matter ([1940] 1959, p. 339). The
same criticism could not have been made of Röpke, even in his earlier
days when his own economic focus was relatively narrow in comparison
to his later works. Like Müller-Armack, Röpke was deeply interested
in philosophical anthropology and the influence of religion. He shared
Rüstow’s passion for history. At the same time, Röpke believed, like
the Austrians, that certain economic truths transcend culture and can be
recognized through theoretical exposition. This much is apparent from
Röpke’s own understanding of the nature of economics, to which we now
turn.
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NOTES
1. More recently, the terms ‘neoliberal’ and ‘neoliberalism’ have lost a core common
meaning in the way that, for example, the expression ‘Keynesianism’ has not. This partly
flows from contemporary tendencies to use ‘neoliberal’ or ‘neoliberalism’ to label polemically many positions with little in common. ‘Ordoliberal’ and ‘ordoliberalism’ have a
more settled meaning. But even here one should be cautious. Streit and Wohlgemuth
note that ordoliberalism was not a monolithic intellectual phenomenon (2000, p. 225).
2. Despite his criticisms of Versailles’ implications for Germany’s political and economic
future, Keynes argued for imposing free trade upon Germany for twice as long as
required by Versailles (Keynes [1919] 2007, p. 152).
3. The broad German ‘neoliberal’ tradition includes figures such as Leonhard Miksch and
Constantine von Dietze. We focus, however, on a select number who most represent
certain trends in this movement.
4. Röpke (1926c) was also dismissive of the alleged connection between currency speculation and inflation.
3.
Economics and the economist
The master-economist must possess a rare combination of gifts. He must reach a
high standard in several different directions and must combine talents not often
found together. He must be mathematician, historian, statesman, philosopher – in
some degree. He must understand symbols and speak in words. He must comprehend the particular in terms of the general, and touch abstract and concrete in
the same flight of thought. He must study the present in light of the past for the
purposes of the future. No part of man’s nature or his institutions must lie entirely
outside his regard. He must be purposeful and disinterested in a simultaneous
mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as
a politician.
John Maynard Keynes (1924, pp. 173–4)
When Keynes penned these words in his obituary of Alfred Marshall
(1842–1924), regarded by many as the doyen of the economics profession of
his time, Keynes may have been outlining the type of economist he himself
aspired to be. Some were left wondering if anyone was capable of attaining
such distinction. More importantly, Keynes’s description provides some
insight into what he understood economics to be: a discipline with scientific
characteristics, but which depended for its efficacy on the cultivation of
particular intellectual and moral habits and certain practical skills.
For one whose thought was to reshape radically the direction of economics, Keynes wrote relatively little on the nature and method of economics. Most of Keynes’s views on this subject have to be inferred from
his writings (Dostaler, 2007, p. 70). This is not uncommon among economists. Relatively few economists in the past or present devote significant
energy trying to delineate more precisely the character of their science.
Such questions involve their own sets of controversies. Hence many economists prefer to apply established theories and concepts to more immediate
practical problems. Nevertheless, as the Methodenstreit demonstrated, an
economist’s particular understanding of the nature of economics is important in shaping the forms and ends of his particular inquiries. Attempts to
recast economics can thus re-orientate the teaching and practice of political economy for considerable expanses of time. The debates fueled by the
publication of Keynes’s General Theory were intense not only because
Keynes’s thought played a significant role in reconfiguring most Western
economics. Many of Keynes’s critics were concerned with what they
regarded as his effort to change the essence of economics itself.
45
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Wilhelm Röpke’s political economy
Efforts to reshape economics are not new. Marshall’s Principles of
Economics (1890) sought to rescue economics from what he regarded as
the chaos into which it had descended in the nineteenth century’s last
quarter. There were, Marshall believed, three reasons for this. The first
was attacks from those who regarded Smithian classical political economy
as lacking substantial moral foundations. Second, there were the methodological questions raised by the German historical school. Lastly, Marshall
was attentive to the critique of classical value theory (that a good’s price
depends on its production cost) by figures such as W.S. Jevons and Carl
Menger, both of whom argued that value is entirely dependent upon
utility. Much of Marshall’s work subsequently involved attempting to
reconcile these critiques with the older economic doctrines. But Marshall
also sought to refurnish economics with claims to ethical substance by
showing how a range of economic phenomena such as incentives required
and generated moral habits such as thrift and honesty.
This chapter analyzes Röpke’s view of the nature of economics and
the role of the economist. It traces his understanding of how modern
economic science emerged and his conception of economics’ positive and
normative dimensions. We then consider Röpke’s diagnosis of trends in
modern economic thinking. Over time, Röpke became increasingly concerned about what he thought was happening to economic science and its
implications for human freedom. On one level, Röpke consistently warned
against rationalism’s influence upon economics. But Röpke was also
perturbed about Keynesianism’s impact upon economic science and economic policy. Sound political economy was, Röpke insisted, impossible if
a false vision of economics prevailed, if economists did not recognize their
own science’s advantages and limitations, or if they sacrificed the integrity
of economic science to the zeitgeist’s demands.
HISTORY AND ECONOMIC SCIENCE
No-one familiar with Röpke’s writings could accuse him of limiting his
attention to positive economics. Even his more technical writings contain
philosophical and historical analysis. Business-cycle theory was an early
area of interest for Röpke. Yet his most substantive analysis of the subject,
Crises and Cycles, contains an entire chapter tracing the history of economic booms and busts in the late-nineteenth and early-twentieth centuries (Röpke, 1936a, pp. 38–60). Admitting that such a historical account
is difficult because of ‘scrappy and inaccurate data’ (ibid., p. 38), Röpke
nonetheless enters into considerable detail about the specifics of different
business cycles. He directs attention to matters ranging from the impact
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of particular events, such as the Californian gold discoveries (ibid., p. 42),
to changes in industrial output and bankruptcy levels (ibid., p. 44). Large
portions of Röpke’s post-1940 works contain as much historical sociology as strict economics. Then there are Röpke’s excursions into economic
history, such as his L’Economie mondiale aux XIXe et XXe siècles (1959c).
Röpke’s attention to these matters did not mean that he had embraced
the historical school’s methodological claims. None of his writings contains the type of exhaustive statistical compilation and analysis typical of
Schmoller and his followers. Nor does Röpke attempt to ‘uncover’ laws
of general historical development, as proposed by early historical school
figures such as Roscher. In another sense, however, some of Röpke’s writings suggest that he agreed with the historical school’s emphasis upon
each nation’s history reflecting differing paths of economic development.
In German Commercial Policy and The German Question, Röpke stresses
how certain political and intellectual trends helped shape the German
economy between 1871 and 1945. Nowhere, however, does Röpke suggest
that this history necessitates a highly economically interventionist state
in Germany. Röpke’s German Question argued that the political and
economic policies pursued by Germany since Bismarck and praised by
the historical school were now so discredited that Germany could make a
decisive break with its dirigiste past ([1945b] 1946, pp. 182–214). Defeated
Germany, Röpke wrote, ‘offers particularly favorable conditions for carrying out an anti-collectivist programme, for the very reason that she has
pursued the collectivist path to the very end’ (ibid., p. 192).
For Röpke, the insights of economic science transcended historical considerations, even if attention to the latter was important for economists
seeking to understand the particular opportunities and obstacles facing
different countries. Even when Röpke enters into highly detailed discussions of the relationship between ideas and economic developments, he
maintains a demarcation between economic science and extra-economic
subjects. While Röpke was interested in reconnecting normative and
positive economic science with historical narrative, he was not seeking
to pursue the type of research agenda advocated by the historical school.
Instead Röpke’s attention to historical concerns owes something to his
wariness of excessive abstraction, a concern that pervades his reflections
upon the nature of economics.
THE ORIGIN OF ECONOMICS
An accurate understanding of the character of economics began, for
Röpke, with reflection upon its origins. At the most basic level, Röpke
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maintains that humanity’s perennial search for truth was as central to
the emergence of economics as it was to natural sciences such as physics.
This quest for truth arose from man’s innate desire to explain why certain
things occur in the natural and human world. Even apparently banal daily
occurrences such as buying and selling goods demand explanation. Once
people sense that there is more going on behind the daily humdrum of the
exchange of goods and services than hitherto realized, they have began
to engage in economic inquiry (Röpke [1937a] 1963, p. 1). They start, for
example, to construct theories about the relationship of prices to competition so as to discern the order that underlies these happenings. As Röpke
later put it, ‘the operation of economics has again and again shown itself
to be a question of order. Order is something continuous; in its true sense,
it is a harmony of parts, not a regularity imposed from without’ (1959f,
p. 232).
Röpke acknowledged that economic theories may not capture the
entirety of a given economic reality. Nevertheless, he also regarded theoretical explanations as indispensible if people were to make any reasoned
judgment concerning why a given set of economic circumstances differed
from the abstract economic conditions associated with the theory of free
prices (1956i, pp. 115–16, 1964e, pp. 78–85). Röpke’s claim that the theory
of the free price mechanism should be a working assumption of economics
may seem odd inasmuch as it appears to deny a priori the possibility of any
economic policy seeking to replace free prices. But Röpke’s point is not
that it is impossible to devise socialist economic theories. Rather it is that
a socialist economy’s workings cannot be explained without comparing
them to the theoretical pattern of free prices.
Another reason for Röpke’s linkage between modern economics as a
distinct post-Aristotelian social science and something as central to the
market economy as free prices is his conviction that modern economics
owed much to the growth of modern economic arrangements. Writing in
a festschrift for Ludwig von Mises in 1956, Röpke argued that ‘economics is, in the main, a science which is rooted in our market economy’. This
makes economics ‘a matter of catallactics’ (1956i, p. 115). Modern economics emerged in part because people wanted to understand how such
an extraordinarily complex system as the market economy functioned
without any conscious central control. ‘Honesty’, Röpke wrote, ‘compels
the admission that the existence of ordered anarchy is cause for astonishment, that it is something which urgently requires explanation’ ([1937a]
1963, p. 4). Another cause for wonder was the objective fact of the superiority of what Röpke called this ‘spontaneous order’ over the commanded
order. By superiority, Röpke meant the manner in which market economies created wealth, harmoniously coordinated the supply and demand of
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services and goods, and provided millions with basic necessities and luxuries without generating chaos (ibid., pp. 1–3, 1953f). Röpke thought that
modern economics owed something to people’s desire to understand these
and other features of market economies. Studying ‘parts’ such as interest,
money and prices became as interesting as the study of the ‘whole’.
It was not, however, simply the existence of market economies that,
to Röpke’s mind, facilitated the development of modern economics.
Contemporary economics owed much to the concurrent emergence of
markets in free societies ([1937a] 1963, p. 4). The market, he held, was
inseparable from political and legal arrangements that promoted liberty.
Neither these liberties nor free economic arrangements had appeared ex
nihilo in the eighteenth century. The economies of the Middle Ages, Röpke
argued, were far from being ‘natural economies’ in the sense of being
money-less. Instead they prefigured the type of ‘world economy’ which
ended with the outbreak of war in 1914 (ibid., p. 15). Medieval economies
were based heavily on business enterprise, generally characterized by free
trade, and emphasized the production of consumer goods. These features
crumbled under the weight of mercantilism and the rise of nation-states
(ibid., pp. 15–16).
At the same time, Röpke maintained that the development of critical
reason and what he called ‘liberal rationalism’ in the 1700s ([1933d] 1969,
pp. 89–91) was crucial in establishing economics as a distinct form of intellectual inquiry. Under the impact of eighteenth-century Enlightenment
reasoning, the economy became viewed as a work of human intelligence
and action and thus subject to rational investigation. Critical reason
probed the causes of everything and became the ‘incorruptible arbiter’
(ibid., p. 90). When the mercantilist practices of the time were subject to
critical reason, they were found wanting. Thus ‘economics as a science’,
Röpke argued, ‘has its origin in rational criticism of the naively unscientific government practices of mercantilism’ (ibid., p. 91). This critique,
especially when accompanied by the Enlightenment’s stress on freedom,
developed into liberal rationalism which itself evolved into a program
of economic liberalism. Reason, freedom and economic inquiry became
intertwined, the result being that ‘economic liberalism in effect [coincided]
with economics’ (ibid., p. 90).
Röpke’s view of the Enlightenment’s impact upon the way people conceptualized the economy was not uncritical. He believed that the same
liberal rationalism which broke mercantilism’s sway over men’s minds
also laid socialism’s foundations (ibid.). Nonetheless, Röpke argued, a
true science of collectivist economics was impossible inasmuch as collectivism involved subordinating free prices to the achievement of particular
political objectives (1956i, p. 115). For better or worse, Röpke held, true
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Wilhelm Röpke’s political economy
economics was a science of market economics. Even the honest study of
collectivist economies underlined the validity of basic imperatives derived
from analysis of market economies, such as the necessity of choice among
given alternatives, the drive for optimal utilization of scarce resources, and
the signaling functioning of prices (ibid., pp. 114–15).
ECONOMICS AS POSITIVE SOCIAL SCIENCE
To Röpke’s mind, the market economy’s emergence was a decisive factor
in making economics more than a descriptive activity. Yet he insisted
that economics was a social rather than a natural science insofar as its
most fundamental unit of analysis was the human being, and more particularly human acts and relationships in light of the fact of scarcity. But
within this categorization, two distinct yet interrelated dimensions to
Röpke’s vision of economics can be identified. The first is best described
as positive-analytical, the other as normative.
If, Röpke suggested, prices reflected relationships that could be identified and sometimes even quantified, then economic science was capable of
assuming the analytical characteristics of a positive science ([1937a] 1963,
p. 115). According to Röpke, economics had three central concerns as a
positive science. One was economics’ peculiar attention to what he called
‘the logic of relationships’ (ibid., p. 118). This focus on interdependencies
was perhaps the most difficult thing for non-economists to grasp. It was
‘second nature’ for the economist to think in terms of relationships; to
know, for instance, that wages and employment are intimately and reciprocally related. But the logic of relationships was not only one of dualities.
Economics recognized that the interdependencies radiated beyond these
phenomena and affected, for instance, the price, supply and demand of
given goods. Consistent study over time of these relationships and the
achievement of a high degree of predictability about how these interdependencies affected each other was, Röpke stated, unique to positive
economic analysis.
A common error of economists, Röpke argued, was a failure to think
through all the implications of different economic relationships. An inevitable degree of intuition was involved in this. By ‘intuition’, Röpke did not
mean something like spontaneous judgments without the intervening force
of reason. Instead he had in mind ‘that intuitive power which enables us to
keep our eyes on all the complicated threads at once, and to emulate the
juggler who never loses sight of a single one of the balls he is keeping aloft’
(1956i, p. 117). It was a state of mind developed by the economist who is
not simply well trained but who maintains a ‘supreme attentiveness’ (ibid.,
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p. 118) to all possible implications of particular economic relationships.
This may explain Röpke’s skepticism of economics’ capacity to make
the type of predictions characteristic of the natural sciences. He regarded
positive economics as involving qualitative judgments that sought not
to predict precise future events, but rather reduce uncertainty through
accumulating greater theoretical and experiential knowledge about how
people act.
The second concern of positive economic science for Röpke was the
study of the workings of marginal utility – something he defined as the
foundational concept for sound economic analysis. Much of human existence consisted of decisions that attempt to balance people’s unlimited
wants and their limited means to satisfy them – that is, the fact of scarcity
(Röpke [1937a] 1963, p. 8). By ‘limited’, Röpke did not mean an objective
scarcity of things. There were many scarce things (such as bubonic plague)
that humans had no need for and indeed were anxious to minimize.
Conversely, there were things of which there is no shortage (such as water
and air), but which can grow in value. The position of any good or thing
in the scale of economic value was determined ultimately by the degree of
subjective value attached to it by human beings (ibid., p. 8). A good’s subjective value was in turn determined by its marginal or final utility – not,
for example, by the value we attach to the glass of water that saves our life,
but rather the utility of the last dose of water we use to bathe ourselves.
On this basis, Röpke concluded that marginal utility diminishes with the
increasing possibility of satisfying a want; that marginal utility determines
the utility of all other units of the supply; and that increasing the quantity
of a good produces its corresponding fall in our scale of values, provided
that our preferences remain stable (ibid., p. 9).
Röpke’s reflections on marginal utility are not remarkable. They reflect
commonly accepted elements of marginal theory as developed by Menger
and Jevons. But Röpke considered it necessary to elaborate on these
points for three reasons. First, Röpke believed the crucial significance of
marginal utility was being ignored by some economists and actively denigrated by others, despite the fact that their own work implicitly accepted
the importance of marginal utility (ibid., p. 16). Second, Röpke wanted
to downplay the tendency to view marginal theory as marking a radical
break with the classical theory articulated by Smith and Ricardo. Modern
marginalist theory provided a clearer and more useful concept of utility
(ibid., p. 16). Yet its explanatory power, Röpke insisted, could only be
understood against the background of classical theory’s own attention
to the importance of utility. Much marginalist theory involved the supplanting of classical theory’s objective-technical explanation of value
with a subjective-economic explanation (ibid., pp. 17–18). This rendered
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Wilhelm Röpke’s political economy
redundant the classical school’s labor theory of value. And herein lay the
third reason for Röpke’s attention to marginal utility. If the labor theory
of value lacked scientific validity, then so too did Marxist economics inasmuch as it was based on the labor theory of value. Socialism could not
be scientifically established on a key foundation that Marxists regarded
as central to their methods of economic analysis (ibid., p. 18). This is an
example of Röpke employing positive economic theory to challenge the
basic validity of particular economic schools of thought.
When marginal utility, scarcity and subjective value are put together,
Röpke argued, we realize that study of the fact of limitation and the necessity of making choices are essential to economics. Faced with the unending
necessity of balancing our unlimited wants with our limited means, people
must choose which wants to satisfy and how much they wish to do so
(ibid., p. 13). ‘It is certain’, Röpke holds, ‘that we shall arrange our purchases in such a fashion that the satisfaction procured by the last increment
of one commodity will be approximately equal to that afforded by the last
increment of any other commodity’ (ibid.). In other words, we constantly
make decisions that seek to balance our means with our wants. These
factors – choice, limitation, equalization of marginal utilities – determine
how people use their resources and organize the production of goods and
services. This is as true of an economy characterized by autarkic structures
as an economy thoroughly integrated into the global market. To make a
choice from possible alternatives is to economize. To this extent, Röpke
maintained, economics is simply the science of alternatives (ibid., p. 14).
The third concern of Röpke’s vision of positive economics is how people
deal with scarcity. This was ‘the commonest point of departure’ for economics and had contributed significantly to the formation of classic data
points for economics such as optimal utilization of resources and choice
among alternatives (Röpke, 1956i, p. 114). Not only, Röpke suggested,
do humans have to decide what needs they will satisfy and in which order
in light of limited resources; they also need to make decisions about what
methods to use as individuals and a society to wage the unending war
against scarcity. In one sense, this involves a choice of method. But even
prior to that decision, Röpke held, people must choose which of three
moral stances they want to dominate their economy.
At this point, Röpke’s understanding of positive economics begins to
draw on normative terminology to achieve analytical clarity. The first
moral position was described by Röpke as ‘the ethically negative’ method:
that is, solving the scarcity problem by employing force to take others’
resources. The second was the ‘ethically positive’ method of altruism. This
occurs when people are given things by others, albeit at the expense of those
giving. The third was ‘the business principle’ – an ethically neutral method
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through which people increase their own well-being by increasing the wellbeing of others (Röpke [1937a] 1963, pp. 20–21). Reciprocal exchange and
a division of labor are crucial elements of the business method.
With this tripartite schema in place, Röpke demonstrated that all
three organizing methods existed in any given economy, albeit to varying
degrees. Altruism and the business principle were present even in command
economies, albeit clandestinely. The use of force to satisfy wants certainly
occurred in market economies – be it through theft or exorbitant taxation.
Nor did the prevalence of the business principle inhibit people from being
altruistic. Röpke also stressed that these ethical distinctions can be used
to avoid errors when economists attempted scientific descriptions of different features of an economy. Many people made ‘the common mistake
of attributing to the third method (business) acts which properly should
be put to the account of the first (fraud, exploitation, etc)’ (ibid., p. 23).
The same criteria also allowed people to avoid misleading language when
engaging in positive economic analysis. One example was the tendency to
describe the business method in terms appropriate for the method of coercion, epitomized by expressions such as ‘the conquest of markets’ (ibid., p.
24). Finally, Röpke’s invocation of normative criteria to clarify his positive descriptions of different ways of organizing an economy also allowed
him to deepen understanding of the business method’s non-economic
prerequisites. From a positive-scientific standpoint, Röpke noted that it
was difficult to deny that the business method’s efficacy depended heavily
upon people’s acceptance of norms of conduct, adherence to the basic
rules governing market exchange, and avoidance of corruption, lying and
manipulation of state power for personal ends (ibid., p. 25).
ECONOMICS AS NORMATIVE SOCIAL SCIENCE
Just as Röpke’s view of economics’ positive-analytical dimensions invoked
normative criteria at crucial points, Röpke’s treatment of economics’ normative dimension draws upon his understanding of positive economic
analysis. For Röpke, true economists did not simply pursue research and
leave it for others to decide the appropriate policy to be adopted. The
point of positive economic analysis was not only the discernment of scientifically verifiable truth. The particular truths discovered through positive economics were unique contributions that economists could bring to
discussions of what should be done in the policy realm.
Here Röpke stressed that positive economic analysis allowed economists to remind people of the full costs of alternative uses of the same
resources. He defined ‘costs’ as the renunciation of alternative utilities:
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Wilhelm Röpke’s political economy
that is, opportunity costs (ibid., p. 38).1 Using the example of building a
bridge, Röpke observed that the engineer has the responsibility of constructing it. His ‘end’ is given. Conversely the economist shares in the
wider responsibility of determining whether the bridge should be built at
all. Economists compare, for instance, the cost of building the bridge with
the costs of alternative means of routing traffic, with the cost of raising the
taxes needed to pay for the bridge, with the cost of requiring taxpayers to
renounce part of their personal utility. The economist then offers a view of
whether the bridge ought to be built from the standpoint of whether it represents the best possible use of the available means in a given economy’s
context (ibid., p. 27). The ‘positive’ aspect of economics was thus a major
foundation of the economist’s normative recommendation qua economist.
Röpke did not believe that the conclusions of positive economics should
necessarily be the decisive element in determining policy-makers’ choice
(1953b, p. 376). He was merely insisting upon a ‘trivial truth’: that economics can furnish public opinion and governments with specific guidance
concerning the formation of public policy (1956i, pp. 124–5). The first
and perhaps most important of these was the difficult but essential task of
disabusing people of ‘home-grown economics’. Economic policy, Röpke
lamented, was one subject where virtually all non-economists considered
themselves competent to offer an informed opinion, despite often being
ignorant of basic economic truths. This was complicated by the fact that
even after some people were informed of the economic effects of particular
courses of action, they often willfully ignored this advice (ibid., p. 125).
The true economist’s ongoing struggle against home-grown economic
falsities was, Röpke contended, perhaps the most important way in which
economists could contribute to the maintenance of ‘culture’, defined as
the essential structures and laws that allowed societies to function. With
reference to Eucken’s study of the principles of economic policy (Eucken,
1952, p. 194), Röpke maintained that a culture in which most people have
ceased to understand its inner laws – including economic truths – will not
survive (1956i, p. 126). But the onus was on the economist to resist the
temptation to ‘esoteric seclusion’ and to invest time and energy in explaining the methods of economics to elite and public opinion in a clear and
intelligible manner (ibid., pp. 126–7). If anything, Röpke thought that this
responsibility was even more incumbent on economists in the democratic
age if populist economic policies (which he described as expressions of
‘mass superstition’) were to be resisted ([1933f] 1969, p. 47). Economists
had to be willing to highlight all the inconvenient economic truths that
self-interested politicians and utopian-inclined intellectuals did not want
to hear (Röpke, 1956i, p. 127).
This brings us to the question of the specific habits Röpke believed
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economists should cultivate if they were to render a meaningful service to
society. Apart from the obvious moral courage needed to deflate populist ideas, Röpke believed that economists needed to be flexible without
betraying the principles of their science. They needed to recognize the
accuracy of a claim of the German mathematician and Enlightenment
philosopher G.W. Leibnitz (1646–1716): there is no truth which does not
have something erroneous comingled with it (Röpke, 1956i, p. 119). This,
Röpke added, should not be interpreted as implying a commitment to
relativism on the part of economists. The fact, for example, that it is ‘difficult to say that a small increase of the amount of money in circulation is
inflationary and yet more difficult to decide whether anything ought to be
done about it’ does not imply that the economist is denying that printing
too much money produces inflation (Röpke [1944b] 1948, p. 76). Röpke’s
point was that economists needed to distinguish between the fundamental
principles and truths of economics, and ‘that which is a modification of
the fundamental thesis’ (1956i, p. 119). Being a good economist does not
mean insisting that all policies must conform to every single demand of
economic science at all times (Röpke, 1953b, p. 378). Nonetheless, as if
to remind economists of the limits of this caution, Röpke specified that
economists must simultaneously bear in mind that ‘the particular circumstances decide in each case how much practical significance attaches to the
qualifying modification’ (Röpke, 1956i, p. 119). Economists cannot simply
rationalize ‘any abuse that assumes the name of economic policy’ (ibid.).
Here Röpke seems to oscillate between presenting economists as those
who must fight for fundamental economic principles to be observed in
public policy, and, on the other hand, suggesting that economists must
be prepared to modify such axioms to fit prevailing circumstances. There
is, however, only conflict between these counsels if we believe that economists cannot be committed to discerning and explicating sound economic
theory, and simultaneously involved in the formation of public policy
which inevitably involves compromises. For our purposes, the importance
of Röpke’s distinctions lies in the fact that they provide important clues
to his own approach to political economy, especially those instances when
he recommended particular forms of state intervention. The adoption of
a particular policy might, to his mind, be consistent with being a good
economist, even if it represented a departure from fundamental principles
that ought to prevail in a market economy. Yet it might also be wrong
for economists to recommend a similar policy in a mild recession, precisely because the conditions did not justify, to use Röpke’s phraseology,
modification of the fundamental thesis.
Fully recognizing the challenging nature of such a role, Röpke specified that it required economists to acquire special virtues, most notably
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‘judgment, sound common sense, a feeling of proportion and perspective’.
These qualities, Röpke stated provocatively, were the exact opposite of
those he labeled ‘modern intellectuals’ (ibid., p. 119). He also recommended that economists subordinate their emotions to their reason,
but allow their reasoning to be guided by experience (ibid.). Above all,
economists had to learn that they could not avoid responsibility by hiding
behind a façade of academic or moral neutrality:
We, beyond all others, are representatives of the social sciences and under the
duty to make up our minds at the great crossroads of our civilization. It is not
enough for us merely to decipher the roadmarkers; we must know whether we
are sending society along the road to freedom, to humane living, to unalterable
truth, or in the opposite direction and toward slavery, the prostitution of man,
and crassest falsehood. To avoid that decision would just as assuredly be a
‘trahison des clercs’ as if we were to betray the sanctity that lies in the truth of
science to the political passions and the social emotionalism of our era. (ibid.,
p. 127)
SCARCITY, ORDER AND LIBERTY
Röpke’s understanding of economics is thus one in which positive analysis
and normative concerns are seamlessly woven together; the true economist
was one who combines objective-empirical analysis with advocacy of normative positions. Few pieces better express Röpke’s pursuit of this ideal
than a series of lectures he delivered to the Bank of Egypt in Cairo in 1951.
At the core of these lectures was a simple question: what is the purpose
of economics? Röpke’s answer was that economics was concerned with
providing an answer to the problem of economic order. Given the sheer
number of commodities and services and the varying levels of demands for
these products, how were these to be made available in the right proportions at the right place and the right time (Röpke [1951h] 1987, p. 14)?
This problem of order, however, is inseparable from the question of
incentives. The production of the right goods and services, in the right
proportions, at the right time, and in the best quality and the maximum
quantity requires ‘the proper incentives corresponding to human nature
as it is – neither angel nor beasts, as Pascal has said’ (ibid., pp. 14–15).
Expecting people constantly to behave in economic life like saints should
be dismissed, Röpke wrote, ‘as utterly unworkable’ (ibid., p. 15). The
economy should be arranged so that everyone has the incentives to
work well and consciously. This has immediate practical implications.
Economics tells us, for example, that high taxes will change the incentives
shaping the economic process, not least because entrepreneurs and would-
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57
be entrepreneurs will simply act differently if they cannot be assured of the
fruits of their labor (Röpke, 1945f, p. 110, 1949g, [1951h] 1987, p. 8).
Correct answers to these questions of order and incentives are, Röpke
says, essential if we are to avoid bottlenecks, understood as disproportionalities and disharmonies that manifest themselves in shortages that
make the economy grind to a halt ([1951h] 1987, p. 16). Here, Röpke
insisted, lies the positive significance of free prices. Collectivism produces
bottlenecks because it lacks the regulating agent that tells those involved
in production and consumption where an increase or decrease of certain
commodities is desired (ibid., p. 17). By contrast, free prices seamlessly
transmit these orders to producers and consumers to expand and restrict.
In collectivized economies, prices are replaced by political directives. But,
Röpke states, political commands are a poor substitute for prices because
they are inevitably wrong and slow in their ability to transmit economic
information. Moreover, producers and consumers will react quickly to
price changes, but ‘not to the orders of the central authority’ (ibid., p. 18,
cf. 1953f, 1954c).
At this point, Röpke’s analysis of economics’ central concerns begins
to embrace normative value-laden features. He argues that there are
only two ways of approaching the economic problem: coordination and
liberty, or subordination and command. Citing Eucken, Röpke states that
once competition is accepted as the means of creating efficiency, then you
cannot have centralized planning ([1951h] 1987, p. 15). Coordination and
liberty is an economic order associated with the market, competition and
the free price. By contrast, subordination and command result in planned
and command economies (ibid., p. 18). Each system’s external focus is also
radically different: coordination and liberty are concerned with the customer; subordination and command concentrate on fulfilling the bureaucracy’s commands which license, order, seize, allocate, distribute and
forbid – all with the threat of coercion in the background (ibid., p. 20).
Significantly, Röpke relies on positive economics to answer the normative objection that a system based on coordination and liberty produces
anarchic disorder and thus a breakdown in harmonious social arrangements. In response, Röpke points to the price mechanism. The free price
is ‘the true measure of the scarcities in question relative to the other economic data of the whole economic process at a particular moment. They
speak out an objective truth, and as long as there is competition there is no
scope for arbitrariness’ (ibid.). The ‘office economy’, by contrast, ‘is quite
at sea in all its decisions’ (ibid., p. 21). The central authority simply cannot
know the right value of any particular good at any particular moment,
let alone what commodities to import or export. Thus it either guesses
or makes snap arbitrary decisions ‘colored by some subjective idea of the
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planners’ (ibid.). Office economies are therefore inevitably political. While
market economies ‘separate the two spheres of economic action and political sovereignty (of dominium and imperium), it is the salient point of the
office economy that it merges the two spheres’ (ibid.).
This, Röpke comments, illustrates that the choice between the market
and office economies is ultimately political. An economist can marshal all
the ‘neutral’ positive facts in favor of free markets, but at some point the
positive scientist must enter the normative realm of argument (ibid., p. 24).
There are three normative reasons why Röpke believes that economists –
and everyone else – should opt for the market: a desire to preserve liberty;
the need to control power; and the fact that markets rather than central
planning can efficiently resolve the scarcity issue (ibid., p. 24, 1954e).
Efficiency appears here not simply in terms of the market’s superior capacity to address scarcity, but also something to be valued for its own sake.
Invoking the indictment against collectivism articulated in Hayek’s
Road to Serfdom, Röpke argues that socialism as an economic technique
– whether directed by a totalitarian or democratic government – demands
the economy’s total subjection to the state. This requires extending state
power to the point whereby liberty is more or less repressed and ‘replaced
by the allocation of productive resources planned and enforced by the
government’ (Röpke [1951h] 1987, p. 26). Responding to objections
that mixed economies need not lead in this direction, Röpke stresses
Tocqueville’s warnings about how the state’s slow expansion of power
gradually reduces the people to a state of servitude with only superficial
appearances of freedom remaining (ibid., p. 28).
Loss of liberty, Röpke insists, is intimately associated with the question of the control of power (ibid.). Socialism proposes to address this
by eliminating capitalism’s alleged concentration of power. But there is,
Röpke comments, ‘no getting away from the fact that collectivism involves
the maximum centralization of the economic process in the hands of the
government’ (ibid., p. 29). While monopolies occur under capitalism, they
are scattered, limited and constantly subject to the pressure of potential
competition (ibid., p. 20). This in turn is related to the value of economic
efficiency. Collectivism, Röpke argues, cannot provide a system of order
and incentives which is as economically efficient as the market. Nor can it
provide substitutes for the incentives associated with market economies
(ibid., pp. 30–31). ‘By frankly appealing to private initiative’, Röpke
writes, the market ‘makes individual success dependent on a corresponding productive performance, provided that markets are competitive’ (ibid.,
p. 31). By contrast, office economies seek to fight self-interest and ‘replace
the natural incentives of the market economy by fear, artificial emulation,
hysteria, and propaganda’ (ibid.).
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ECONOMICS, VALUES AND VALUE JUDGMENTS
Röpke’s insistence that economists cannot confine themselves to positive economic analysis and must be willing to promote particular moral
values involved him in two important debates for economists. The first,
hardly limited to economists, is whether there are discernible values
beyond utility. The second controversy was whether such values should be
allowed to play a role in economics. The most common objection would
be that a commitment to certain moral goods necessarily compromises the
integrity of any positive science. The underlying assumption is that values
are ultimately a subjective matter. Hence, an a priori commitment to particular values could distort the integrity of the knowledge yielded by the
application of positive scientific methods to given problems.
Röpke squarely addressed these matters in the 1940s, most notably in
Civitas Humana and an article published in an otherwise obscure Turkishbased journal. For Röpke, the question was whether the authority of
science can be used not simply ‘for demonstrations of “facts” but pass on
into positive recommendations or rejection, in short, for so-called valuejudgments in contradistinction to statements of facts’ ([1944b] 1948, p. 73).
Facts were invariably portrayed as the area of inquiry for ‘the so-called
exact sciences’ (ibid.). But, Röpke commented, many natural and social
scientists disputed the idea of objectivity ‘where it is a matter of deciding
between good and bad, the beautiful and the ugly, between healthy and
unhealthy, between the normal and the degenerate’ (ibid.). It was curious,
Röpke wrote, that those who insisted upon the subjectivity of such values
invariably did so with ‘the emphatic . . . authority of someone who knows’
(ibid.). In short, arguments that all values are relative are themselves based
upon a truth-claim. This is, Röpke stated, ‘the old catch of the Cretan,
who declared that all Cretans are liars’ (ibid., p. 75). Marxism exemplified
this internal contradiction. By supposing ‘all philosophy to be but “an
ideological superstructure” above the material relationships of society
and therefore of only relative value, Marxist philosophy therefore cannot
be exempted from this law’ (ibid.). Attributing many natural and social
scientists’ attachment to value-relativism partly to positivist philosophy’s
influence upon the sciences (ibid., p. 73), Röpke contended that such arguments embodied a contradiction common to all commitments to valuerelativism. To condemn, he wrote, ‘value judgments in Science, is itself
a value judgment’ which the relativist ‘intolerably forbid[s] . . . to others’
(ibid., p. 75).
Röpke did not view all the concerns of those economists skeptical about
the place of values in their discipline as completely unfounded. Ideologies
per se were an obstacle to sound economic reflection (Röpke, 1936e), and
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Wilhelm Röpke’s political economy
he acknowledged that there are many occasions when science and ‘topical
political ideas’ were merged and used as a basis for ‘making demands for
which the authority of Science could not be claimed in the least’ ([1944b]
1948, p. 73). Nonetheless, Röpke regarded the claim of some economists
that economics should aspire to value-neutrality as absurd. On the most
basic level, Röpke emphasized that the entire enterprise of science was
premised on the assumption that it was good to know truth (1942a, pp.
1–6). To this extent, science was inseparable from value-judgments,
‘especially the moral sciences, to which the social sciences inclusive of
jurisprudence belong’ (Röpke [1944b] 1948, p. 75). The real question for
economists was ‘what type of value-judgments were legitimately scientific
and for what reasons’ (ibid.).
Conceding the challenges involved in answering this question, Röpke
attempted to delineate the sphere of value-judgments properly understood. There, he argues, are three types of judgment. The first are the
strictly logical: A cannot be at the same time not A. The second are empirical judgments, the truth of which can be established by experiment. The
third are judgments of value. Each of these has a different logical structure. Nevertheless it was possible in this third group to distinguish between
‘all political whimsicalities, arguments and ideologies’ which ought to be
excluded from science, and ‘ultimate and highest values’ (ibid., p. 74).
It is the last that cause people to ‘go in for Science at all, that the social
sciences have been developed as a branch worthy of study, that we select
specific problems, that we economists and sociologists devote ourselves to
our Science, that we view Truth as an indispensible scientific principle: all
these imply value judgments’ (ibid., p. 75). At the root of the endeavor of
ancient and modern medicine, for instance, is ‘the moral assumption that
living is preferable to dying and health better than disease’ (ibid.). Putting
the point another way, Röpke asks the relativist ‘whether he is seriously
prepared to devote his life to the task of discovering the method for the
quickest possible ruination of a country, for constructing the most horrible
concentration camp possible’ (ibid.). To this extent, positive science only
finds its higher purpose when these inquiries serve the values that make
human society truly human. Röpke seems to be indicating that human
reason itself suggests that there are certain values that are self-evidently
good for man. Who, for example, would reasonably prefer ignorance to
truth?
Having established that not all value-judgments are subjective, Röpke
argued that social scientists could create distinctions between valuejudgments on the basis of how much subjectivity and arbitrariness they
may embody (ibid., p. 77). This was not, he thought, as difficult as it might
initially appear. There were value-judgments so universally accepted (such
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as truth being intrinsically better than error) that they assumed a virtually objective character. Others derived their high degree of objectivity
from simple moral-anthropological facts about human beings (Röpke,
1942a, p. 5). An example was Pascal’s description of human beings as
being neither angels nor beasts, but rather ‘Medium Creatures’ (Röpke
[1944b] 1948, p. 77). This fact involved an implicit moral characterization of human nature: humans could not live as if they were angels, but
nor were they as self-absorbed and intrinsically brutish as animals. To
deny the truth of these value-judgments in the name of scientific integrity
would amount to ‘[narrowing] the sphere of Science in a scientifically
non-tenable way, and is at the same time adopting a standpoint which
can only be disastrous for society as a whole’ (ibid., p. 73). The validity
of these value-judgments, Röpke argued, was so evident that they ought
to ‘guide us in our judgments upon the desirability of this or that form of
society and economic system’ (ibid., p. 77). Though we cannot determine
a society’s ‘health’ as a doctor determines a patient’s health by taking his
temperature, this does not change the fact that there ‘are healthy and sick
forms of society even if here the zone of doubt and indeterminativeness is
much larger than in medicine’ (ibid., p. 76).
Röpke also underlines the importance of value-judgments for economics by examining the controversial issue of interpersonal comparisons of
utilities. ‘After at first heedlessly making use of the concept of “marginal
utility” in order to demonstrate “scientifically” the advantage of a more
equal division of income or of progressive taxes’, Röpke notes that economists soon concluded that this stance was ‘illusionary without taking
value judgments into account’ (ibid., p. 81). Most economists therefore
concluded that ‘interpersonal comparisons of utility were scientifically
inadmissible’ (ibid., p. 79). This determination, Röpke suggested, was
‘altogether too precipitate’. Different individuals’ value-judgments might
be ‘subjective’ in the sense that they derive from individuals’ subjective
decisions, but they are also objectively real inasmuch as these valuejudgments unquestionably existed. This meant that the tendency to view
all value-judgments as subjective and therefore excludable from science
was itself unscientific because it involved willfully ignoring reality.
These reflections about value-judgments, Röpke stressed, find support
in the development of an anti-relativist line of thought ‘which meets
us in such varied thinkers such as Thomas Aquinas, Montesquieu or
Tocqueville’ (ibid., p. 78). There is surely something deliberate about
Röpke’s effort to include pre-modern and modern thinkers as proponents
of such a position. He is seeking to dissolve any false divisions between
a pre-modern world that stressed the knowability of objective values,
and a modernity that limited objectivity to empirical issues. The broader
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relevance of attention to value-judgments for Röpke’s work as an economist was threefold. First, his own enterprise of addressing the problem of
economic order was premised at crucial points upon affirmation of the
values of order and liberty. Second, he regarded the tendency of many
economists to disengage from value-questions as contributing to adverse
developments in economic science. Third, Röpke believed that these
changes contributed to economic policies that violated certain values and
sought to defy certain economic truths. Here Röpke singled out the effects
of mistaken understandings of human nature and the growth of what he
called the ‘scientistic’ mentality.
ECONOMICS, HUMAN NATURE AND SCIENTISM
Writing in the 1950s, Röpke marveled at the enormously augmented scope
for economic research. It was a remarkable contrast to the situation of the
economics profession in pre-war Germany in which economics was often
a lowly appendage to faculties of philosophy and law (Röpke, 1956i, p.
112). Economic science now enjoyed a prestige that had hitherto eluded
it, partly, Röpke thought, because a range of problems that had emerged
since the 1930s had caused many to turn to economics for answers (ibid.,
p. 114). These new realities were more grounds, Röpke held, for deep
concern to be expressed about economics’ development in the post-war
period.
‘The economist’, Röpke once wrote, ‘has his occupational disease:
restricted vision’ (1959f, p. 234). Stressing that he spoke from personal
experience, Röpke commented that some economists found it difficult
to look beyond their own area of competence or to concede that economics and the economy were part of a larger order, about which other
disciplines had relevant things to say (ibid.). This was compounded by
the error of ‘economism’: the tendency to judge ‘everything in relation to
the economy and in terms of material productivity, making material and
economic interest the center of things by deducing everything from them
and subordinating everything to them as mere means to an end’ (Röpke
[1942] 1992, p. 53). Paraphrasing the eighteenth-century physicist Georg
Christoph Lichtenburg, Röpke wrote, ‘Whoever understands economics
only, understands not even them’ (1959f, p. 234). By this, Röpke meant
that the pursuit of economic science would not be fruitful if economists
ignored the highly complex world in which economic laws operate (ibid.).
Economism invariably led economists into the trap of what Röpke called
‘social rationalism’ – the habit of viewing market mechanisms as valueneutral techniques applicable to any social order. One example was the
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63
attempt of socialist economists to reconcile the price mechanism with
collectivist economies. How, Röpke asked, could this mechanism which
assumes human freedom operate in societies premised on the radical subordination of liberty ([1958f] 1998, p. 93)?
Being wary of basing anything on simplified assumptions, Röpke strove
to avoid separating economics from the reality of human nature. Though
not inattentive to utility, Röpke rejected the neoclassical working assumption of humans as rational utility maximizers: ‘The ordinary man is not
such a homo oeconomicus . . . The motives that drive people toward economic success are as varied as the human soul itself’ (ibid., p. 121). Nor did
Röpke consider it reasonable to premise economic theory on the vision of
human beings as selfless creatures. ‘An economic system’, he wrote, ‘that
presupposes saints and heroes cannot endure’ (1959f, pp. 233–4). Instead,
Röpke invoked more Smithian assumptions about human beings and
society to explain his moral preference for the market economy over the
alternatives:
There is a deep moral reason for the fact that an economy of free enterprise
brings about social health and a plenitude of goods, while a socialist economy
ends in social disorder and poverty. The ‘liberal’ economic system delivers
to useful ends the extraordinary force inherent in individual self-assertion,
whereas the socialist economy suppresses this force and wears itself out in the
struggle against it. Is the system unethical that permits the individual to strive
to advance himself and his neighbor through his own productive achievement?
Is the ethical system the one that is organized to suppress this striving? . . . It
makes virtue appear irrational and places an extravagant demand upon human
nature when men in serving virtue in a collectivist economy must act against
their own proper interests in ways that, as even the simplest of them can see, do
nothing to increase the total wealth. (ibid., p. 233)
Alongside faulty moral-anthropologies, Röpke was impatient with
those forms of political economy that reduced the study of individual
human choice and action to relative insignificance (Röpke, 1942i). This
was an inevitable result of scientism’s impact upon economics. Röpke
defined ‘scientism’ as the tendency to ‘understand by science [what] is
merely fundamentally the narrow territory of the “positivist” and “exact”
natural sciences and their technical application’ ([1944b] 1948, p. 61).
It was the child of Cartesian rationalism and embodied the notion that
there were no limits to the cognitive abilities of positivist methodology
and technical analysis. Invariably, this was accompanied by ‘an optimistic
belief in progress by means of a mechanical leadership of society’ (ibid.,
p. 69). To say that Röpke was skeptical of these developments would be
an understatement. He regarded scientism as epitomizing the struggle
between ‘a humanistic and tolerant “Enlightenment” and the intolerant
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Wilhelm Röpke’s political economy
and unbridled positivist–mechanistic Rationalism of the Encyclopaedists’
(ibid., p. 62). It resulted in ‘the scientific elimination of the Human element
in political and economic practice’ (ibid.). To this end, Röpke would often
cite the French philosopher Rabelais: ‘science sans conscience n’est que
ruine de l’âme’ ([1942g] 1992, p. 8, 1963a, p. 199).
Röpke also regarded scientism as destructive of humanity’s centuriesold striving towards a unity of knowledge, epitomized by the scholastic
tradition. Though he accepted ‘the endless multitude of possible problems’
([1944b] 1948, p. 75) as necessitating much specialization, Röpke was
convinced of ‘the utter futility of a science which progressively heaps up
matter, which is always measuring, analyzing, and documenting but which
gets further and further away from a synthesis’ (ibid., p. 70). It produced
people ‘whose head . . . is filled exclusively with “useful” knowledge and
who cannot grasp that abstract natural science and physics possess quite
a different educational value from the moral sciences . . . that the science
of mathematics is an admirable, nay an indispensible training for the intellect but that when it has done its work it can be put aside’ (ibid., p. 66).
Scientism, Röpke claimed, ‘implies simultaneously disdain for synthesis.
It means ever more specialization, the breeding of a learned type’ (ibid., p.
68). In the economics profession, Röpke lamented, scientism had significantly contributed to ‘the disinclination of so many economists to make
contact with sociology, ethics or politics’ (ibid., p. 79). This added up to
a cult ‘of endless documentation, of Empircism and Historicism, of the
quantitatively measurable, of research more geometrico to the detriment
of the humane sciences (the moral sciences), and their orientation towards
the natural sciences as the one ideal to be pursued in everything’ (ibid.,
p. 68).2
Much of Röpke’s critique of scientism’s impact upon economics parallels and draws upon writings of Hayek (ibid., p. 59). In Hayek’s view,
scientism distorted economics insofar as it involved the illegitimate
application of the methods of the natural sciences to the social sciences.
While mathematics lent itself to describing the functional relationships
and constants of sciences such as chemistry, Hayek thought that there
were limits to its applicability to a social science like economics (Hayek,
1952) because he did not see economics as embodying the same type of
functional relationships. Any such relationships were undermined by the
fact of entrepreneurial creativity, which disturbs the constancy of information required by mathematics and the methods of the natural sciences
(Huerta de Soto, 2008, p. 14). Röpke also shared Hayek’s concern that
scientism in economics encouraged collectivist economic thinking. The
post-Enlightenment ‘faith in the mission of rationalism for the reconstruction of society, faith in the task of organizer scientifiquement l’humanité’
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(Röpke [1944b] 1948, p. 64) had led some social scientists to believe that
economic life could simply be redesigned along more ‘rational’ lines than
the market economy. It produced a viewpoint which Röpke described
as ‘eternal Saint-Simonism’ (ibid., p. 63). Named after the nineteenthcentury French philosopher of scientific socialism Henri de Saint-Simon
(1760–1825), Röpke presented this attitude as ‘the outcome of a mixture of
the hubris of the natural scientist and engineer mentality of those . . . who
would construct and organize economics, the State and society according to supposedly scientific laws and blueprints, whilst mentally reserving
for themselves the principal portefeuilles’ (ibid.). Röpke described Walter
Rathenau as personifying Saint-Simonist tendencies (1922c) insofar as
he, with his engineer friends, invented the term ‘planned economy’ while
managing Imperial Germany’s war economy ([1944b] 1948, p. 79).
Nothing, to Röpke’s mind, could be further from the vision of economic
science found in Smith’s works. In his Economics of the Free Society,
Röpke presents Smith as ‘a deistic moralist’ and ‘a representative of
the humanist spirit of the eighteenth century’, whose Wealth of Nations
formed part of a larger intended opus on ‘the cultural history of mankind’
in which ‘economics was viewed as an organic part of the larger whole of
the intellectual, moral and historical life of society’ ([1937a] 1963, p. 224).
In other writings, Röpke presented Smith as one who, as the author of
The Theory of Moral Sentiments (1759), understood that his Wealth of
Nations (1776) did not and could not capture the entirety of human existence ([1958f] 1998, p. 92). For Smith, Röpke maintained, the economy and
society resulted from an invisible hand and ‘a living order with an immanent logic of its own which the human mind could comprehend and even
destroy but not duplicate’ ([1937a] 1963, p. 224).
In the same writings, Röpke presents Keynes as the antithesis of
Smith. Keynes, he wrote, was ‘a representative of the geometric spirit of
the 20th century’ and ‘an exponent of positivistic scientism’, for whom
‘economics was part of a mathematical–mechanical universe’ (ibid.).
When added to the modern penchant for statistics, this outlook actually
limited economists’ ability to understand phenomenon such as the Great
Depression (Röpke, 1938b). Thus, for Röpke, while Smith marks a promising beginning, Keynes embodied a rationalistic regression in economics’
explanatory power ([1937a] 1963, p. 224).
KEYNES AND KEYNESIAN FALLACIES
Though Röpke did not regard all Keynesian positions as wrongheaded, he
did consider ‘Keynesianism’ to be an unreliable way of economic thinking.
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Wilhelm Röpke’s political economy
While Röpke assigned more blame to Keynes’s disciples (ibid., p. 225,3
[1951h] 1987, p. 3, [1958f] 1998, p. 193), he insisted that Keynes’s approach
to economics had created an ‘old economics’ and a ‘new economics’ in
which the sense of one was nonsense in the other (Röpke [1952b] 1969,
p. 170). Economics had effectively split into ‘two realms of logic’ (Röpke
[1951h] 1987, p. 5) to the extent ‘that there is today a rabies economica
which is just as bad if not worse than the old rabies theologica’ (ibid., p. 4).
Whereas the economics pioneered by Smith in the Wealth of Nations was
viewed as part of society’s larger social and intellectual life, Röpke insisted
that Keynesian economics reflected Keynes’s ‘mathematical–mechanical’
outlook on life, as evidenced by Keynes’s prior work on probability theory
in his Treatise on Probability (1921). Hence no-one should therefore be
surprised, Röpke concludes, that Keynes viewed the economy as ‘the
result of mechanical quanta subject to precise measurement and direction
by an omnicompetent technical human intelligence’ (Röpke [1937a] 1963,
p. 224).
Röpke’s claim that Keynes had a mathematical view of life that dominated his approach to economics is almost certainly unfair. Keynes’s
vision of morality and society was profoundly shaped by his reading
of G.E. Moore’s Principia Ethica (1903). Even later in life, Keynes said
that he accepted Moore’s ‘fundamental intuitions’, especially Moore’s
critique of Benthamite utilitarianism – a system of moral reasoning that
relied heavily upon the (highly problematic) claim that numerical value
could be assigned to each expected and unforeseen effect of all actions
or rules. Keynes claimed that Moore’s book had protected him from the
Benthamite tradition’s ‘overvaluation of the economic criterion’ (Keynes
[1933] 1972, pp. 445–6), so much so that even Röpke acknowledged that
Keynes had rejected utilitarianism as a philosophy ([1958f] 1998, p. 276).
Moreover, when we examine Keynes’s Treatise on Probability ([1921]
1989) we see, as Robert Skidelsky writes, that one of its key implications
is that ‘we can and do have probabilities without numbers’, in the sense
that we can say something is ‘greener’ in color than something else without
assigning ‘greenness’ a numerical significance (2003, p. 285).
On the other hand, probability theory is a subject that teeters on a
hazy borderline between philosophy and mathematics, calculus and logic.
Strictly speaking, it is considered a branch of mathematics. It is also one
of the mathematical bases for statistical analysis and indispensible to the
quantitative study of significant sets of empirical data. In his characterization of Keynes’s outlook on life, Röpke may simply have been indicating
that he thought Keynes’s long-term interest in such questions colored the
post-Keynesian understanding of economics. This thesis begins to acquire
validity when we consider the substance of Röpke’s methodological
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complaint against Keynesianism. According to Röpke, Keynesians were
inclined to reduce economics to mathematical and statistical formulae
and analysis. The whole science of economics thus became a quantitative exercise that ‘teems with equations in ever-increasing profusion’ and
the development of models and patterns of aggregate behavior by whole
populations with little resemblance to reality and real human beings.
Opening a post-Keynes economic textbook, Röpke suggested, made
readers wonder if they had stumbled upon a chemistry curriculum (1956i,
p. 121, cf. 1953a).
Röpke’s wariness about the Keynesian macroeconomic focus did not
entail that he was entirely dismissive of macroeconomics. The new economics, he stated, had enhanced the use of macroeconomic concepts.
Even non-Keynesians used expressions like ‘a country is living beyond its
means’ as a shorthand way of describing how the aggregate expenditure
for consumption and investment in a given geographical area created
more purchasing power than could be provided at present prices for the
economy’s output in that area (Röpke [1958f] 1998, p. 226). Röpke’s complaint was that Keynes had effectively ‘declared the method of thinking
in aggregates to be the only one, both now and in the long run’ thereby
defying what theory and common sense ‘have so far considered right and
proven’ ([1952b] 1969, p. 172). This trend – aggressively propagated by
Keynesian economists – was obliterating the great achievement of 150
years of economic science: the doctrine of the movement of individual
prices (Röpke, 1956i, p. 121, cf. 1953a) and thus economics’ real content.
With the emergence of a generation of economists exclusively trained to
operate with economic aggregates, Röpke argued that the economist’s
skills were increasingly reduced to the ability to express ‘hypothetical
statements about functional relationships in mathematical formulas or
curves’ through methods illegitimately transferred from the natural to the
social sciences ([1958f] 1998, p. 193).
Röpke may have been thinking of Paul Samuelson’s effort to reconfigure economics on the basis of mathematical language (Samuelson, 1947).
For Röpke, such efforts conflated the object of economics with a medium
of economic analysis. Mathematics is a form of language based upon
symbols. Its origins lie in facilitating the study of the natural sciences.
But mathematics and empirical studies are less adequate when it comes to
the study of things such as traditions, institutions and values. In Röpke’s
view, mathematical formalism addressed these realities by generally ignoring them. It thus lost sight of economics’ essence which is not macroaggregates but the choices of individuals and institutions. On this basis,
Röpke believed that the ‘new economics’ was destroying economics as ‘a
“moral science” in the sense that it deals with man as an intellectual and
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moral being’ (1956i, p. 122). Economic science partly involved analysis of
the economic order based upon a truthful understanding of human nature,
whereas neo-Keynesian economics was about economic modeling based
on certain assumptions, mathematical formulae and quantitative methodology (ibid.). In the new economics, the economist became a type of
bureaucratic technocrat charged with acting preemptively against a range
of real and imagined economic problems through the use of constantly
developing quantitative and mathematical tools. Thus, Röpke states, the
post-Keynes economist was typically
. . . obsessed by only one thing, i.e., ‘economic demand’, which he thinks must
be kept up at whatever cost, while he forgets the working of the mechanism of
prices, wages, interest, and exchange rates. Whereas formerly a good economist
was a man who knew how to assess the relation of the actual economic forces
and whereas formerly judgment, experience, and a sense of proportion were
rated higher than the formal skill in handling certain research techniques introduced illegitimately from the natural sciences into economics – today glory goes
to him who knows how to express more or less hypothetic statements in mathematical symbols and curves. ([1951h] 1987, pp. 4-5, cf. [1958f] 1998, p. 193)
Worries about these developments, Röpke stressed, were not confined
to non-Keynesians. He quotes one of Keynes’s followers (and first biographer), Roy Harrod, to the effect that the substitution of attention to
basic economic principles with an immersion in mathematics and aggregates had led him to conclude that ‘ “we should be better off with the old
political economy” ’ (Harrod cited in Röpke [1951h] 1987, p. 3).
Drawing upon Mises, Röpke maintained that sound economics allows
mathematics to be used to explicate certain relationships that have quantitative characteristics. This was one element that made economics ‘truly
a border science’ with all its attractions and dangers. Nevertheless the
more economics drifted in a mathematical–statistical direction, the more
it lost sight of that which is un-mathematical and which does not always
behave predictably – human beings (Röpke, 1956i, p. 122). Though Röpke
believed that mathematics can be useful in describing relatively stable and
uncomplicated economic relationships, he was unconvinced that it could
handle the full complexity and instability of economic life. For all the
apparent knowledge conferred by neo-Keynesian methods, be it in the
form of enhanced data and greater ability to predict economic developments, economic trends rarely seemed to conform to either the short- or
the long-term forecasts of Keynesian economists. The eventual result
was not only the fact that ‘with all our cleverness, we have become decidedly less wise, while knowing more and more about less and less’ (Röpke
[1951h] 1987, p. 3), but also the ‘dehumanization of economic science’
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(Röpke, 1956i, p. 123). ‘Keeping economics human’, Röpke held, did not
require rejecting mathematics or always refraining from using aggregate
concepts. But he did ask economists to remember that, ‘behind factors
such as supply and demand, amounts of savings, volumes of investment,
rates of inflation, and levels of wages were individual human beings with
their feelings, their deliberations, their appraisals of value, their collective
suggestions and decisions’ (ibid.).
At another level, Röpke’s strictures against the dominance of mathematics and the use and language of aggregates – ‘ “coefficients of elasticity”, “multipliers”, “accelerators” and other ingenious devices’ – reflected
his concern that economics would be rendered increasingly unintelligible
to non-economists and thereby of decreased utility to policy-makers (ibid.,
p. 124). But in an example of his refusal to separate value-judgments from
economic science, Röpke argued that the new economics’ marginalization
of individual human beings, choices and actions reflected general social
trends ‘toward impersonalization, toward collectivization, toward mechanization, toward dehumanization’ (ibid.). Just as true economic science
received tremendous impetus from the desire to understand the workings
of market economies, Röpke also thought that mid-twentieth-century
economics was being negatively influenced by the context of political and
economic collectivization in which it was practiced. Röpke even compared
Keynes with Pablo Picasso, inasmuch as Picasso’s purported banishment
of real human beings from art paralleled Keynes’s expulsion of humans
from economic science (ibid.). It was no wonder, Röpke wrote somewhat
cuttingly, that Keynesian economics was so popular in those countries
where a preference for planning and a suspicion of liberty tended to
prevail ([1937a] 1963, pp. 227–8).
FROM ECONOMIC SCIENCE TO ECONOMIC POLICY
Though expressed in rather passionate terms, the preceding observation
illustrates how closely much of Röpke’s views of economic science and
the economist’s role were shaped by his normative concerns. Certainly
Röpke’s reflections on economics’ origins and nature contain many standard distinctions between its positive and normative dimensions that few
modern economists would dispute. The normative/positive distinction in
Röpke’s view of economics may be viewed as a continuum that involves
statements of a highly positive nature at one end of the spectrum, and
highly normative claims at the other. Yet the two are interwoven so tightly
in Röpke’s thought that separating them becomes difficult. Free prices
are a centerpiece of his understanding of positive economic analysis, but
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Wilhelm Röpke’s political economy
he stresses that their functioning presupposes and facilitates a normative
concern for liberty. Likewise, Röpke’s criticism of Keynes’s approach to
economics as a science is closely associated with his criticisms of Keynesian
policies. The direction of economic policy, in Röpke’s view, be it at the
national or international level, had become unhinged in the twentieth
century, not least because economics had lost sight of the primordial fact
that economic life concerned human choices and action. This observation
was central to Röpke’s particular effort to articulate a reformed theory of
economic liberalism.
NOTES
1. Röpke observed that this understanding of costs rendered redundant the notion of costs
as the expression of and compensation for the pain and sacrifice involved in production
– an idea that found its purest expression in Marx’s labor theory of value. Modern marginal theory thereby refuted another staple of Marxist economics ([1937a] 1963, p. 38).
2. In later life, Röpke’s anti-positivism was increasingly derived from his religious convictions: ‘For more than a century, we have made the hopeless effort, more and more baldly
proclaimed, to get along without God and vaingloriously to put man, his science, his art,
his political contrivances, in God’s place’ (Röpke, 1959f, p. 236).
3. The sections on Keynes and Keynesianism in Economics of the Free Society were added
to this text for the 1963 American edition (Boarman in Röpke ([1937a] 1963, p. ix).
4.
Toward a new economic liberalism
The whole edifice of the Reich will collapse, and much more completely than
in 1918, since the whole framework of the national economy, of the monetary
and financial system, of communications and administration, which in 1918 had
largely remained intact, will now fall into hopeless ruin. Again in contrast with
1918, there will this time no longer be any organized political life, no parties and
programmes, no group ready and able to take over the bankrupt estate of the
Third Reich, but only prostration and immense longing for peace . . .
Wilhelm Röpke, 1945 Memorandum to Allied Diplomats (cited in Röpke
[1945b] 1946, p. 186)
On 7 May 1945, Colonel-General Alfred Jodl, Chief of the Wehrmacht’s
Operations Staff, signed the instruments for Germany’s unconditional surrender. Once dominant over continental Europe, National Socialism was
extinguished. Marxism–Leninism, however, was poised to achieve a stranglehold over much of Europe. While many Western Europeans were prepared to resist the political collectivism imposed on most Soviet-occupied
nations, opposition to extensive economic planning was weaker. Despite
the considerable anti-socialist sentiment in Europe and North America
revealed by the publication of Hayek’s Road to Serfdom in 1944, nothing
better symbolized the low regard in which capitalism was held than the
Labour party’s sweeping victory in Britain’s 1945 general election. With
its explicit commitment to nationalizing the British economy’s ‘commanding heights’ and creating a cradle-to-grave welfare state, the Labour government’s efforts to implement key provisions of the 1942 Beveridge report
suggested that comprehensive economic planning was the future.
At the time, exploring the deeper reasons for these developments was
not a priority for some economic liberals. Their post-war focus was upon
protecting economic liberty against further extensions of planning. This
much is apparent from the proceedings of the first gathering of the Mont
Pèlerin Society in 1947. The conference considered questions ranging
from monetary reform to Germany’s future. The only papers addressing why the world was embracing collectivism were delivered by William
Rappard (a close friend of Röpke and cofounder of the Graduate Institute
of International Studies), Aaron Director (a progenitor of the law and
economics movement), and Hayek.
Rappard argued that the turn to planning had resulted from two
71
72
Wilhelm Röpke’s political economy
factors. One was many societies’ militarization during two world wars.
The second was that Europeans, empowered by democracy but exhausted
by the 1914–45 ‘thirty years war’, were ‘clamoring for social security and
equality’ (Danielson [1947] 1997, p. 14). Director agreed that there had
been a drift away from the values associated with individual freedom in
favor of an emphasis upon security. He added, however, that increasing state intervention proceeded from ‘the incomplete character of the
theory of liberalism as developed in the nineteenth century’ (ibid., p. 76).
Nineteenth-century liberal philosophy had proved unable to provide
adequate answers to the social conflicts generated by capitalism (ibid.).
Hayek’s explanation was somewhat different from that of Director and
Rappard. Aspects of continental liberalism, he suggested, had ‘led many
of its adherents directly into the folds of socialism or nationalism’. Other
elements (most notably aggressive rationalism, positivism, Hegelianism
and extreme utilitarianism) had simultaneously alienated many people,
especially Christians, from a liberal movement to which they may have
otherwise been sympathetic (Hayek, 1992, p. 244). Hayek’s critique of this
‘false rationalism’ – which Hayek described as an instance of ‘intellectual
hubris’ and ‘which presumed that science was competent to tell us not
only what is but also what ought to be’ (ibid.) – foreshadowed his later
arguments concerning the constructivist understanding of reason and the
collectivist impulse (Hayek, 1952).
At the 1947 meeting, Röpke refrained from offering detailed reflections
upon economic liberalism’s decline. Commenting, however, upon lectures
presented by Vivian Wedgwood and Carlo Antoni upon historiography’s
influence upon the contemporary political context, Röpke suggested that
there was a problem in the relationship ‘between economic liberalism and
general liberalism’ (Danielson [1947] 1997, p. 105). The subjects discussed
under the heading of ‘economic liberalism’, he argued, concerned means
rather than ends. This, Röpke insisted, made it all the more urgent for liberals to ‘find out the truth, including the truth about ourselves’ (ibid.).
Two days after the conference, the leading Swiss newspaper, Neue
Zürcher Zeitung, published an article by Röpke outlining his arguments
for ‘a new market economy combined with a broad program of economic
and social reform’ (1947n). It demonstrated that Röpke had been probing
the truth about the development of liberalism and its economic implications for many years. The same article illustrated that Röpke had definite
views about what needed to be done to resist the drift to planning, both
in terms of economic policy and at the level of political order. These
amounted to a program for a reformed economic liberalism – a neoliberalism – that, alongside preserving and promoting the values, institutions
and benefits of the market, addressed what Röpke regarded as nineteenth-
Toward a new economic liberalism
73
century liberalism’s shortcomings so as to defuse the historical and social
forces facilitating the spread of planning.
TREASON OF THE INTELLECTUALS
Röpke first began to explore the challenges faced by liberalism in a systematic manner in the 1930s. He wrote German Commercial Policy in order to
explain how the world had gone from embracing ‘a new era of economic
liberty’, symbolized by the 1834 Zollverein, to the starkly different scenario
of 1934: a world in which interventionist policies were dominating Europe
and where ‘the mentality of 1834, even in its noblest parts, is decried as a
strange abomination’ (Röpke, 1934a, p. 2). Röpke subsequently unfolds
a story of struggle between economic liberalizers and protectionists, in
which economic liberalism’s gains were wound back, partly because of
Germany’s ‘three great economic crises’ of 1873, 1902 and 1929. These
encouraged particular industries, especially the iron and steel industries and the agricultural sector, to establish cartels and seek subsidies.
Gradually a situation emerged whereby lobbying for government protection became more important for many businesses than marketing, costcutting and entrepreneurship. Bismarck’s economic policies are underlined
by Röpke contributing to these developments (Röpke, 1955e).
German Commercial Policy, however, presents only part of Röpke’s
explanation of Germany’s turn away from economic liberalism. This is
evident from a number of essays penned by Röpke before he left Germany
in late 1933. Characterized by its polemical tone, Röpke’s 1931 article,
‘The intellectuals and “capitalism”’, accused the intellectual classes –
regardless of ‘whether they join the social democrats, the communists, or
the national socialists’ – in Germany, Britain and America ([1931l] 1969,
p. 31) of weakening an economic system that had generated widespread
economic prosperity for millions. While noting his personal distaste for
certain features of contemporary capitalism, such as the commercialization of culture (ibid., p. 27), these concerns did not justify the intelligentsia’s active fostering of anti-capitalist sentiment – a criticism he later
extended to most German economists ([1933f] 1969, p. 46).
Conceding that many intellectuals were genuinely concerned about the
difficult interwar economic conditions (Röpke [1931l] 1969, p. 32), Röpke
maintained that the same intellectuals had uncritically embraced a number
of erroneous ideas about markets. First, they failed to distinguish between
the market economy’s sound institutions and capitalism’s particular historical manifestations, such as the capitalism of the 1920s, distorted by
excessive regulation, interventionist policies and the Great War (ibid.,
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Wilhelm Röpke’s political economy
p. 30). In doing so, they had displayed a lack of nuance, detachment and
capacity to make distinctions – the very qualities supposedly valued by
intellectuals. Second, the same intellectuals were woefully ignorant of
basic economic insights. This was reflected in their refusal to acknowledge
the consequences of socialism’s suppression of free prices, as exemplified
by the Soviet experiment (ibid., pp. 28, 39, 43); failure to understand how
free competition forced businesses to perform efficiently (ibid., p. 38); and
advocacy of ‘geographical romanticism’ (ibid., p. 36) in the form of autarkic policies that emphasized countries acquiring more ‘space’, but which
could not account for the economic prosperity enjoyed by small countries such as Belgium and the Netherlands. Third, Röpke accused many
intellectuals of favoring a planned economy because, with its demand
for engineers and lawyers, they thought that it would improve their
career prospects. Lastly, Röpke insisted that many intellectuals, especially
Marxists and nationalist anti-capitalists, had become so intoxicated with
forebodings of catastrophe, doom and destruction (ibid., pp. 33–4, 1933b)
that they were actually inclined to resist constructive reforms to address
the crisis. Writing fifteen years later, Röpke commented that no other
class had failed Germany so badly in its time of need than its intellectuals
([1945b] 1946, p. 64, 1946j).
In 1933, Röpke repeated many of these arguments, but underscored
how the intellectuals’ moral and philosophical errors had become widespread among the masses. The explosion of nationalist sentiment, he
noted, threatened to accelerate the trend toward autarkic policies (Röpke
[1933f] 1969, pp. 76–7). This was accentuated by growing acceptance of
the economic fallacy that capitalism had encountered insurmountable
limits in geographical space (Röpke, 1932b), despite the observation of
economic liberals that a market’s size was not determined by geographical
space but rather by the volume of production and purchasing power in an
economy (Röpke, 1934c). Above all, Röpke expressed growing skepticism
about the masses’ ability to grasp even the simplest explanation of how
market economies work (Röpke [1933f] 1969, p. 74). Part of the problem,
Röpke maintained, was that Germany’s economic crisis had been sparked
largely by the international economy’s disintegration under the weight of
international capital movements. This facilitated an international liquidity crisis, much of which was associated in many Germans’ minds with the
burden of war reparations (ibid., pp. 58, 69–70). More worryingly, Röpke
contended, German capitalism was faltering in the face of what he called
(using the title of Ortega y Gasset’s famous book) ‘the revolt of the masses’
against the principles of reason, tolerance and peace. These were, he
claimed, quintessentially liberal values, but ‘never had much appeal for the
masses’, who were, even in prosperous times, susceptible to emotionally
Toward a new economic liberalism
75
satisfying but economically irrational sloganeering. Explaining free
trade’s benefits was difficult in such an atmosphere, because understanding free trade required ‘serious thought and control of the emotions by
reason and independent judgment’ (ibid., p. 75).
LIBERALISM AND ITS FOES
Röpke’s theme of economic liberalism being suffocated under a wave of
populism is reiterated in his other writings from the period (1930–31),
but also in works penned by Eucken (1932a, 1932b) and Rüstow in the
same time-frame (1932–33). Looking beyond immediate circumstances,
however, Röpke argued that a deeper intellectual problem undermining
market economies was widespread questioning of liberalism’s key moral
commitments. Liberalism and the market economy, Röpke contended,
were inextricably linked fruits of two thousand years of Western civilization ([1933d] 1969, p. 84). Liberalism was not therefore to be reduced to
its nineteenth-century manifestations (ibid., p. 83). A richer liberal tradition needed to be rediscovered, especially when it came to the idea of
liberty itself. Röpke was not content to confine this to the idea of negative
liberty in the sense of being ‘free from something’ (ibid., p. 84). Indeed
liberalism valued the freeing of people from redundant authorities so that
they could contribute to the development of civilization. ‘True creative
power’, Röpke wrote, ‘can prosper only in liberty’ (ibid., p. 85). Part of
liberalism’s genius was its protection of such individuality from arbitrary
power (ibid., p. 85). This led to liberalism’s emphasis on civil liberties, the
rule of law (ibid., p. 86), and political liberty in the sense of political selfdetermination. This usually facilitated democratic arrangements, though
Röpke thought that there were real prospects for conflict between liberty
and democracy (ibid., p. 87). This emphasis may have owed something
to Röpke’s experience of watching mass movements such as National
Socialism and Marxism (Röpke, 1936c, 1937d, 1939a) dismantle safeguards of civil, political and economic liberty throughout Europe. But it is
also a theme constantly underlined by particular nineteenth-century liberals, including Lord Acton, Alexis de Tocqueville and Benjamin Constant,
whose writings were regularly referenced by Röpke.
Röpke noted, however, that no-one should assume that economic
liberty necessarily flowed from liberalism’s emphasis on freedom.
Economic liberty, he observed, had existed in less-than-free countries.
Certainly there was a point when growing impositions on economic liberty
would deliver a society into bondage (Röpke [1933d] 1969, p. 87). But
Röpke maintained that economic liberty was more directly a product of a
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Wilhelm Röpke’s political economy
second liberal value – reason (1924a). Warning against tendencies to associate reason with progressivist and utilitarian outlooks, Röpke defined
reason as the pursuit of truth and rejection of bias and obscurantism
([1933d] 1969, p. 88). Historically speaking, Röpke claimed that this vision
of reason was effectively rediscovered with the advent of modernity associated with the Renaissance and the Enlightenment. The application of
reason to economic life, Röpke suggested, had produced economic liberalism. For once mercantilism and protectionism were subjected to rational
scrutiny, it was hard to deny that they resulted in losses of productivity
and national wealth (ibid., pp. 90–91).
An attachment to liberty and reason, according to Röpke, was central
to another liberal concern: the idea of humanity. Röpke did not understand this as ‘secular humanism’, but rather ‘the unquestioned and
absolute respect for every individual’s human dignity’ – an idea rooted in
Antiquity which Christian, natural law and Enlightenment thought had
developed (ibid., pp. 91–2). This meant that violence was rejected in favor
of reasoned discussion and only employed as a last resort. It also implied
the development of the polite civilized society which allowed people to live
together peacefully (Röpke, 1938a).
Once liberalism’s essential values were understood, Röpke stated, it was
easy to see why it was in decline. Each of its key ideas was under attack
from their opposites. Liberty was being replaced by an acceptance of servility inasmuch as people were allowing the modern state to relieve them
of the burden of self-responsibility in return for permitting the government
increased control over many spheres of life. This servility was closely connected to nationalism, which exalted the nation above the individual and
permitted the state to isolate entire nations from all external influences.
Röpke regarded this as contrary to the development of an international
Western civilization rooted in the worlds of Athens, Rome and Jerusalem
(Röpke [1933d] 1969, pp. 93–5). Likewise, reason was being replaced by
a cult of the irrational, as exemplified by Nazi appeals to ‘myth’, ‘voice of
the people’ and ‘blood’ when asked to provide reasons for their policies
(ibid., p. 95). Finally, liberal humanism was being undermined by an unashamed appeal to a Nietzschean ‘brutalism’ that justified ‘every immoral
and brutal act’ ‘by the sanctity of the political end’ (ibid.). The pernicious
effects of these developments were amplified, Röpke stated, by the advent
of Ortega y Gasset’s ‘mass man’, who ‘likes others to do his thinking for
him’. When the masses’ rebellion against liberty, reason and humanism
found able leaders, liberals had to insist that their advocacy of democracy
assumed that democracy is limited by safeguards which protected liberal
principles. Liberal democracy, Röpke commented, was very different from
illiberal democracy (ibid., pp. 96–7).
Toward a new economic liberalism
77
And yet for all the energy and historical analysis that Röpke invested in
his early defense of liberalism, it has an air of being incomplete. Though
he noted that liberal rationalism eventually gave birth to socialism (ibid.,
p. 60), Röpke did not explain how this occurred. The same articles raise
questions concerning the coherence of Röpke’s view of the Enlightenment.
He conflates, for example, figures such as Pascal, Smith, Kant, Voltaire
and Descartes, despite the fact these individuals belonged to often dissimilar streams of Enlightenment thought. Röpke’s attempt, however, to
distinguish liberalism from its nineteenth-century manifestations did hint
at some dissatisfaction on his part with aspects of liberalism. This became
more evident after he went into exile in 1933.
RATIONALISM AND LAISSEZ-FAIRE
Life was difficult for German intellectual exiles in Atatürk’s Turkey
(Röpke, 1977, p. 421). Often unable to speak Turkish, viewed with suspicion by their hosts, and wary of friendships with other Germans for
fear of Nazi agent-provocateurs, they were cautious about whom they
associated with. Matters were further complicated for Röpke and his
fellow economist-exile Alexander Rüstow by the fact that, unlike most
other German exiles, they were not Jewish and thus could have made their
peace with the Nazi regime and returned to Germany. This sometimes
created awkwardness between them and the German-Jewish exiles. Thus
it is hardly surprising Rüstow and Röpke spent much time in each others’
company, even living together in the village of Kadiköy on the Asian side
of Istanbul (Röpke, 1963a; Reisman, 2006, p. 106). They continued to
collaborate after Röpke’s departure for Switzerland in 1937.1
A number of scholars have noted that Röpke’s thinking about economic
liberalism developed significantly under Rüstow’s influence (Johnson,
1989, p. 56; Zmirack, 2001, pp. 101–13). Röpke himself acknowledged this
influence on several occasions (1963a). This became especially evident with
the publication of Röpke’s International Economic Disintegration in 1942.
It contains an appendix by Rüstow and begins with an introduction based
on a memorandum coauthored by Röpke and Rüstow in 1938. This introduction contains the essential points of Röpke’s critique of nineteenthcentury liberalism and begins to articulate a distinct reform agenda.
Capitalism, Röpke suggested, had fallen into disrepute because competition had been corrupted by the monopoly and interventionism which
proceeded from the exploitation of state power by sectional interests
(1942h, p. 5). The situation was further complicated by the fact that
free competition itself had socially corrosive effects. It ‘reduces the
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Wilhelm Röpke’s political economy
moral stamina and therefore requires moral reserves outside the market
economy’ (Röpke [1942g] 1992, p. 52). The sources of these reserves were
primarily the family and intermediate associations, the importance of
which Röpke thought had been ignored by those economists focused on
the egoistical atomistic homo œconomicus (ibid.). Social cohesion, Röpke
added, cannot be based simply on the principle of competition (1942h,
p. 6). Unfortunately, Röpke argued, the ‘traditional liberalism’ which
formed the primary philosophical foundation for pre-1914 capitalism was
permeated with the idea that competition was an ordre naturel and selfsustaining once impediments to its functioning were removed. Echoing
Rüstow, Röpke maintained that Smith’s ‘invisible hand’ was no different from the ‘logos’ of the Greek philosopher Heraclitus (who held that
everything is ultimately unified in a system of balanced exchanges) or the
rationalistic ‘divine reason’ of deistic philosophy (ibid., p. 67; cf. Rüstow,
1980, pp. 169–70, 215–16). From this standpoint, the market economy was
a self-regulating, sociologically autonomous system that required neither
a special morality nor extra-economic supports, and produced forms of
social morality, peace and security in its wake (Röpke, 1942h, p. 68).
How far Röpke and Rüstow accurately interpret eighteenth-century
liberal thought is questionable. They seem to conflate, for instance, the positions of the Physiocrats with those of Smith. While praising Smith for his
warnings concerning the tendency for merchants to seek favors and subsidies
(Rüstow, 1980, p. 458), Rüstow argued that the invisible hand ‘is the perfection of the Physiocratic conception of the ordre naturel’ (Rüstow in Röpke,
1942h, p. 270). Careful reading of the Wealth of Nations certainly indicates
that Physiocrat ideas are present in Smith’s work. Yet Smith also criticized
certain Physiocrat ideas such as their insistence that agriculture was the ‘sole
source of the revenue and wealth of every country’ (Smith [1776] 1981, IV.ix,
2) and their view of merchants as ‘altogether barren and unproductive’ (ibid.,
IX.ix, 9). Nor does characterizing Smith as laissez-faire – an expression that
appears nowhere in Smith’s work – explain Smith’s advocacy of particular
policies uncharacteristic of a committed free marketer, such as his approval
of particular export subsidies (ibid., V.ii.k, 12), official limits on interest rates
(ibid., II.iv, 13–16), and certain monopolies (ibid., V.i.e, 30).
Moreover, Smith’s political economy is not premised on a Physiocrat–
rationalist vision of man but rather one of complex human beings with a
variety of interests and limited knowledge. For Smith, economic liberty
operated within a context of customs and specific institutions, and was
enveloped in a legal framework in which government had clear albeit
limited roles. Self-interest is certainly operative, but it is shaped, molded
and occasionally constrained by law. Though Röpke’s writings do not
suggest it, he may have been influenced by the focus of many nineteenth-
Toward a new economic liberalism
79
century German intellectuals associated with the historical school on what
they called Das Adam Smith Problem, which asserted a contradiction
between the self-interested activities underlined in the Wealth of Nations,
and the Theory of Moral Sentiments’ emphasis on benevolence and sympathy (Montes, 2008, pp. 159–62). Twentieth-century scholars, however,
have demonstrated that though there may be tensions (Otteson, 2000),
there are also profound links between the two works (Montes, 2008, p.
166), many of which involve Smith applying different and partial models
of human choice to dissimilar areas of human activity, most notably the
more impersonal market where self-interest tends to dominate and the
spheres of family and church where sympathy prevails (Coase, 1994, pp.
81–2; Viner, 1991, pp. 252–4). Perhaps a better target for Röpke’s reservations about metaphysical harmonies may have been the French economistjournalist Frédéric Bastiat, whose insights Röpke greatly appreciated, but
who came closer to articulating the arguments for invisible harmonies of
which Röpke and Rüstow were critical. As if aware of potential criticisms
that their analysis oversimplified the position of some eighteenth-century
economic writers, Röpke conceded that such thinking had never been
stated as crudely as he and Rüstow put it (Röpke, 1942h, p. 67).
Far from being an ordre naturel, Röpke claimed that free economies
depend upon an extra-economic framework of moral, legal, political
and institutional conditions. More specifically, it was ‘a highly sensitive
artifact’ of Western civilization and Christian and pre-Christian morality.
Even the eighteenth-century economists, Röpke acknowledged, simply
assumed the moral influence of church and tradition (ibid., pp. 68–9,
1960f). The underlying problem was that these truths were lost sight of in
the nineteenth century by particular liberal philosophers such as Herbert
Spencer who thought that the market economy, with its division of labor
and exchange, could be relied upon to educate and domesticate humanity.
These, Röpke claimed, were ‘fatal errors’ ([1957d] 1988, p. 515). Röpke
affirmed that market economies played a role in molding people toward
more civilized behavior, but they were only one factor.
Röpke’s criticisms of economic liberalism’s associations with rationalism were extended in The Social Crisis of our Time and Civitas Humana.
By ‘rationalism’, Röpke meant a ‘hubris of the intellect’ that regarded
human reason as a ‘never-failing guide’, that did not accept the possibility
of making mistakes, and which refused to accept that reason can know
unquantifiable certainties ([1944b] 1948, p. 46). Rationalism also reflected
the tendency to base political economy upon ‘the always rationally acting
homo œconomicus’ (Röpke [1942g] 1992, p. 48), the application of the a
priori reasoning employed in mathematics to social life (ibid.), and an
associated contempt for that which is spontaneous, bequeathed to us, or
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Wilhelm Röpke’s political economy
smacks of tradition (Röpke [1944b] 1948, p. 46). All three characteristics
were shared by
the libertarian fanatic who . . . forgets that freedom without constraints will end
in the worst kind of bondage . . . the apostle of equality who airily dismisses the
brutal truth that the essence of life is inequality and variety; [and] the socialist who builds his ideal state without taking man’s unalterable nature and the
anthropologically vital character of property into account; it is likewise true of
the liberal, who [desires] to turn competitive economy into a precision machine
based entirely on men’s rational behavior. (ibid., p. 49)
Röpke did not view this rationalism as a reaction against seventeenthand eighteenth-century absolutism (ibid., p. 50). Illustrating how far he had
moved from his previous tendency to broadly associate the Enlightenment
with liberty, Röpke noted that the progress of absolutism and the centralization of power in France were associated with the rise of rationalist
thought during the French Enlightenment which fostered greater concentration of power in the state (ibid., p. 50, 1945c). This process continued during
the revolutionary period under the inspiration of Rousseau’s desire to equalize society (Röpke [1944b] 1948, p. 52). In the realm of eighteenth-century
economic science, Röpke maintained that rationalism manifested itself in
economic doctrines which were grounded on a ‘theological–metaphysical’
foundation of absolute optimism regarding human progress in the sense that
it assumed that the invisible hand would guide all egoism freed from external
limitations towards the greatest happiness of the greater number (ibid., pp.
51–3). It was not, Röpke believed, the case that nineteenth-century liberals
were blind to the social disturbances associated with the spread of capitalist
industrialization and what Röpke called the ‘proletarianization’ of large
segments of society (Röpke, 1949j).2 In line with their economic philosophy,
however, economic liberals had believed that the market would gradually
resolve these problems (Röpke, 1936f, [1942g] 1992, p. 53). When this failed
to occur, many liberals began supporting social programs often indistinguishable from socialist measures (Röpke [1942g] 1992, p. 55).
None of these criticisms, Röpke stressed, implied that either economic
liberalism or the market economy was irredeemable (1940a). While economic liberty was insufficient for freedom, it was indispensible: ‘Freedom,
immunity of the economic life from political infection . . . these are the
non-materialistic achievements of the pure market economy’ (Röpke
[1942g] 1992, p. 108). To this extent, Röpke viewed market economies
as indispensible for civilized societies seeking to integrate concerns for
liberty and order with an attention to economic efficiency. From the
standpoint of liberty, the market economy ultimately consisted of ‘innumerable voluntary economic actions of individuals’ (ibid., p. 89). In terms
Toward a new economic liberalism
81
of efficiency, the competitive mechanism allowed production to be guided
by consumer choices, and quickly punished those businesses which ceased
to be attentive to consumer demand (ibid., pp. 90, 105). Hence in a free
economy, economic performance was the decisive factor in a business’s
survival rather than proximity to state bureaucrats (ibid., pp. 90, 106).
The market was also successful in coupling together responsibility and
risk insofar as individuals and businesses taking risks enjoyed the profits
of success and bore the loss of failure. Profit was thus an irreplaceable
yardstick for determining whether an enterprise was going to be successful
(ibid., pp. 90, 105, 1964c).
Socialist systems had failed to find a replacement for this function of
profit (Röpke [1942g] 1992, pp. 90, 106). Nor had socialism proved able
to produce a substitute for the free price structure – ‘the sole apparatus in
a highly differentiated society for making economic calculations’ (Röpke
[1944b] 1948, pp. 13–14). Instead, socialism had produced state-planning
bureaucracies that bumbled their way through the maze of constantly
changing economic data without the compass of free prices (Röpke,
1926b). Socialism thus meant replacing this democracy of market choice
with an autocratic ruler of the economy in the form of the state and the
subsequent politicization of economic life (Röpke [1942g] 1992, p. 103,
1960g, p. 223). Equally inadequate, in Röpke’s view, were proposals to
entrust the economy’s direction to professional and business associations
that incorporated managers, workers and union officials among their
membership ([1944b] 1948, p. 38). For Röpke, ‘corporativism’ – epitomized by what he called ‘the veritable farce of the guild state in Austria’
([1942g] 1992, p. 93) (the attempt by Engelbert Dollfuss to construct a corporatist state in Austria before the 1938 Anschluss) as well as some fascist
countries’ economic policies (1935a) – implied that the state either retained
ultimate direction of the professional groups and therefore the economy,
or it effectively abdicated large parts of its sovereignty to professional
groups who would in all likelihood protect their own bureaucratic interests at consumers’ expense ([1942g] 1992, pp. 93–5). In totalitarian states,
Röpke observed that the government invariably uses corporative policies
‘to push its tentacles far into the economic sphere and [increase] its power’
([1944b] 1948, p. 38). As Eucken later commented, ‘a corporative economy
prepares the ground for central control’ (1951, p. 59).
REVIVING THE LIBERAL CIVILIZATION
Not content with simply criticizing historical liberalism’s deficiencies,
Röpke embarked upon the difficult task of articulating a tradition of
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liberal political economy that avoided these errors. This endeavor had
two distinct but associated components. One involved outlining a particular vision of the market order. This, however, was premised on Röpke’s
conscious attempt, beginning in the mid-1930s, to revive a philosophical
tradition of liberalism that avoided the intellectual tendencies of which he
was so critical.
As Chapter 2 illustrates, Röpke was not the only self-identified liberal
interested in reconfiguring liberalism in this period. In 1935, for example,
Hayek argued it was not true that the only rational form of capitalism was
laissez-faire, recognizing that private property did ‘not by any means necessarily imply that the particular delimitation of the contents of this right
as determined by the existing laws is the most appropriate’ (Hayek [1935]
1948, p. 135). By the late 1930s, many European liberals’ growing conviction that liberalism itself needed to be systematically rethought eventually
resulted in this subject being discussed in detail at the last major gathering
of liberal intellectuals before World War II. The purpose of the conference – the Colloque Walter Lippmann – was to discuss Lippmann’s book,
The Good Society (1937), which had made a considerable impression upon
many European liberal thinkers. Among the prominent attendees in Paris
in 1938 were Mises, Rüstow, Hayek, Jacques Rueff, Walter Lippmann,
Raymond Aron and Röpke himself.
Seeking to focus the conference on liberalism’s contemporary inadequacies, the opening speech of the French philosopher Louis Rougier
(1889–1992) argued that Lippmann’s book had illustrated:
the liberal regime is not solely the result of a spontaneous natural order as
several authors of the eighteenth century with their Codes of Nature declared.
It is also the result of a juridical order that presupposes the legal intervention
of the state. Economic life occurs within a legal order, one that fixes the regime
of property, of contracts, of patents, of fault, the status of professional associations and commercial enterprises, currency and banks – all things that are
not given in, or by nature, as are the laws of economic equilibrium, but are the
contingent creations of the legislator. (Travaux, 1938, p. 9)
Also likely to gain Röpke’s approval was Rougier’s point that
Lippmann had highlighted the need to integrate economic problems in
their political, social and psychological context. Rougier argued that
Lippmann was not opposed to economists reasoning on the basis of theoretical models, which implies simplified and simplifying models. Rather,
theoretical analysis should be done with a view to synthesizing multiple
and complicating hypotheses. Homo economicus was one place to begin,
but he must be integrated with ‘the man of flesh, passion, and limited
understanding who is subject to collective moods, adheres to mystical
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beliefs and never really knows how to calculate the exact or full consequences of his acts’ (ibid., p. 10).
Lippmann himself followed upon Rougier’s critique of traditional
liberalism by bluntly contending that nineteenth-century liberalism’s
inadequacies were evident from the fact that it had collapsed (ibid., p. 13).
It was therefore vain to believe that reaffirming liberalism simply meant
‘repeating formulas from the nineteenth century’ (ibid., p. 14). Liberalism
itself required a total revision. This was not a matter of resurrecting an old
theory; rather ‘mankind must once again evaluate science and its relationship with philosophy and morality, it must revise the notion of the state, of
property, of individual rights . . . in order to reconstruct liberalism’ (ibid.,
p. 15). Lippmann’s envisaged liberalism was ‘one which reconciles such
obvious antitheses as individual liberty and popular sovereignty, order
and liberty, national sovereignty and international security, the power of
majorities and the continuity of the state, between stability and change,
between private property and the common good, between liberty and
social organization’ (ibid., p. 18).
Variations upon these themes were articulated by other Colloque
participants. In a debate with Mises and Hayek, Rüstow insisted that
‘traditional liberalism’ had paid insufficient regard for the need for noneconomic forms of integration, the absence of which National Socialism,
Fascism and Communism had capitalized on (ibid., pp. 65–6). Rüstow
even argued that the world had simply ceased listening to representatives
of traditional liberalism. ‘If they have not listened’, Rüstow stated, ‘to . . .
the prophets – Adam Smith and David Ricardo – how will they believe
Mr. von Mises?’ (ibid., p. 66). Supporting Rüstow’s position, Röpke commented that one needed to ‘be prepared for the new type of liberalism to
be attacked by the old liberals’ (ibid., p. 75). By ‘old liberals’, Röpke was
probably thinking of Mises. Jörg Guido Hülsmann’s biography of Mises
underlines the degree of disagreement between Mises on the one hand,
and Röpke and other German neoliberals on the other (Hülsmann, 2007,
pp. 866, 869–72, 878–80, 1005–11). In later years, Röpke stressed that,
notwithstanding his admiration for Mises’ economic insights, he had significant differences with Mises’ ‘whole social philosophy’ ([1954g] 1969,
p. 182).3
It is not, however, apparent from the papers delivered at the 1938 conference what advocates of a reformed liberalism had in mind as alternatives to ‘old liberalism’. Rougier vaguely suggested that ‘the return of a
revised liberalism . . . would simply be the return of the state of civilization’
(Travaux, 1938, p. 12). Much of Röpke’s subsequent work was devoted
to explaining that liberalism and market orders were a product of preChristian, Christian and certain Enlightenment strains that, together,
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constituted Western civilization. Liberalism in this civilizational sense
was distinct from the liberalism which Röpke denoted as ‘the narrower
and more specific sense of an intellectual, economic, and political ideology, born in the nineteenth century under the influence of certain factors
proper to that period’ ([1957d] 1988, p. 514). Instead, the liberalism that
Röpke imagined was
the valuable work of centuries . . . even of millenniums, a heritage which goes
back to the origins of our civilization, to the Ionian Greeks, to the men of the
Stoa, to Aristotle and Cicero. . . . those thinkers of antiquity who were among
the first to speak of human dignity and the absolute nature of the individual
soul in terms that could be understood by all rational men – who discovered
the kingdom of ideas, who opposed human caprice, who proclaimed the inviolability of an order beyond the State – ideals which became the guiding stars of
Western thought. What the animae naturaliter Christianae launched was completed in a grand way by Christianity and transmitted to us as Christian natural
law. Christianity was necessary to wrest man, as a child of God, from the grasp
of the State and to undertake . . . the destruction of the ‘Pharaonic spirit’ of the
State of antiquity. (ibid.)
Antiquity, in Röpke’s view, was an insufficient basis for a civilization
of freedom. The Greek view of the state and its ‘notion of the collective
freedom of the “sovereign people” did not exclude the total subjection
of the individual’. A modern equivalent was Rousseau’s notion of the
General Will with all its implications for democratic despotism (ibid.,
pp. 514–15). Western civilization’s view of liberty embodied protections
for the rights of the person, of the family, of political opposition, and of
religious practice, not least by limiting state power (ibid., p. 515). All these
elements, Röpke stated, were intrinsically linked to Christianity’s insistence upon rendering to Caesar what belongs to Caesar, but to God what
belongs to God (1955a, [1957d] 1988, p. 515). In summary, Röpke contended, it would be possible to write a description of his vision of reformed
liberalism ‘using only the orations of Cicero, the Corpus Juris, and the
Summa of Aquinas’ ([1957d] 1988, p. 515, cf. 1950f, p. 17).
Röpke’s neoliberalism was thus underpinned by a commitment to
Christian humanism. Making the point explicit in the last decade of his
life, Röpke wrote:
my picture of man is fashioned by the spiritual heritage of classical and
Christian tradition. I see in man the likeness of God; I am profoundly convinced that it is an appalling sin to reduce man to a means (even in the name
of high-sounding phrases) and that each man’s soul is something unique, irreplaceable, priceless, in comparison with which all other things are as naught.
I am attached to a humanism which is rooted in these convictions and which
regards man as the child and image of God ([1958f] 1998, p. 5)
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The Christian humanism that increasingly shaped Röpke’s political
economy emphasized the folly of pretending that humans were perfectible.4 But did embracing such ideas mean that Röpke gradually transitioned from liberalism to conservatism? Certainly Röpke grew critical of
policies largely justified by appeals to ‘progress’ in the sense that change
constituted its own justification (Röpke, 1951g). He was also sympathetic
to domestic American efforts to forge alliances between conservatives
and liberals against socialism and communism (Röpke, 1955f, 1956a).
In later life, Röpke acknowledged that his liberalism had absorbed some
conservative insights of a Burkean variety ([1958f] 1998, pp. 227–8): these
‘conservative ingredients are plainly recognizable in our predilection for
natural law, tradition, Corps intermédiaires, federalism and other defenses
against the flood of modern mass democracy’. Such principles also counteracted particular currents within contemporary liberalism that Röpke
regarded as ‘elements of moral and spiritual disintegration’, most notably
progressivism and rationalism (1959f, p. 235). Nevertheless, Röpke continued to consider himself a liberal, partly because he considered conservatism to be a discredited term ([1958f] 1998, p. 228).
The forefathers of the liberalism advocated by Röpke were exemplified
by Catholic liberals such as Tocqueville and Acton (Röpke 1950f, p. 20,
[1957d] 1988, p. 515) and, at a greater distance, the late-scholastic moral
theologian Luis de Molina (Röpke, 1950f, p. 33).5 As a contemporary
example of the liberalism he supported, Röpke identified Eucken as one
who was both an economic liberal and a Christian, and who believed,
partly because of the experience of living under the anti-liberal and antiChristian Nazi regime, that Christians had to join secular-minded liberals
in pursuing ‘a common goal: the development of a political and economic
order which would be the opposite of a totalist society and economy and
express both Christian and liberal ideals’ (Röpke [1957d] 1988, p. 514, cf.
1955a).6
The Christian humanist liberalism increasingly espoused by Röpke
enabled him to reinforce his particular normative case for liberalism and
the market economy. Röpke favored ‘liberalism’ and opposed socialism
partly on ‘technical grounds’. ‘The economic “orthodoxy” ’, with which
Röpke associated liberalism adequately demonstrated that ‘economic
activities are not the proper sphere of any planning, enforcing, and penalizing authority; these activities are better left to the spontaneous cooperation of all individuals through a free market, unregulated prices, and
open competition’ (1959f, p. 232). But more importantly, socialism simply
gave ‘too little to man, his freedom, and his personality; and too much
to society’. In economic terms, socialism was ‘committed to means that
simply are not compatible with human freedom’ (ibid., pp. 232–3). By
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contrast, Röpke insisted that ‘only a free economy is in accordance with
man’s freedom and with the political and social structure and the rule of
law that safeguard it’ (ibid., p. 233). For these reasons, Röpke stated, he
would favor the market economy even if it were the case that economic
liberty implied material hardship for all and planned or collectivized
economies ‘gave the certain prospect of material increase’ (ibid.).
A NEOLIBERAL REFORM PROGRAM
The desire of many participants at the Colloque Walter Lippmann to
reform economic liberalism found expression in more than rethinking
the foundations of liberalism. It also took on a practical dimension when
it came to reexamining the state’s economic role. Rougier, for example,
asked conference participants to consider ‘what forms of intervention are
compatible with the price-mechanism, [and] what forms are incompatible with the laws of the market?’ (Travaux, 1938, p. 9). Reflecting upon
Western capitalism’s disarray, Rüstow asked ‘how these situations have
occurred, [and] whether it wasn’t the state itself that encouraged them, or
even created them’. ‘And’, he added, ‘one must ask how the state ought to
intervene once a similar situation is created . . . it is not competition that
kills competition. It is rather the intellectual and moral weakness of the
state which . . . lets competition decline’ (ibid., p. 28). During this discussion, Röpke limited himself to suggesting that one had to ‘discover the
criterion by which one can determine the sector in which competition can
be done without’ (ibid., p. 75).
Röpke had, however, already been thinking about how to reconfigure the state’s economic role in a manner consistent with a commitment
to the market economy. Though suspicious of interventionism, he had
commented in German Commercial Policy:
I believe it to be a great mistake to say that we are sinning against the spirit
of liberalism by admitting that there are kinds of state intervention which are
rational and useful, and I believe further that that is just the mistake which has
discredited economic liberalism so much in these days. (1934a, p. 50)
Three years later, in an echo of Freiburg ordoliberalism, Röpke wrote in
the preface to the first German edition of Lippmann’s The Good Society:
‘the question is not: For or against laissez-faire? Rather it is: Which judicial order fits an economic constitution that is just, free, of the highest productivity, and based on a sophisticated division of labor?’ (1937c, p. 32).
Röpke did not embark on this project expecting that it would produce
immediate results. He was thinking of the future. The rationalism of
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eighteenth-century deistic philosophers and political economists, Röpke
argued, had sown the seeds for nineteenth-century capitalism. This was
an instance of what he called ‘historical interference’, whereby ‘internal,
mental incubation’ in one period led to a new ‘phase of external, physical realization’ in the future ([1942g] 1992, p. 54), just as Marx’s ideas
had helped prepare the way for socialist policies in the twentieth century
(Röpke, 1951, p. 267). By 1940, Röpke had decided that the time had
come for another instance of historical interference – one which he was
determined to shape by articulating his ‘third way’ vision of economic
liberalism.
Röpke did not have in mind a ‘middle road’ between socialism and capitalism. In his Bank of Egypt lectures, Röpke was extremely critical of third
way propositions, such as ‘market socialism’ and ‘cooperativism’, because
of their destructive effects upon the free price mechanism (Röpke [1951h]
1987, pp. 20–21, 23). All third ways tried to avoid both the workings of
free prices and the problem of bureaucracy, but essentially amounted to
a type of ‘ersatz-socialism’ (ibid., p. 22) because any system attempting
to diminish the price system inevitably heads in a collectivist direction.
He also considered ‘syndicalism’ – understood as a type of industry
self-government or industrial democracy based upon co-ownership by
employers and employees (with trade unions effectively exercising employees’ ownership rights) under the state’s broad supervision – as highly
problematic, not least because it could facilitate a trade-union capture
of the economy and the state (ibid., pp. 24–5). Röpke also observed that
many purported third-way programs were central to the economic policies
advocated by fascist regimes. But, Röpke noted, the collectivist politics of
fascist movements invariably necessitated collectivist economic policies on
their part. In this sense, Röpke wrote, ‘Fascist Economics has nothing new
to offer, whether in practice or in theory’ (1935a, p. 100).
Röpke’s ‘third way’ closely paralleled the efforts of Eucken, Böhm
and Rüstow in the 1930s to devise an economic constitution which would,
first, prevent the state being co-opted to serve particular interests; and,
second, reposition the state as an institution capable of protecting market
institutions from monopoly, cartelization and interest-group manipulation. Of his fellow neoliberals, Rüstow was perhaps the most influential in
shaping Röpke’s thinking on this subject. In his 1932 essay ‘Liberal intervention’, Rüstow called for rejection of the haphazard interventions that
seemed to drive government economic policy, much of which was done
at the behest of particular interest groups and invariably required other
interventions to assist those economic sectors damaged by the original
intervention. But rather than calling for a return to laissez-faire, Rüstow
argued for:
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. . . interference in precisely the opposite direction to that in which we have
hitherto proceeded, i.e., not contrary to the laws of the market but in conformity with them: not to maintain the old situation but to bring about a new one,
not to delay the natural course of events but to accelerate it. With this in mind,
our recommendation is for a form of liberal interventionism under the motto
of fata volentem ducunt, nolentem trahunt [Fate leads the willing, and drags the
unwilling]. ([1932] 1982, pp. 184–5)
When, for example, an agricultural industry began to lose its competitive edge due to changes in the world economy, Rüstow suggested that
governments should neither do nothing nor immediately inject subsidies
and erect tariffs. Instead, those affected should be immediately encouraged with educational and financial aid to move to a less fragile sector
of the economy. This was far less costly than subsidies and tariffs, which
would in any case fail to achieve their purpose (ibid., p. 185). Rüstow thus
presents a new logic for government intervention: it is to accelerate the
reestablishment of equilibrium, while confining such interventions to cases
of extreme social distress, keeping them free of interest-group manipulation, and not undermining the workings of prices and competition. In this
short paper, Rüstow made no attempt to spell out the full implications of
his liberal interventionism, save to say that it ‘presupposed the creation
of a completely different type of state to the one that has hitherto been
customary’ (ibid., p. 185).
Röpke first gave serious attention to this matter in his work in the 1920s
and 1930s on business-cycle theory, isolated articles dealing with particular aspects of state intervention (Röpke, 1929f, 1929g), and his participation in the 1931 Brauns Commission advising the Weimar government
on how to respond to the Depression. Röpke’s more mature reflections
on economic liberalism reflected his growing conviction that, like democracy, market economic orders presuppose a number of concrete decisions
which must be continuously adhered to, or the market order will weaken
or even collapse. In Röpke’s schema, the first and most central step to a
sustainable market economy is a basic decision for the market and against
collectivism. This fundamental option for the market economy implied
a choice for free exchange, private initiative, genuine competition, free
prices, flexible costs and consumer sovereignty. It also meant a choice
against monopoly and attempts by pressure groups to use state power to
enrich themselves (Röpke [1944b] 1948, pp. 26–7, 32, 1952g).
Once this choice is made, Röpke maintained that the second step was
to implement positive economic policy. Positive economic economy was
divided into what Röpke called framework policy and market policy.
Drawing explicitly upon the work of Böhm and Eucken (Röpke, 1942e,
1943b, [1944b] 1948, pp. 38–9), Röpke’s framework policy concerned the
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rules for competition; that is, the rules of the market and an impartial
apparatus to ensure that these rules are followed. This necessitated the recognition of clear legal and moral rules, and a limited, impartial and strong
government that sought to ensure that effective competition was not being
displaced (Röpke [1944b] 1948, p. 28). By market policy, Röpke had in
mind a version of Rüstow’s liberal interventionism (ibid., p. 39). The
key to ensuring that the state intervenes in the way envisaged by Rüstow
‘without continually intervening to the point where the highly developed
nervous system of the market economy refuses to function’ was to distinguish between ‘ “compatible” and “incompatible” interventions: i.e., those
that are in harmony with an economic structure based on the market and
those which are not’ (Röpke [1942g] 1992, p. 160, [1944b] 1948, pp. 28–9).
An intervention that did not interfere, for example, with the price mechanism was market compatible; one that undermined the price mechanism
was incompatible (Röpke, 1941b). On this basis, Röpke thought that
modest customs duties could be viewed as a market-conformable policy
inasmuch as they resembled internal freight costs insofar as they simply
widen the cost margin between geographically different locations without
significantly deforming the workings of free prices (1955b, pp. 252–3). By
contrast, other devices such as exchange controls and quotas were market
non-conforming precisely because they interfere with free prices (ibid., pp.
252–3; cf. Sally, 1998, p. 148).
The third element of Röpke’s reform of economic liberalism – ‘economic
and social policy’ ([1944b] 1948, p. 40) – concerned the pursuit of specific
social–economic objectives. As if aware that pursuing some of these goals
could considerably compromise economic freedom, Röpke claimed that
these social goals flowed directly from the prior commitment against
monopoly and concentration and the willingness to allow conformable
interventions aimed at making life easier for those negatively impacted by
market competition. This implied a choice in favor of:
small and medium-sized business in every branch of economic life, in favor of
moderation, of what can be overseen and of what is suited to human dimensions, in favor of the middle classes, of the re-establishment of property for
the widest circles, in favor of that policy which can be described in the catchphrases ‘deproletariatization’ and economic decentralization. (ibid., p. 30)7
Economic and social policy also implied using the state to break up
monopolies. Such actions, Röpke claimed, constituted a compatible intervention. Monopolies, Röpke observed, were far more common in socialist
economies, not least because such systems were based on principles of
anti-competition and centralization (Röpke [1951h] 1987, p. 21). But he
also held that monopolies could exist in free markets; hence, antitrust laws
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might be necessary ([1942g] 1992, p. 179). In later works, Röpke become
more skeptical of such measures. If, he contended, monopolies and other
impediments to the growth of small and medium-sized enterprises were
essentially products of government intervention, then ‘it is of no avail to
look to government for new compulsion and new legislation which would
only accelerate centrism elsewhere’ ([1958f] 1998, p. 241).
The fourth and last component of Röpke’s neoliberal economic theory
was ‘social policy’. This concerned the protection and promotion of nonmarket associations (Röpke, 1951f, p. 49). It meant recognizing that the
market was reliant upon a broader set of social institutions if it was to
work. The person who competes in the market was also someone with
a family, often a member of civil associations, and usually a citizen.
According to Röpke, these sociological facts needed to be taken into
account when it came to the functioning of various market mechanisms.8
This placed him, Röpke thought, at odds with both ‘unregenerate Liberals
of the old school’ and contemporary ‘unregenerate illiberals’ (Röpke
[1944b] 1948, pp. 32–3). To illustrate his point, Röpke used the example
of wage policy. Wage elasticity was indispensible in a market economy.
Without it, flexibility in costs is undermined and there is no possibility
of competition. Inflexible wages also undermined an economy’s ability
to absorb external movements in the global economy. But, Röpke also
argued, wage elasticity could only be maintained if wage-earners enjoyed
a minimum of stability in their material lives. Hence they needed practical
skills that permitted them to earn a living during the short-term periods
of unemployment that are often part-and-parcel of a dynamic market
economy (ibid., p. 33).
To provide content to the third and fourth elements of his reformed
liberal program, Röpke detailed a large number of specific policies. These
included the decentralization of political power (1942d, [1944b] 1948, pp.
99–114); the decongestion and decentralization of industry in the name of
deproletariatization (1943d, [1944b] 1948, pp. 152–81); reducing population growth ([1958f] 1998, pp. 39–52); the revitalization and growth of
peasant agriculture, artisans and smaller trading industries ([1942g] 1992,
pp. 201–17, 1945g, 1948d, 1948e); the integration of factory workers into
the countryside; and the promotion of tax and credit policies that favored
small and medium-sized businesses and the acquisition of land property
([1942g] 1992, pp. 218–22, 1948h). For a short time, Röpke even argued
that there existed a strong presumption for utilities (such as radio, postal
communications, water, gas and electricity) to belong to the state, and
wondered whether the state should not have some monopolies of raw
material production ([1942g] 1992, p. 190).
Even pursuing only a small number of these policies in a systematic
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manner would require the state to assume a major role in the economy.
This may explain why Röpke attached heavy caveats to some of these
goals. He stated, for example, that neither agricultural subsidies nor
artificial rigidities in agricultural prices were compatible with a thriving
agricultural sector (1942h, pp. 111–90, [1944b] 1948, pp. 184–93). Röpke
also acknowledged that his neoliberalism raised genuine questions about
whether it burdened the state with too many tasks. He even asked if he was
‘committing the frequent mistake of turning the state into an ideal which
does not correspond to sober reality? Quis custodiet ipsos custodes? Who is
to guard the guardians?’ ([1942g] 1992, p. 191).
Responding to these objections, Röpke specified that a state capable of
achieving these ends would require a small, but utterly incorruptible civil
service, especially when it concerned the administration of legal justice
(ibid., pp. 193–4). But more broadly, Röpke claimed:
A market economy and our economic program presuppose the following type
of state: a state which knows exactly where to draw the line between what does
and what does not concern it, which prevails in the sphere assigned to it with
the whole force of its authority, but refrains from all interference outside its
sphere – an energetic umpire whose task it is neither to take part in the game
nor to prescribe their movements to players, who is rather, completely impartial
and incorruptible and sees to it that the rules of the game and of sportsmanship
are strictly enforced. That is the state without which a genuine and real market
economy cannot exist. (ibid., p. 192)
Unfortunately, this answer fails to address the question of whether there
is a basic incongruity between the first and second elements of Röpke’s
neoliberal political economy, and its third and fourth elements. If, as
Röpke’s economic and social policy suggests, certain industries are to be
favored on grounds of size, then the ‘umpire’ is effectively favoring some
market participants. A vital element of Röpke’s framework policy is thus
compromised. There is also the broader problem of maintaining a meaningful distinction between the framework of a market economy and the workings of the price mechanism, insofar as government intervention by its very
nature – be it directly in the formation of prices or indirectly through the
framework in which prices are formed – affects the market price.
Then there are difficulties with Röpke’s conception of market policy.
One example of a compatible intervention, he argued, was a government
implementing a currency devaluation to reestablish an economy’s external
equilibrium. Röpke cautioned that this step should only be implemented
in extreme circumstances. But, he added, it was a potentially compatible
intervention because it did not paralyze the price mechanism. Röpke also
suggested that some forms of protectionism might be compatible with the
price mechanism. Though they may add costs to business, tariffs left the
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price mechanism’s workings otherwise unfettered. By contrast, quotas
and clearing agreements resulted in the state suspending the market
mechanism’s automatism and replacing it with government control (ibid.,
pp. 160–61).
But does not each compatible intervention listed above affect the crucial
role of prices in signaling an accurate state of affairs with regard to the
true demand for and supply of goods and services? If we treat money, for
example, as an economic good (albeit one with its own special qualities),
then the state’s decision to alter the value of a currency vis-à-vis other
currencies constitutes the state setting a price for a good rather than the
market. Anticipating such criticisms, Röpke maintained that the incompatibility of an intervention becomes apparent when it generates calls for
more and greater intervention. He used the ever-expanding state actions
associated with the introduction of rent controls as an example (ibid., p.
161), not least because rent controls essentially involved an unceasing privileging of one set of tenants over all other parties (1951j). At one level, this
is an adequate answer. An intervention that does not immediately spark
more interventionist demands could be viewed as having avoided distorting market mechanisms. This leaves unresolved, however, the question of
which state actions are always compatible with the workings of the market
and which are not. If a relatively stable set of actions cannot be mustered
as instances of always incompatible interventions, then the very validity of
Röpke’s compatible/incompatible distinction appears questionable.
FROM THEORY TO PRACTICE
Despite several unsettled contradictions, Röpke’s ‘third way’ differs significantly from most of the theories and policies usually associated with
the term. Unquestionably it represents a departure from what Röpke perceived to be the principles and practice of laissez-faire liberalism. However,
far from seeking to replace the market economy, Röpke was concerned
with furnishing liberalism with a more resilient extra-economic rationale
for the market, and devising an economic constitution that reconfigured
the state’s role in capitalist economies without unduly undermining the
market itself. One subject to which Röpke applied these neoliberal ideas
was an issue which occupied many economists’ attention in the post-Great
War period: the nature, causes and effects of the business cycle. It was a
subject to which Röpke gave much attention, both as a technical economist but also increasingly as a political economist focused upon engaging
in descriptive analysis and outlining prescriptive policies aimed at promoting both liberty and order.
Toward a new economic liberalism
93
NOTES
1. For all their influence on each other, Röpke and Rüstow disagreed about some matters.
Röpke did not share, for example, Rüstow’s animus against inherited wealth. One
should, he thought, at least recognize that death taxes represented a brutal incursion into
a family’s social and economic life, and could diminish some of the qualities of knowledge, manners, philanthropy and taste often – though hardly always – associated with
inherited wealth (1988, pp. 257–8).
2. While noting that Hayek was correct to underline the immense increases in living standards for all social classes that proceeded from nineteenth-century capitalism, Röpke was
nevertheless critical of Hayek’s apparent failure to acknowledge the associated social
proletarianization of much of European society (1954b).
3. Röpke, for example, insisted that studying the economy from the standpoint of human
action (as Mises did) need not imply that one had to commit oneself entirely to a social
philosophy of individualism (1944f).
4. The precise doctrinal character of Röpke’s Christianity is unclear, partly because of his
reticence to discuss it publicly. He described himself as one of ‘those Protestants who
consider the Reformation, or, if you wish, the situation it created, one of the greatest calamities in history, but one that, neither in whole nor in part, can be undone.
Such a Protestant has difficulties in finding his religious home either in contemporary
Protestantism, which in its disruption and lack of orientation is worse than ever before,
or in contemporary, post-Reformation Catholicism. For his own part, he can only try,
with whatever grace is allowed him, to re-assemble in himself the essential elements of
pre-Reformation, undivided Christianity, and in this I think I am one of a company of
men whose good will at least is beyond dispute’ (1959f, p. 236).
5. In making these connections, Röpke (1950f, p. 33) underlined his debt to the theologian and later Cardinal-Archbishop of Cologne, Joseph Höffner, a leading theorist of
Catholic social doctrine.
6. This did not mean that Röpke was uncritical of particular expressions of Christian
social thought. He criticized, for example, John XXIII’s encyclical Mater et Magistra for
failing to recognize inflation’s negative moral and economic effects, its inattentiveness
to the monopolistic dominance that unions were acquiring over labor markets, and for
its limited appreciation of free competition (1962a, pp. 162–72). In later life, Röpke also
expressed skepticism about codetermination arrangements often advocated by Christian
social philosophers such as Oswald von Nell-Breuning, SJ (1936). These mandated
worker participation in the management of businesses. Individual businesses should,
Röpke argued, be free to adopt this approach, but he feared making it a legal requirement insofar as such laws would unduly restrict the authority of executives and provide a
means for unions to promote agendas at odds with the company’s best interests (Röpke,
1965b).
7. Here Röpke acknowledged some parallels with a market-friendly interpretation of the
1931 papal encyclical Quadragesimo Anno (Röpke [1944b] 1948, p. 38) as well as distributivist ideas associated with Catholic thinkers such as G.K. Chesterton (Röpke 1941a,
[1944b] 1948, p. 39).
8. Though consumerist tendencies worried Röpke, he opposed austerity measures partly
because of the impossibility of governments being able to decide what are economic
needs and luxuries for countless numbers of individuals. Such a decision ‘presupposes
that bureaucracy knows better than the consumers what is good and useful’ (Röpke
[1948a] 1969, p. 145). But he also believed that they represented a questionable infringement of individual autonomy (Röpke, 1948b). ‘It does not really matter’, Röpke wrote,
‘whether the government calls something a luxury or not, so long as it is left to us, as
adult human beings, to decide whether we can afford it or not’ ([1948a] 1969, p. 145).
5.
Booms, recessions and business
cycles
It has often been suggested to ‘stimulate’ economic activity and to ‘pump the
prime’ by recourse to a new extension of credit which would allow the depression
to be ended and bring about a recovery or at least a return to normal conditions;
the advocates of this method forget, however, that even though it might overcome
the difficulties of the moment, it will certainly produce a worse situation in a not
too distant future.
Ludwig von Mises (1936, p. 463)
Economic recessions come and go, but the persistence and extent of
the Great Depression spawned much frantic activity by economists and
politicians alike as they sought solutions to a downturn that left millions unemployed and susceptible to siren-calls from the extreme left
and right. Some viewed the Depression as confirming Marx’s theory
that capitalism would eventually implode. Others insisted that preserving political liberty in these conditions required radical curtailments of
economic freedom. The Depression also stimulated discussion concerning
whether it was possible to proactively address the fluctuations of investment, growth, employment and consumption that occurred in business
cycles. Active contra-cyclical policies designed to smooth the boom–bust
rollercoaster are often associated with Keynes. Some German economic
liberals were, however, prepared to contemplate similar measures.
Müller-Armack favored contra-cyclical monetary measures to take the
heat out of a credit boom (1929, p. 665). Eucken thought that in times
of very high unemployment, governments should subsidize labor costs,
thereby encouraging businesses to hire more people (1952, p. 304). Röpke
was writing about business cycles long before the Depression, publishing
several long studies on the subject (1922b, 1926a, 1928a), and arguing
that policy-makers ignored the new insights offered by this expanding field at their peril (1925c). His work on business cycles was further
stimulated in 1930 and 1931 when Röpke served on a government inquiry
chaired by former Labor Minister Heinrich Brauns into measures to
reduce Germany’s catastrophic unemployment levels. Though willing to
defend the Commission’s work in public (Röpke, 1931a, 1932d), Röpke
was shocked when Brauns stated that the causes of unemployment were
94
Booms, recessions and business cycles
95
outside the Commission’s terms of reference (Röpke, 1931k, pp. 435–40).
How, he wondered, could one seriously propose solutions if there was
no discussion of causes? In many respects, Röpke’s Crises and Cycles
(1936a) represents the culmination of his reflection on business cycles.
It elaborated upon his Krise und Konjunktur (1932a), which itself had
been expanded in a subsequent Swedish translation in 1934. As late as
1944, by which time Röpke’s attention had turned to the broader issue of
reforming economic liberalism, Röpke’s writings still contained extended
reflection on business cycles.
Careful analysis of Röpke’s work on this subject is important for two
reasons. First, the business cycle attracted interest from the period’s most
prominent economists. Hence it allows us to highlight similarities and differences between aspects of Röpke’s political economy and figures such as
Keynes and Hayek. Despite some initial similarities between Röpke’s and
Keynes’s views on contra-cyclical measures, Röpke became increasingly
critical of Keynesian policies designed to prevent economic contractions,
and moved closer to Hayek’s position. Second, Röpke’s thinking on business cycles provides us with insights into how his emerging neoliberalism
affected his approach to a major problem occupying many economists in
the 1920s, 1930s and 1940s.
DEFINING BUSINESS CYCLES
All of Röpke’s analyses of business-cycle crises devoted considerable attention to defining the business cycle’s nature. He did so because he believed
that the coherent study of business cycles made it analytically essential
to separate the business cycle proper from two other characteristics of
economic life. The first was seasonal fluctuations in economic activity.
According to Röpke, these embraced phenomena ranging from economic
activities affected by the seasons such as crop-sowing, to short-wave oscillations, such as changes in fashions (1936a, p. 14). Another fluctuation was
what Röpke called ‘anticipatory cycles’ (1922b, p. 32). These concerned
those situations in which buyers and sellers act in ways that reflect their
anticipation of forthcoming events, such as imminent new taxes. While
seasonal fluctuations can deepen or accelerate broader business-cycle
trends, identifying them as key elements driving a business cycle could lead
to misdiagnosis of the business cycle’s direction. The second set of information to be excluded from study of business cycles was ‘the underlying
trend of economic data’ (Röpke, 1936a, p. 15). Here the economist had to
give way to historians who trace the data shaping longer-term economic
trends such as population changes and technological innovations. These
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Wilhelm Röpke’s political economy
‘long-wave’ phenomena, Röpke held, were different from cyclical changes
(ibid., p. 16, 1953e).
There are distinct analytical advantages to isolating these short- and
very long-term economic changes from business cycles. They make the
study of the relevant data more manageable by reducing the sheer amount
of information to be digested. They also concentrate economists’ attention
upon identifiable periods of economic growth and contraction, allowing
these to be distinguished as an area of study from the historical analysis of
different economic phenomena, such as industrialization’s gradual shift of
population from rural to urban areas. This permits business cycles to be
treated as a subject of economic science rather than economic history. The
risk is that the study of a given business cycle may assume an artificially
ahistorical character. This is like deciding that one will study the business
cycle associated with the Great Depression without substantial reference
to the Great War’s contribution. Röpke’s Crises and Cycles includes a
chapter on the history of identifiable periods of economic growth and contraction from 1818 to 1929 (1936a, pp. 38–60). But the primary object of
his historical survey was not to demonstrate that certain events may have
contributed to particular economic upswings and downswings. Röpke was
also trying to make a scientific point concerning ‘the inflationary origin of
every boom and every crisis following a boom’ – something that Röpke
considered relatively neglected in business-cycle research until Keynes’s
Treatise on Money was published in 1930 (ibid., p. 39).
Röpke’s description of business cycles has two parts. One involves establishing their identity as a distinct economic fluctuation. The other concerns
outlining the typical course of the business cycle. As a species of economic
fluctuation, Röpke contended that a business cycle has four elements.
First, it is all-embracing insofar as it affects the whole economic process
over and above particular fluctuations of different branches of economic
activity. This means that economists study data (for example, price levels,
volume of money and credit, interest rates, wage levels, volume of production, and employment levels) applicable to all these branches – the same
data which reflect the economic integration of all these different branches
(ibid., pp. 17–18). The second element is that it is cyclical insofar as business cycles have a characteristic rhythm: each cycle phase is a definite and
identifiable stage, each of which develops from the previous phase until
one returns to the initial phase. At this point a new cycle begins: the fall
(contraction) is followed by the rise (boom) which eventually passes into
a new contraction. This basic schema is subject to different variations,
inasmuch as each phase varies in matters such as length, intensity and
geographical extent (ibid., pp. 18–19).
A third defining element of business cycles, Röpke holds, is their
Booms, recessions and business cycles
97
duration. The business cycle lies between seasonal variations and longerterm periods of prosperity and recession. Here Röpke immediately
encounters problems of specificity as he concedes that the marked
irregularity of upturn-to-recession periods makes it impossible to identify
any real uniformity of interval. The question of regularity, he suggests,
should simply focus on the fact of the regularity of the sequence of phases
(ibid., pp. 19–20). The fourth element of business cycles, Röpke states, is
that they ‘first and foremost’ affect an economy’s industrial–commercial
sector. Agriculture, he maintains, is subject to different cycles, partly
because agriculture has its own laws of economic development and partly
because the business cycle assumed visible form with the advent of industrial capitalism (ibid., pp. 20–21). This is the least convincing aspect of
Röpke’s definition of business cycles. It amounts to modern agriculture’s
artificial isolation from the rest of the economy. It also reflects, Röpke
concedes, the then relative dearth of studies of the relationship between
an economy’s agricultural and industrial segments (ibid., pp. 21–2, cf.
1928b).
While Röpke acknowledged that each business cycle has its own specific
characteristics, he stressed that enough common elements can be identified to outline the ‘typical’ course. The business cycle’s upswing begins,
Röpke argues, when the economy has entered a state of equilibrium:
factors such as profits, interest rates, wages and prices are persisting at
low levels; the money market rests in what Röpke calls an ‘easy state’;
and unprofitable enterprises have been purged from the economy. These
elements create incentives for entrepreneurship, the revival of which spurs
developments opposed to that of the contraction: that is, rises in demand
followed by growth in production (Röpke, 1945f, p. 111, 1936a, pp. 22–4).
This is accelerated by credit expansion. Banks become more willing to lend
and businessmen more eager to invest. Money thus moves out of money
markets into capital markets (Röpke, 1930d). This rise in investment
mobilizes human and material resources of production. Production and
employment subsequently increase, and wealth grows. The boom is underway and prices begin to rise.1 The price rise seems paradoxical until one
realizes that the tendency of prices to fall as a result of increased output
is offset by monetary factors such as increases in the amount of money
and credit or acceleration of the velocity of money through the economy
(Röpke, 1936a, pp. 25–6).
The boom, however, contains the seeds of its own destruction, primarily
because of tensions in money and capital markets. A credit inflation can
occur because banks do not raise interest rates quickly enough (Röpke,
1926a, p. 250). Moreover the ongoing growth of demand for credit and
the subsequent increase in lending eventually causes banks to become
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Wilhelm Röpke’s political economy
concerned about their liquidity. They become more reluctant to finance
investments. Interest rates subsequently increase, thereby gradually reducing availability of capital. This and the change in the banks’ outlook begin
to register in the stock exchange. New issues of securities begin to fall, thus
drying up a principal source of finance. Businesses find that they cannot
fund their debts through issuing new shares or debentures. Banks become
nervous about their loans’ security and even less willing to give credit.
This contraction of the money and capital market results in a slowdown
in industrial expansion, and eventually a decline in production. This
facilitates bankruptcies, wage declines and a fall in prices. The general collapse thus acquires its own momentum: the entrepreneurial spirit becomes
subdued; security prices are halved; weaker firms are eliminated; and any
false expectations of particular sectors of the economy are exposed and
deflated. Interest rates begin dropping as credit demand falls and money
shifts to money markets because of fears about the viability of long-term
investments (Röpke, 1936a, pp. 27–9).
Röpke’s account of the business cycle’s boom and crisis stages was
conventional enough for the time, though it emphasized the monetary
dimension more strongly than some of his contemporaries. But Röpke
insisted that it was especially important to understand what occurs during
the general crisis because this allows economists to judge whether an economic downturn is simply part of this normal fluctuation in an economy’s
equilibrium, or if something different to the cycle’s ‘normal’ course is
occurring which may require special attention (ibid., p. 30). Another
analytical advantage of the business cycle is that the concept permits
economists to identify a ‘total crisis’ of an economy rather than particular
crises that affect different industries in an economy at different times (ibid.,
pp. 32–3).
With this caveat in mind, Röpke specified that four different variations
of the ‘total crisis’ can be identified. Each of these he drew from Arthur
Spiethoff (1873–1957), a German economist and disciple of Schmoller.
One was the ‘capital crisis’ that flows from over-speculation in loans and
investments in undertakings that have begun but cannot be completed
because of insufficient capital supplies (ibid., p. 33). A second was the
‘promotion crisis’. This arises from over-speculation in the promotion of
new businesses based on false expectations (Röpke, 1926c, p. 512, 1936a,
p. 33). A third crisis was the ‘speculation crisis’. This consisted of two
parts: the ‘stock-market crisis’ and the ‘commodity-market crisis’, which
are respectively driven by over-speculation in security transactions and
commodities. The fourth crisis was the ‘credit crisis’: the credit system’s
collapse and a subsequent scramble for cash (Röpke, 1936a, p. 33).
Röpke devoted much effort to explaining why credit crises are the most
Booms, recessions and business cycles
99
dangerous, and used the example of the 1931 credit crisis which prolonged
and deepened the Great Depression to underline the point (ibid., pp.
33–6). The particular danger of the credit crisis, Röpke stressed, was that
it reflected a collapse in confidence. This, he argued, is the indispensible
psychological foundation of not only credit but capitalism in general
(ibid., p. 36). For this reason, Röpke insisted that if confidence is on the
brink of collapse, the central bank must be willing to ‘place at the disposal
of the banks all the cash desired by the panic-stricken public’ (ibid., p. 37,
cf. 1931g). The Reichsbank’s failure to do so quickly in Germany in 1931
provided a salutary example of the political and economic consequences
of not observing this principle (Röpke, 1936a, p. 37). Though Röpke did
not describe this type of central bank action as a ‘compatible intervention’,
it may be viewed as such insofar as it provided sufficient quantities of the
means of exchange necessary if people are to even be able to enter into free
exchanges in a market economy.
UNDERSTANDING THE CRISIS
When it came to explaining the causes of the cyclical crisis, Röpke was
disinterested in developing a theory that discredited all existing positions. Instead he adopted ‘a synthetic attitude’ (ibid., p. 62). The primary
methodological division in explaining business-cycle crises, Röpke held,
was between deductive analysis and empirical description. He had little
time for the latter. The endless collation of enormous amounts of statistical information was, Röpke says, reminiscent of the historical school’s
methodology and its contempt for theory. He did not dispute the worth
of statistical research. But statistical method involves ascertaining facts,
rather than explaining them in the sense of putting them into logical order.
As long as no investigation was made of the causal relationships underlying a cyclical crisis, Röpke maintained that we were left with a series of
temporary time sequences that cannot explain how past events shaped the
future (ibid., pp. 66–7).
To a certain degree, Röpke noted, there are natural disturbances in any
capitalist system. Such economies are based on a complex of voluntary
decisions and institutional factors. Frictionless cooperation is thus impossible. This was heightened, Röpke suggested, by the division of labor’s
growing sophistication. Both factors increase the economy’s susceptibility to upheaval, but also greater productivity. One could have a static
economy with relatively little disturbance, but the price was a lack of
liberty and a subsistence-level economy (ibid., pp. 70–71, [1944b] 1948, p.
200). In a free and productive economy, one must accept a certain degree
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Wilhelm Röpke’s political economy
of frictional unemployment – a point, Röpke claimed, never acknowledged by ‘full employment’ advocates, be they National Socialists or
Keynesians ([1944b] 1948, pp. 196–204). The liberty to consume and save
one’s monetary income in market economies meant that producers must
continually adapt to changes in consumers’ spending and savings decisions (Röpke, 1928c). Since people can change their spending and saving
habits more quickly than producers can adjust, some disequilibrium was
natural (Röpke, 1936a, pp. 76–7).
But how, Röpke asked, do we explain the type of large slump in economic activity that qualifies as a cyclical crisis? The first explanation he
considers is the ‘general over-production’ thesis. Röpke does not doubt
that a general slump follows from total demand falling behind total supply
(ibid., p. 78). But the cause does not lie in production outstripping consumption (Röpke, 1926a, pp. 256–62). Scarcity of all conceivable goods
is a fact of economic life. Unfulfilled wants will always outstrip available
goods. Thus the slump must follow from ‘a lack of proportion between
the different lines of production . . . within the highly complicated modern
exchange economy’. In these instances, ‘the wheels of the machine which
delivers the goods do not fit together at times of crisis’ (Röpke, 1936a, p.
79). Explaining how this disproportionality occurs – that is, the partial
overproduction of goods that, by virtue of the highly interdependent
nature of capitalist production, produces a glutting of markets – is central
to any adequate crisis theory (ibid., p. 82).
If the general overproduction theory is inadequate, what can be said
of underconsumption explanations? According to Röpke, such theories
hold that at some point of the cycle upswing, a deficiency of consumer
purchasing power occurs, rendering one part of production unsaleable
at prices covering costs (ibid., p. 85). Such arguments, Röpke states, are
often associated with Marxist analysis which holds that employers’ effort
to keep wages low produces low-spending power on the workers’ part.
This facilitates slackening demand. Röpke counters that the most obvious
difficulty with such arguments is that wage-earners’ incomes actually rise
along with the total income during the cycle’s upswing (ibid., pp. 85–8).
Röpke also takes issue with the ‘dilemma of thrift’ argument: the notion
that savings equates to non-consumption, thus undermining consumer
demand which requires the provision of alternative purchasing power
(presumably through state spending and/or inflating the money supply).
Drawing upon Hayek’s famous ‘The “paradox” of saving’ article (Hayek
[1931] 1995), Röpke notes that underconsumption theories overlook the
fact that savings make possible new productive investments which reduce
the unit cost of production, thereby allowing prices to fall without causing
problems for producers (1936a, p. 92).
Booms, recessions and business cycles
101
Röpke gives more credence to psychological factors in explaining the
causes of crises. As early as 1922, Röpke was attentive to this element
(1922b, pp. 70–84). Given that economies reflect millions of people’s free
decisions, Röpke thought it reasonable to suggest that the individual
and collective moods of these millions affect economies’ expansions and
contractions (1936a, p. 93). During upswings, a general sense of optimism
encourages people to take risks and invest capital. In downswings, the pessimistic mood drives down investments in securities and the capital market
and discourages people from being entrepreneurial. Such mood swings
affect entrepreneurs, savers, consumers and bankers alike (ibid., pp. 94–5,
1963e, p. 18). Confidence, Röpke concedes, is an intangible factor. But, he
adds, market economies cannot function without people having faith in
the law, other people and the future. Once this confidence starts ebbing,
the economy weakens (1936a, p. 96). Yet Röpke also insists that psychological factors cannot be considered in isolation. They must be linked
to the facts of economic life. It was implausible that mass psychological
phenomena could last unless they were somehow rooted in real events and
information which sustained them. Even something like confidence in a
currency could not be disentangled from crucial determinants of money’s
value, such as its quantity and velocity of circulation (ibid., p. 95).
Having considered these alternatives, Röpke maintains that ‘the swing
from boom to depression is primarily a change in the volume of investment and of the production of capital goods’ (ibid., p. 97). As he stated in
an article on socialism and business cycles:
The cause of a major disequilibrium of the economic process is an excess of real
investments in fixed and working capital in the sense that the rate of investment
has increased in a great volume and in a quicker tempo than is compatible with
the preservation of economic equilibrium. The proportion in which the productive forces of the economic system are being devoted to the production of
consumption goods or that of capital goods – i.e., the proportion between consumption and accumulation – can vary in magnitude and tempo, only within
rather narrow limits without engendering disruption and lack of coordination.
(1936d, p. 325)
In market economies, Röpke states, economic development does not
occur evenly. Rather it is manifested through rhythmical jumps, whereby
contraction follows expansion. The expansionary period is usually connected with technological advances and entrepreneurs who turn them into
marketable propositions. This releases the impulse for investment which
grows ever stronger, partly for psychological reasons. The increase in
investment, however, is not possible without the additional credits provided to the economy at low-interest rates by the central note-issuing bank
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Wilhelm Röpke’s political economy
and private banks engaged in current-account deposit business. While
whatever liquidity was stored up during the previous contraction may help
to finance the upswing’s beginning, Röpke holds that the upswing is financially sustained primarily through ‘increased savings during the boom
period and, above all, additional credits (credit expansion)’ (1936a, p.
100) – what he calls elsewhere ‘credit creation’ (ibid., p. 113). This eventually results in a monetary over-capitalization which disturbs the economy’s
equilibrium (ibid., p. 134). ‘The evil’, he writes, ‘is not that too little has
been saved but that too much has been invested’ (ibid., p. 101, cf. 1929b,
1929c, p. 45).
By this, Röpke means that industries on the crest of the boom attract
more and more credit-based investment as they build new facilities and
employ more people to meet demand. At some point, however, the banks’
willingness to create more credit can no longer keep up with the demand
for investment if they want to maintain sufficient liquidity. The central
bank signals that this point has been reached by raising the discount
rate (Röpke, 1936a, p. 116). The now overcapitalized industries begin
faltering as rising interest rates make it harder for them to finance the
debts previously contracted with banks and other investors to expand
their business, and even harder to obtain extra credit. Eventually, by a
reverse-accelerator process, their activities begin to contract and investment falters. The economy subsequently enters a period of recession and
correction. This is usually followed by the reestablishment of equilibrium
from which a fresh boom begins. Occasionally, however, it can result in a
depression so severe that the slump can no longer be designated as simply
a reaction to the boom and requires its own theoretical explanation (ibid.,
p. 135).
BETWEEN HAYEK AND KEYNES
The critical part played by credit expansion in Röpke’s account of the
boom–bust cycle placed him in the middle of the discussion about the
subject between Hayek and Keynes in the early 1930s. Keynes believed
that the classical response – that wages should decrease in a recession until
all those who wanted to work were able to do so – had been discredited by
the high involuntary unemployment characterizing America and Europe
in the 1930s. In Keynes’s view, the classical theory had not accounted for
the ‘stickiness’ of wages. Labor markets were thus unable to regain equilibrium and high unemployment persisted (Keynes, 1936, pp. 258–65).
Another problem, Keynes argued, was that a decline in aggregate demand
inevitably followed from the fall in employment. Wage stickiness was such
Booms, recessions and business cycles
103
that those who owned businesses were unable to adapt. Less capital was
subsequently available for new investment because of persisting high labor
costs (ibid., p. 263).
To summarize, Keynes held that high unemployment proceeded from
businesses’ inability to sell sufficient goods and services. They did not
augment production because of the lack of adequate aggregate demand,
and aggregate demand would not rise because of high unemployment.
This vicious cycle, to Keynes’s mind, required government intervention
to increase employment levels. This necessitated government attempting
to manage aggregate demand. ‘I conceive’, Keynes wrote, ‘that a somewhat comprehensive socialization of investment will provide the only
means of securing an approximation to full employment’. Keynes was
not advocating state socialism: ‘It is not the ownership of the instruments
of production which it is important for the state to assume. If the state is
able to determine the aggregate amount of resources devoted to augmenting the instruments and basic rate of return to those whom own them, it
will have accomplished all that is necessary’ (ibid., p. 378). Thus, while
Keynes leaves microeconomic activity to the market, the state takes over
macro-level management, without excluding the possibility of socializing
particular industries (Ritterhausen, 2007, p. 17).
A common critique of Keynes’s analysis is his assumption of wage stickiness. If wage stickiness proceeded from the refusal of powerful unions
to entertain wage cuts, and many governments’ unwillingness to prevent
unions from adopting intransigent positions on wage reductions, then
Keynes’s theory was based on a political assessment rather than economic
logic. In this regard, Röpke particularly lamented Keynes’s apparent
unwillingness to accept the need for painful readjustment (Röpke, 1936a,
p. 109). More generally, while Röpke praised Keynes’s Treatise on Money
(1930) for its explanation of how the savings–investment relationship
shapes the downswing, he considered Keynes ‘rather vague’ on the critical
issue of how overinvestment affects the structure of production (1936a, p.
109).
In contrast to Keynes, Hayek argued that although the credit expansion
that follows from manipulating the interest rate creates new resources for
investments by entrepreneurs, the fact remains that the credit expansion
has not been backed by prior real savings. A lengthening of the production process thus occurs which cannot be maintained over the long
term (Hayek, 1995, pp. 74–121). Painful readjustment through recession
becomes unavoidable. In Röpke’s view, Hayek correctly identified credit
expansion as the driving force of overinvestment. As early as 1926, Hayek
portrayed Röpke as one of the few to recognize that monetary theorists
of the business cycle were mistaken in focusing on the effects of change in
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Wilhelm Röpke’s political economy
the value of money rather than the more important issue of how money is
introduced into the economy (Hayek [1929] 1933, p. 21 n.16). For Hayek,
it was the rise of investments not funded out of voluntary savings that
eventually upset the structure of production, thus causing recessions.
Röpke agreed with Hayek about the crucial role played by credit expansion and other non-voluntary savings in facilitating the crisis. He insisted,
however, that it was the rise in the absolute amount of overinvestment
that mattered (Röpke, 1936a, p. 110) – including the contribution associated with large businesses investing significant portions of their profits
in their own plants rather than new capital markets (Röpke, 1929c,
pp. 20–40). Hayek had signaled his disagreement with Röpke on these
issues almost seven years earlier in a review of Röpke’s Die Theorie der
Kapitalbildung. He described Röpke as acknowledging that voluntary
savings represented the only unobjectionable source of capital formation,
but as too lenient when it came to criticizing forced capital accumulation:
when the government prints more money to allow the purchase of capital
goods, thus attracting investment into capital goods’ production at the
expense of consumer goods (Hayek [1929] 1992, p. 198). Röpke in turn
does not dispute that Hayek had reason to be concerned about capital
formation through loose monetary policy. But, Röpke added, ‘not every
credit expansion is inflationary’ (1936a, p. 117). This was especially true
at the beginning of the upswing or at the low point of the recession (ibid.,
pp. 117–18).
THE SECONDARY DEPRESSION
Careful reading of Crises and Cycles underlines how much Röpke’s explanation of the business-cycle crisis was influenced by his observations of
the Depression, especially in Germany and America. According to Röpke,
contributing factors to the Depression included an unusually severe agricultural downturn as well as the spread of tariffs, monopolies, subsidies
and wage-hikes that diminished the economy’s elasticity and ability to
adapt (Röpke, 1930a, 1936a, p. 137). But a more fundamental cause,
Röpke argued, was ‘the overinvestment of the preceding boom caused by
credit expansion’ (1936a, p. 136) – most notably by the Bank of France
and the Bank of England as well as Germany’s enormous capital imports
in the interwar period (1930g, 1931c, 1936a, p. 136). The Depression’s
severity also led Röpke to develop a separate theory to account for those
circumstances in which economies seemed unable to escape a downward
spiral. This proved especially important for his policy recommendations
concerning business cycles. He first became interested in articulating
Booms, recessions and business cycles
105
such a theory while serving on the Brauns Commission (Röpke, 1931k,
1933d).
It is possible, Röpke wrote, that an economic downswing can grow
to dimensions disproportionate to the preceding boom inasmuch as its
readjustment function degenerates into a ‘secondary depression’ (1933c,
p. 535). This demoralizes the population, plays no constructive role in
allowing economic recovery, and facilitates a new disequilibrium that has
nothing to do with the factors initiating the original downturn (Röpke,
1936a, p. 119). While the secondary depression is marked by falling
prices and shrinkages in the volume of currency, Röpke argues that these
elements are driven by the contraction of total demand, especially as
expressed in the contraction of credit money which becomes apparent in
phenomena such as the immobility of bank accounts and the shortening of
bank balance sheets. Contraction of total demand is connected to the contraction of incomes and, to a certain extent, with the contraction of costs.
This results in a general contraction of production that in turn contributes
to the contraction of demand and incomes.
This vicious cycle is self-maintaining, Röpke notes, ‘and constantly
interferes with the attainment of a new equilibrium’ (1933d, p. 434)2
because of two lags (1935c). The first is the lag in the contraction of
production behind the fall of prices. The second is in the contraction
of costs behind falling prices. Thus two disproportions are maintained
in place: one is between supply and demand while the other is between
costs and prices – in other words, a lack of profit (Röpke, 1936a, p.
122). This creates disharmony between the formation of incomes and
the process of utilizing incomes. Money is withheld from expenditure
of consumption goods but without any compensation for this nonspending taking place in the form of investments in capital goods.
Thus the rate of savings remains continuously greater than the rate of
investment (ibid., p. 123). Businesses, for example, maintain as high a
level of liquidity as possible and decline to make new investments or
even replace their old machinery (Röpke, 1931d). Families leave their
bank accounts idle or actually hoard money because they fear for their
financial security (Röpke, 1936a, p. 123). Stagnation and a type of
sterilization of purchasing power thus occurs insofar as the reserves of
productive resources, savings and cost reductions are not accessed for
new investment (ibid., p. 135).
Röpke suggests that, in these conditions (especially with confidence so
low), not even injecting additional credit into the economy’s arteries seems
to have an effect (1933d, p. 436). Drawing upon the United States’ experience (Röpke, 1934b), Röpke contends that the banking system’s willingness to give new credit is insufficient in these circumstances to facilitate
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a credit expansion. Entrepreneurs need to be willing to take these new
credits and enlarge the volume of circulating media through new enterprises. The American experience suggested to Röpke that it is difficult to
persuade entrepreneurs to do this in a secondary depression. This reflects
the general lack of confidence prevailing among entrepreneurs and the
general population (Röpke, 1936a, p. 125, [1944b] 1948, p. 206). From
a less-subjective standpoint, the depressed stock market and the apparent lack of any sign of recovery indicate to entrepreneurs that neither
banks nor the public are interested in long-term investments. The only
available form of private credit thus tends to be of the short-term variety.
Entrepreneurs wanting to make long-term investments are understandably reluctant to rely on short-term funds (Röpke, 1936a, p. 125, 1960c,
p. 112). Hence economic growth and recovery is stalled.
Röpke was not alone in his efforts in the 1930s to define the secondary
depression’s causes. He underlines the contributions of Keynes’s Treatise
on Money to this discussion, while signaling his disagreement with aspects
of Keynes’s diagnosis. Röpke also acknowledges the impact of economists who would emerge as prominent skeptics of aspects of Keynesian
economics, most notably Jacob Viner (1892–1970) and D.H. Robertson
(1890–1963), on his thinking about business cycles (Röpke, 1936a, p.
133). But perhaps Röpke’s most curious reference to Keynes occurs in the
preface to Crises and Cycles when he writes:
Unfortunately, the book was already in type when Mr. Keynes’s new work The
General Theory of Employment, Interest and Money was published. The author
believes, however, that the reader will be able easily to discern where and why
the bold views of Mr. Keynes do not coincide with those set forth in the present
book. (ibid., p. vi)
Crises and Cycles certainly differs from the General Theory insofar as
it views the economic problems of the 1930s primarily through the lens
of business-cycle theory, critiquing and amending existing business-cycle
theories as part of Röpke’s synthetical approach to the subject. By contrast, the General Theory attempts a revolution in economic science itself.
Parallels do emerge between Keynes and Röpke, however, concerning the
issue of whether one should or can smooth out the business cycle. In 1936,
Röpke held that the secondary depression, unlike the primary economic
downswing (which it is best simply to endure), may be combated using particular means of which Keynes would have approved but which Röpke was
more reticent to employ (ibid., p. 120). Indeed within six years, Röpke’s
reticence hardened into deep reservations about Keynes’s thinking about
addressing economic crises – especially Keynes’s insistence on incorporating a full-employment policy in any approach to economic downturns.
Booms, recessions and business cycles
107
BETWEEN ACTIVISM AND BENIGN PASSIVITY
Röpke’s approach to alleviating business-cycle fluctuations and the separate issue of how to escape secondary depressions was influenced by
the fact that Germany’s 1929 economic crisis, and mistakes made by
Germany’s political leadership in addressing it, helped precipitate the
Nazis’ rise to power (Röpke [1944b] 1948, p. 207). Escalating unemployment propelled large numbers of desperate people into the Communist
and National Socialist movements. While Röpke saw drawbacks to intervention (1929f, pp. 861–5), he was convinced by 1931 that if no proactive
measures were taken, anti-market sentiment would become so widespread
that ‘Liberalism – or the remnants of it which still exist – will disappear
into the museum’ (1931k, p. 450). Eucken arrived at similar conclusions,
so much so that he joined Röpke in offering qualified support for a proposal by the economics ministry for limited government spending on infrastructure, accompanied by action to force down wage rates and to break
the cartels’ price monopolies (Borchardt and Schötz, 1991, pp. 309–25).
When it came to addressing unemployment, Röpke argued that socialist
proposals were bound to fail because socialist economies lack mechanisms
that alert people to the need to diminish or end unsound investments. The
subsequent persistence of these investments results in economic downturns and increasing unemployment (Röpke, 1936d, p. 321). But Röpke
also disputed Mises’ view that reducing wage levels would eventually
reestablish equilibrium. ‘This is wrong’, he suggested, ‘because given the
total paralysis of investment, each reduction of prices and income would
lead to a continued sterilization of means of payment – in the form of an
increase of the liquidity of the banking system – and thus to an extended
disequilibrium’ (Röpke, 1932c, p. 274). Mises had failed to see, Röpke
maintained, that large capital reserves were frozen that only needed credit
expansion to be unlocked. A government-initiated credit expansion would
not therefore divest the private sector of its resources but actually increase
the means available in the private sector (ibid., p. 275). Yet, as Hülsmann
notes, a flaw in Röpke’s critique is that this implicit acceptance of an
initial inflationary policy assumed that owners of capital ‘would quietly
contemplate a reduction of the real prices they obtained for selling or
renting out their resources’. The other problem which Röpke sidesteps is
that of unions’ unwillingness to reduce real wage rates in order to diminish
unemployment (Hülsmann, 2007, p. 625).
As the following chapter illustrates, Röpke’s anti-inflationary views
became increasingly pronounced after World War II as did his conviction that trade union power was a major factor driving post-war
Keynesian employment policies. In the 1930s, however, Röpke considered
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it politically unwise to simply let the cycle associated with the Depression
take its course. Some limited government intervention was necessary
because of the immediate political consequences for Germany of failure to
act. Reflecting on these circumstances a decade later, Röpke wrote:
. . . a fatal vicious cycle had arisen which ought to be broken at all costs by
bold and energetic measures of business-cycle policy, so that together with the
economic crisis the political situation could be controlled. We realized that we
had to deal with an emergency with which it would no longer be possible to
cope on the familiar orthodox lines of the accepted business-cycle policy and
that an ‘active business-cycle policy’ would have to be embarked upon. . . . I
can remember very well that evening when the basic idea of this business-cycle
policy became clear to us, but we all immediately agreed that it was dynamite
which we were handling and that it ought not to be allowed to fall into the
wrong hands. ([1944b] 1948, p. 207; emphasis added)
Röpke’s caution expressed in the last sentence may reflect his awareness of
the potential mischief that might result from policy-makers deciding that it
was possible not just to alleviate but actually to control business cycles.
When it came to practical recommendations, the Brauns Commission –
and Röpke – rejected any policies with inflationary implications. Business
cycles were simply a fact of modern economic life. There was no such
thing, Röpke wrote in his commentary on the report, as a permanent boom
(1931k, p. 449). The Commission also rejected a number of suggestions,
such as requiring married women to cease holding jobs (ibid., p. 451).
Instead, the Commission recommended seeking long-term international
loans and a policy that Röpke labeled ‘initial ignition’ (initialzündung)
(1933g, pp. 430–31). This involved public works, ranging from agricultural improvement schemes to enhancements of the road network.
In Crises and Cycles, Röpke integrated these experiences of attempting
to cope with a major economic downturn into his thinking about active
business-cycle policies. Röpke asked two questions (1936a, p. 138). First,
should we seek to shape the upward and downward swings of business
cycles? Second, can we do so? Röpke’s answer to the first question is that,
as an economist, he can marshal the relevant facts but that ultimately the
final decision is a political one. If people want to combat the boom–bust
cycle, they have to decide if they are willing to give up or at least greatly
reduce the acceleration of economic development that occurs during
booms through the credit expansion (Röpke, 1931i). Do they prefer steadier, albeit much slower growth or discontinued bursts of frantic economic
energy? Booms allow tremendous economic progress, but contractions
bring with them considerable evils, especially unemployment’s damaging
social effects (Röpke, 1936a, pp. 138–41). Part of the difficulty, Röpke
writes (in almost exasperated tones), is that people want the boom’s
Booms, recessions and business cycles
109
benefits without the inevitable ‘bitter medicine’ of contractions. This
makes the economist’s task ‘extremely thankless’, which is compounded
by the fact that growing government intervention has accustomed people
to imagining that the state must do something (ibid., p. 146).
In his first book on business cycles, Röpke suggested that governments could play a subsidiary role in alleviating cycles by establishing
legal frameworks to make business and factory closures less sudden and
more orderly (1922b, pp. 74–5). He also thought that laws encouraging
futures-trading on the stock exchange could assist businesses in navigating the highs and lows of business cycles (ibid., pp. 126–7). In his more
mature schema, Röpke held that a sound business-cycle policy should and
can aim at accelerating the recovery from the downturn. The measures
that he advocates are largely of a ‘negative’ kind; they involve removing
obstacles to recovery, especially those created by state intervention. To
this extent, Röpke takes a different stance from Keynes (insofar as Keynes
wanted active stimulation of the economy in order to maintain a moreor-less continuous boom) and is closer to Hayek’s and Mises’ minimalist
prescriptions. It is also consistent with the framework policy of Röpke’s
neoliberalism. Röpke adds, however, that there may be scope for positive measures such as unemployment relief or supporting major banks on
the verge of failure. He insists, however, that these should be regarded
as palliative measures rather than part of an active business-cycle policy
per se (1936a, p. 147). These might be considered early manifestations
of the ‘economic and social policy’ dimension of Röpke’s neoliberalism because such measures seek to prevent the emergence of mass anticapitalist sentiment. The collapse of a number of German banks in 1931
and the Reichsbank’s slowness to bolster the banking system’s position
in these circumstances helped, Röpke wrote, discredit capitalism in many
Germans’ minds (ibid., pp. 33–4). At the same time, Röpke cautions that
some of the palliative measures may actually introduce new frictions into
the process of recovery (ibid., p. 147).
A key element of Röpke’s view of business-cycle policy is his insistence that any direct interference with the structure of production, costs
and prices is normally a dubious exercise (1931h, 1936a, p. 159). In his
neoliberal theory, these would constitute non-conformable interventions.
Noting that monopolies, for example, are often presented as a way of
smoothing out business cycles, Röpke maintains that this ignores the fact
that the price rigidities created by monopolies should not be equated with
economic stability. If anything, monopolies tend to facilitate overinvestment of capital in particular economic sectors on a huge scale, precisely
because of the absence of competition (Röpke, 1931f, pp. 289–307, 1936a,
pp. 160–61).
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Röpke states that he has only modest expectations of attempts to
control business cycles (1935b, 1936a, p. 176). Much of the business cycle,
Röpke believes, is driven by countless individuals’ psychological attitudes
and only so much can be done to shape these. His overall approach to
active business-cycle policy distinguished between measures for controlling the cycle as a whole; measures for addressing secondary depressions;
and measures for relieving the symptoms associated with recessions and
secondary depressions (1936a, p. 148). Concerning the entire cyclical
movement, Röpke argued that if one accepts that overinvestment fueled
by credit expansion is central to cyclical disturbances of equilibrium, we
can contemplate measures that keep credit expansion within reasonable
limits. Such measures should not, he notes, be regarded as the means to
create a ‘cycle-less’ capitalism (ibid., p. 149), but rather as a way of dampening the boom and therefore diminishing the downturn’s scale without
sacrificing the growth generated by the boom.
In Röpke’s understanding of the cycle’s expansionary phase, the bulk
of the credit money that fuels the expansion is created by private banks
(Röpke, 1930a, 1930c). Nevertheless, the central bank can influence the
scale of the expansion by ‘regulating the quantity of cash . . . in existence
through its credit policy’ (Röpke, 1936a, p. 153). Röpke suggests that
central banks’ most important tool for doing so is through raising or lowering the discount rate (1929d, p. 30). This is especially important at the
boom’s beginning when raising discount rates is likely to dampen credit
expansion and thus act as a safety-valve. Raising and lowering discount
rates, Röpke specifies, differs from the strategy of credit restriction. In the
latter’s case, the central bank moves from allowing the amount of credit
to be determined by the discount rate, to fixing the maximum amount of
credit permitted (1936a, p. 153).
Röpke is adamant that credit restriction by central banks should only be
contemplated in particular circumstances because of the profound inflexibility it introduces into the banking system and the risk that it will drive
many sound private banks into bankruptcy (1931j, 1936a, pp. 154–5).
A preferable method for central banks is open market operations that
regulate the amount of credit in circulation via central banks’ purchasing
and selling securities (Röpke, 1936a, p. 154), thereby ‘preventing a total
collapse of security markets’ (Röpke, 1933d, p. 437). This assumes that it
is possible to measure the amount of money and credit in circulation – a
somewhat questionable proposition. Then there is the option of varying
deposit-reserve requirements by law inasmuch as banks would be required
to hold a minimum reserve against their deposits. This minimum would
vary in accordance with the central bank’s credit policy (Röpke, 1936a,
p. 154).
Booms, recessions and business cycles
111
Another measure contemplated by Röpke for ‘managing’ business
cycles was compensatory budget policies. He had limited expectations of
this approach and considerable doubts concerning its prudence. If one
accepts the state’s growing share of national economies – a trend that
Röpke considered undesirable (ibid., p. 157) – Röpke thought that there
was a case for using the public sector to counterbalance cyclical movements in the private sector. By altering the amount and kind of taxation
and government expenditure, Röpke argued, the state could shape trends
in economic development, especially through taxes which affect production
and entrepreneurship. Increasing these taxes can reduce excessive market
buoyancy. Reducing them can help economies recover during downturns
(ibid., pp. 156–7). But while not diametrically opposed to such measures,
Röpke was wary of them. First, he believed that they help habituate people
to the idea of the state controlling large segments of the economy. Second,
Röpke did not think that there is any particular reason to assume that
governments are especially good at diagnosing particular stages of business cycles. Third, while governments may be more than willing to engage
in expansionary budget policies during downturns, Röpke held that they
will be reluctant to implement ‘the mortification of restrictions’ during
the upswing (ibid., p. 158). Indeed, considering Germany’s experiences in
the late 1920s and 1930s, Röpke suggested that governments tend to do the
opposite of what a rational budget policy would demand (ibid., p. 159).
In instances of secondary depressions, Röpke was willing to contemplate a range of positive measures (ibid., p. 147), though his skepticism
regarding their efficacy grew after 1936. In Crises and Cycles, Röpke
articulates an alternative to ‘restrictionist’ and ‘expansionist’ approaches
to overcoming depressions which he denotes – using language prefiguring
his neoliberal theory – as ‘conformable’ business-cycle policy (ibid., p.
195). Restrictionists, Röpke states, insist that the process of liquidation
and adjustment should be allowed to take its course. This means that
nothing should be allowed to obstruct the adaption of the whole structure or prices and costs to the lower economic level. This may imply a
restriction of state expenditures. Expansionists, by contrast, believe that
secondary depressions contain their own vicious cycle that undermines the
economy’s ability to recover equilibrium. Proactive measures by the state
must therefore be taken to break out of these conditions since the private
sector appears unable to do so (ibid., pp. 179–80).
In 1936, Röpke described himself as belonging, with numerous qualifications, to the expansionist camp (ibid., pp. 179–80). His most important modification was that expansion should – and could – be combined
with permitting normal market readjustment to occur (ibid., p. 186).
Restrictionists, he stated, were right in their diagnosis of the primary
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crisis and in insisting that the economy be cleared of obstacles to growth
such as subsidies, monopolies and tariffs (ibid.). They were also correct
to observe that wage and labor market inflexibilities (especially resistance
to wage reductions) must be addressed, though, Röpke adds, this should
be accompanied by action against other monopolies in the economy. He
slightly qualifies this by suggesting that further lowering wages at the
secondary depression’s low point is unlikely to have much effect, except
further decreasing demand just when it needs to grow (ibid., p. 184).
Röpke subsequently calls for using the state to re-expand the economy
in secondary depressions, without interfering with the market’s competitive processes – a clear instance of ‘market policy’. Röpke outlines a rather
minimal picture of what such measures might entail, while underlining the
drawbacks of these policies. In mild instances, Röpke argues, such policies
could amount to the state stimulating private initiative via a ‘cheap money
policy’ (that is, lowering discount rates) and offering special incentives for
new investments, such as tax exemptions (ibid., p. 198). Röpke is even willing
to consider low tariff protection for special industries in these circumstances,
on the grounds that it might alleviate the need for extensive wage-cutting
which he doubts society’s willingness to tolerate. He subjects this suggestion, however, to numerous conditions and emphasizes that, once installed,
tariffs are difficult to remove and can foster monopolistic behavior (ibid.,
pp. 198–9). Hence, Röpke comments, using tariffs to address the secondary
depression is ‘not . . . particularly recommendable’ (ibid., p. 199).
If these measures of stimulating the private sector failed, Röpke contemplated – as a last resort – direct public initiatives that involve enlarging
the volume of credit, thereby compensating for the private sector’s rigid
contraction. One method was to borrow while simultaneously running
a public sector budget deficit by reducing taxes and/or raising expenditures. The other was to borrow money to fund large public works. Röpke
favored the first approach because it expanded credit via state borrowing
while also creating incentives for private business to recommence borrowing. It also represented the least departure from the market’s normal ways
and was thus likely to dampen expectations that a ‘new economy’ was
being created (ibid., p. 200).
Röpke found it difficult to suppress his reservations about such measures. Budget deficits and increases in public indebtedness were not, he
commented, normally to be encouraged. They should only be employed
in extraordinary circumstances; that is, when doing nothing is not feasible
and then only for short periods of time. Röpke worried that what would
otherwise be defined as reckless government spending might become
viewed as normal (ibid., pp. 200–201). Röpke is even more circumspect
about public works programs. These normally required creating new and
Booms, recessions and business cycles
113
difficult-to-dismantle administrative bureaucracies. Public works also take
time to implement and the impact of any positive effects takes even longer
(ibid., p. 200).
Röpke’s lingering doubts about governments attempting to reignite the
business cycle become more apparent in his treatment of the ‘palliative
measures’ that governments might undertake to mitigate the secondary
depression’s social impact. Their ‘palliative’ character is derived from
Röpke’s conviction that these measures will not re-start credit expansion.
He viewed unemployment relief as a matter of ‘political common sense’
insofar as it may help prevent sudden breakdowns in social order. But, he
notes, it ‘has the drawback of making the wage system more rigid’ (ibid.,
p. 211). Such benefits, Röpke cautions, should not be so high that they
discourage people from wanting to work for reasonable wages. While
other measures such as productive relief works, compulsory labor service
and land settlement had some potential to redress the secondary depression’s psychological effects, Röpke underlined their very limited economic
effectiveness (if not ineffectiveness) and high costs. Land settlement might
help some workers acquire some security, but, contrary to the expectation
of romanticists, was no cure for unemployment and had proven ineffective
in discouraging people from moving to the city (ibid., p. 217).
Then there are those palliative measures that Röpke considers have
no redeeming features. Suppressing ‘unwarranted double-earning’ is an
especially futile exercise. It falsely assumes that one can define what constitutes ‘double-earning’ and would require a bureaucracy to control the
distribution of labor. Nor does Röpke have any time for labor nationalism
– the notion that foreign workers withhold a job from native workers –
and tight restrictions on immigration. Such policies reflect the autarkic
mentality (Röpke, 1933a), which ignores the fact that immigrants are
often enterprising and energetic workers and a source of specialist skills
lacking in a given economy. Labor nationalism also implies a zero-sum
outlook regarding employment insofar it accepts work shortages as a
static situation (Röpke, 1936a, p. 219, cf. 1930b, 1932a, pp. 133–40,
1947d, pp. 134–41, 314). Lastly, labor nationalist policies effectively
deny that ‘the interchange of men is not the least part of our complicated
economic system, to say nothing of its spiritual implications’ (Röpke,
1936a, p. 218). Here Röpke may be referring to Nazi Germany’s racially
orientated employment policies, which involved expelling Jews from most
professions in the name of ‘Aryanization’. More generally, Röpke always
maintained a generally liberal approach to immigration (1946a, 1947d, pp.
134–41, 1959c, pp. 79–114), not least because it facilitated an international
division of labor that helped meet an ever-growing world population’s
economic needs (Röpke, 1930b).
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SECOND THOUGHTS ON BUSINESS-CYCLE POLICY
Though Röpke did not change his mind concerning the nature and causes
of business cycles, his repeatedly stated cautions about using the state
to combat downturns (including the secondary depression) deepened
into profound skepticism in later years. He appears to have concluded
that most anti-cyclical measures actually generate more uncertainty by
artificially prolonging booms, thereby making an inevitable downturn
more painful, not least because such policies rarely addressed the critical
problem of poor investments. Röpke regretted that some of his early work
on these matters could be viewed as supporting the post-war tendency
to use the state to pump-prime the economy. ‘I am ashamed’, he wrote,
‘to say that I must take my share of the blame for creating this concept
of “functional finance” (Krise und Konjunkter and my subsequent book
Crises and Cycles), but I am forced to admit now that it has stood the
test neither of counter-argumentation nor of experience’ ([1958f] 1998,
p. 295). According to Röpke, if overinvestment was to become a reality,
‘some sort of compulsion will be required to loosen the bond which ties
capital goods production to the voluntary savings of the population, and
to raise the relative restriction of consumption above the point which the
population itself is prepared to undergo via its savings’ ([1937a] 1963, p.
213). In short, Röpke concluded, severe recessions owe much to the state
previously pump-priming the economy, thereby breaking the link between
the level of voluntary private savings and investment.
Here Röpke’s position drew closer to the Austrian analysis of the business cycle. For Mises, the very practice of fractional-reserve banking overseen by a central bank inevitably gave rise to the creation of money (or,
more precisely, fiduciary media) not backed by real savings. This results
in artificial growth in the money supply. As Huerta de Soto notes, when
‘loans are created ex nihilo at artificially reduced interest rates, it inevitably
causes an artificial unsustainable “lengthening” of productive processes,
which thus tend to become excessively capital intensive’. The inflationary
process created by credit expansion thus eventually provokes an economic
crisis which reveals the investment errors alongside the necessity of liquidating and reallocating all the wrongly invested resources (Huerta de
Soto, 2008, p. 65).
Röpke’s thinking was also affected by the failure of Roosevelt’s New
Deal to reignite the American economy (Röpke, 1942c). According to
Röpke, ‘it turned out that the original calculation that the Government’s
boost of purchasing power would set off the private investment drive that
was due, was wrong. Every time the Government’s injections were withheld, it was as if there was no private initiative which could take the place
Booms, recessions and business cycles
115
of public initiative’ (Röpke [1942g] 1992, p. 169). America’s choice, it
seemed, was now between wholesale economic collectivization or liberating business so that it could react to the business cycle’s normal stimuli
(ibid., pp. 169–70). In the end, the indecision was only overcome when
America adopted a war economy in 1941 and an armaments boom ensued
(Röpke [1944b] 1948, p. 209, [1952d] 1960, p. 371).
Röpke was also perturbed how active business-cycle measures were
increasingly used for ends other than escaping severe recessions (Röpke,
1940b). They should not, he emphasized (in what may be viewed as a
critique of Keynesian policies), be ‘misemployed for the neck-breaking
attempt to keep the boom inflated for ever’ ([1944b] 1948, p. 208). Röpke
was not adopting an entirely restrictionist position; he did not favor completely abandoning active business-cycle policies altogether ([1942g] 1992,
p. 173). But any ‘pump-priming’, Röpke reiterated, should be guided by
three conditions: it must not diminish the capital from other investments;
the objects of public investment must be chosen and policy managed so
as to avoid all unfavorable repercussions to private investment; lastly, it
must not be combined with measures that increase costs, especially wages
([1944b] 1948, p. 222). Most interwar active business-cycle policies aimed
at combating secondary depressions, Röpke argued, had failed because
these cautions had been ignored. Instead ‘only an artificially continued
prosperity developed which was bound to come to an end the moment
the state injections of purchasing power upon which it depended, ceased’
(ibid., p. 208). Bad investments had driven out good investments, meaning
that governments were not only bound to keep injecting purchasing
power, but to increase them. Such, Röpke wrote, was ‘the slippery slope of
collectivism’ (ibid., p. 209).
TOWARD THE NEW ECONOMICS
The embrace of full-employment policies by most governments after
World War II reflected not only a determination to avoid the interwar
period’s catastrophic unemployment levels by attempting to guarantee
a type of economic stability for all, but also the growing dominance of
what Röpke called ‘the new economics’ associated with Keynes and
‘Keynesians’ such as Sir John Hicks (1904–89), Joan Robinson (1903–83)
and Lord Nicholas Kaldor (1908–86). Analysis of Röpke’s proactive
business-cycle recommendations suggests that he wanted to satisfy the
instinctive desire to act in times of economic crisis (not least to prevent the
rise of political extremism), while also quietly insisting that, if one valued
certain goods and institutions, there were limits to what governments and
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central banks could do. Here Röpke put himself at odds with most postwar economic opinion, especially when it came to employment, inflation
and the welfare state.
NOTES
1. Röpke specifies that though the price rise is general, it is not necessarily uniform.
Commodity prices, for example, tend to rise more quickly than finished goods (1928c,
1936, p. 26).
2. Here it is important to consider the concept of equilibrium in Röpke’s business-cycle
theory. Röpke’s view of the price mechanism’s role in business cycles suggests that
one reason he regards free prices as important is that they help to eliminate disparities
between supply and demand, thereby allowing markets to clear. Yet his business-cycle
theory implies that, even with free prices, economies can enter a state of underemployment equilibrium, as held by post-Keynesian economics, especially during secondary
depressions. How are we to reconcile this apparent contradiction? Perhaps the answer
lies in the fact that Röpke viewed equilibrium as a conceptual tool. Rather than regarding
it as an ideal real state in itself, Röpke viewed equilibrium as one concept among many
that enabled him to explore the real economy’s working in order to build a business-cycle
theory. This was entirely normal for economists until the 1930s (Huerta de Soto, 2008,
p. 59). After Keynes, however, equilibrium itself became a major focus for many economists; thus a tool that economists once employed to facilitate the theoretical study of
economics become an object of study in its own right. Röpke took a different approach.
Perfect competition, he wrote, almost never occurred. If it was defined as ‘that situation
which obtains when demand for the output of each producer is perfectly elastic’, then
‘no producer can ask more than another without risking the loss of all his customers;
should he demand less than other producers, they would lose all their patronage to him’
([1937a] 1963, p. 179). In reality, competition never acquired this state of perfect equilibrium. Thus, Röpke notes, equilibrium ‘is in fact more or less imperfect’ (ibid.). Röpke
consequently thought that what he called the ‘chemical purity’ of ‘perfect competition’
encouraged by economics’ increasing mathematization in the post-Keynesian period
should be supplanted by a concept of active competition in the sense that businesses in
the real economy had to compete vigorously to attract customers’ patronage (1962g, p.
33). This continually sets in play new factors and changes in information to which all
competitors must respond. This is Röpke’s dynamic vision of ‘ordered anarchy’. The
economy is thus constantly in a state of flux, and economic equilibrium always unstable.
‘Given’, Röpke wrote, ‘the inevitable fluctuations in economic conditions and associated
fluctuations in unemployment, the necessity of continual adaption and adjustment is of
the first importance’ ([1937a] 1963, p. 218). The economy therefore had to remain as flexible as possible, and attempts to reduce this flexibility in the name of stability would be
counterproductive: in Röpke’s words, ‘The more stabilization, the less stability’ (ibid.,
p. 219).
6.
After Keynes: full employment,
inflation and the welfare state
Many economists hope indeed that the ultimate remedy may be found in the field
of monetary policy, which would involve nothing incompatible even with nineteenth
century liberalism. Others . . . believe that real success can be expected only from
the skilful timing of public works undertaken on a very large scale. This might lead
to much more serious restrictions on the competitive sphere, and in experimenting
in this direction we shall have to carefully watch this step if we are to avoid making
all economic activity progressively more dependent on the direction and volume of
government expenditure.
Friedrich Hayek (1944, pp. 90–91)
Sometimes a book’s importance lies not in its content but in its timing.
The reception accorded to Hayek’s Road to Serfdom in 1944 owed
much to Europeans’ and Americans’ growing alarm about extensive
economic planning becoming a post-war norm.1 While concerned about
Communism, they also worried about the post-war dirigiste policies of the
non-Communist left and much of the right. On his first visit to Germany
after World War II, Röpke noted that many Germans yearned for socialist
solutions to their economic problems ([1947f] 1964, p. 158). He was also
disturbed that the occupying powers were effectively continuing the same
economic policies of the defunct National Socialist regime ([1945b] 1946,
p. 237).
Prominent among such policies was a commitment to ‘full employment’.
This had been given particular impetus in Europe by the 1942 Beveridge
Plan, of which Röpke was an early and vocal critic (1943a, 1943e). Six
years later, West Germany took a different economic path. The intense
debate preceding Ludwig Erhard’s institution of a new currency on 20
June 1948 and his subsequent abolition of rationing and price controls has
been exhaustively documented, as has the role played by ordoliberals and
neoliberals in supporting Erhard at a time when socialist tendencies were
intellectually ascendant (Bark and Gress, 1993, pp. 175–209; Hook, 2004,
pp. 53–232; Nichols, 1994, pp. 178–233).
Less well known is Röpke’s extensive pressing of the case against economic planning after 1948. Much of this occurred in the context of West
Germany’s gradual drift from market policies, so much so that Röpke
referred to the ‘ruin’ of Germany’s economic miracle only one month
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Wilhelm Röpke’s political economy
before his death (1966b). As early as 1950, Röpke warned that ‘a very
strong trend’ to overly restrict market disciplines was apparent in West
Germany (1950c). He insisted that welfare spending and taxation could
not exceed certain levels ‘without impairing the expansive and regulative
aspects of a free market economy’ ([1950e] 1982, p. 47, cf. 1950d, 1951a).
However, Röpke labored in vain. West Germany began abandoning
neoliberal economic prescriptions between 1950 and 1960, as Keynesian
policies, personified by the economist Erich Preiser (1900–1967), rose to
dominance, not least because Preiser and others were relatively successful
in portraying Germany’s economic successes as resulting from Keynesianlike policies (Rittershausen, 2007, pp. 38–47; Sally, 1995).
Throughout the 1950s and 1960s, Röpke was one of the few German
liberals to detect and critique this shift. Ten years after Erhard’s reforms,
Röpke observed that German socialists no longer focused upon nationalization schemes. Instead, they purportedly accepted market competition
while simultaneously pursuing policies of demand management, statefacilitated wage increases, full employment and generous welfare (Röpke,
1958c, pp. 94–8). The result, Röpke argued, would be ‘bottlenecks,
diminished achievement and destruction of the market equilibrium’, all
of which would be used to justify further state intervention (ibid., p. 100).
Moreover, Röpke added, however much German socialists insisted that
they now accepted the market, socialists lacked an in-principle aversion to
‘the increase of constraints on society’ (ibid., p. 102).
Röpke’s desire to preserve economic and political freedom permeates
his writings about the welfare state, employment and inflation after World
War II. Like Eucken, Röpke thought that the new ‘social question’ was
no longer mass impoverishment. Workers had in fact benefited immensely
from post-war capitalism. The danger, Eucken postulated, was one of
‘enslavement to the state’ (1952, p. 314), a point stressed in Röpke’s obituary of Eucken (Röpke, 1950i). This concern underpinned the increased
stridency of Röpke’s negative view of Keynes and Keynesianism, to
the point where he described himself as a radical Keynes critic (Röpke,
1949h). Röpke once recalled that Keynes had praised him in an article
about the Brauns Commission which expressed Keynes’s happiness that
German economists also believed that the state needed to intervene during
severe economic downturns. But, Röpke stated, Keynes’s position that
market economies required constant government intervention to manage
‘aggregate demand’ was fundamentally mistaken. Even worse, Keynes’s
General Theory had established a justification for endless government
expansionism and inflationary policies (Röpke, 1951b, 1963g). In his last
book, Röpke actually labeled Keynes one of ‘the great intellectual ruiners
of history – like Rousseau and Marx’ ([1958f] 1998, p. 219).
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119
In examining Röpke’s analysis of post-war welfare, inflation and
employment policies, we see that much of Röpke’s critique flowed not
only from his basic dispute with Keynesians about the nature of economics, but also arguments concerning economics’ proper horizon. Among
other things, Keynes is famous for remarking, ‘The long run is a misleading guide to current affairs. In the long run we are all dead’. To be fair,
Keynes’s comment from his Tract on Monetary Reform (1923) is invariably cited out of context. In using this expression, Keynes was arguing
against the view that inflation’s internal dynamics were such that they
could control themselves without government intervention. Strictly speaking, he was not prioritizing the pursuit of short-term advantage over
medium- and long-term economic performance. Nonetheless, an underlying element of Röpke’s critique of Keynesian policies is that they are
forever focused on the short term.
Röpke did not regard the short term as irrelevant. His willingness to
consider economically suspect policies that might nevertheless temper
severe recessions sufficiently to prevent extremists from seizing power
testifies to this. At the same time, Röpke’s critique of Keynesian policies indicates that he belongs very much to the Smithian tradition which
concerns itself with resolving economic problems over the long term. The
short view in Keynesian ‘new economics’, as portrayed by Röpke, is the
predominant view, and works in favor of more-or-less permanent and
extensive government intervention and against the claim that free markets
are more productive over the long term. Beyond efficiency issues, however,
Röpke was also convinced that policies flowing from the new economics
constituted a genuine threat to particular values and created the prospect
of entire societies gradually becoming accustomed to Tocqueville’s ‘soft
despotism’.
FROM EXPEDIENT TO DOGMA
Röpke believed that post-war trends in economics associated with Keynes
– such as the notion of aggregate demand as the sum of consumption,
investment and government spending, and the rise of econometrics to
provide empirical explanations of Keynesian macroeconomic theories –
had produced two fundamentally different economic ways of thinking. In
practical terms, the ‘new economics’ served to legitimize, Röpke believed,
extensive welfare programs, full-employment policies, and blasé attitudes
toward inflation. On one level, Röpke thought that the economic theory
underlying such policies was mistaken because Keynes had based his economic revolution on his diagnosis of extraordinary circumstances – the
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Great Depression (Röpke [1952b] 1969, pp. 171–2). Eucken considered
this to be an occupational hazard for economists. ‘The more exclusively
economists’, Eucken wrote, ‘devote themselves to the current situation,
the more they may be inclined to propound as “absolute” generalizations
which are based simply on the momentarily existing system in their own
country’ (1940, p. 306).
Surveying developments in economic policy, Röpke argued that it
reflected a hardening of Keynesian expedient into Keynesian dogma.
Keynes had elevated ‘his diagnosis of an extraordinary situation and
the treatment accordingly prescribed . . . into a general theory in which
“deficiency of demand” is always around the corner and economic policy
must always be poised to close this “gap” in order to ensure eternal “full
employment” ’ (Röpke [1952b] 1969, p. 172). Röpke thus agreed with
Jacob Viner that Keynes was mistaken to build an entire general theory
to address unique circumstances and even more mistaken to continue
advocating the same policies when economic life had returned to normal
(Viner, 1936). At a deeper level, Röpke traced the drift of post-war economic theory and policies to the dominance of the rationalist mindset.
As observed in Chapter 4, Röpke became convinced that rationalist
tendencies had exerted a pernicious influence upon the market economy’s
development from the late eighteenth century onwards. Besides producing outright collectivization, Röpke insisted that the same mechanistic
mentality underlay the welfare programs that he predicted would emerge
after World War II ([1942g] 1992, pp. 163–5). Röpke also held that
rationalism was central to ‘the social philosophy’ informing Keynes, ‘a
man who, proud of his alleged modernity and progressiveness, believes
himself capable of “making over” society and the economy’ ([1937a] 1963,
pp. 227–8).
In Chapter 3, we observed that there are reasons to question Röpke’s
analysis of Keynes’s philosophical commitments. Skidelsky’s biography of
Keynes reveals his philosophical ideas as complicated, sometimes contradictory, but difficult to classify as that of a rationalist in Röpke’s sense of
the term. Furthermore, Röpke himself speculated that Keynes had grave
doubts at the end of his life about his followers’ zeal (Röpke, 1946d, 1946i)
and ‘might well have written the most effective correction of Keynesian
economics’ (Röpke [1952b] 1969, p. 175) – an observation echoed by
Hayek (1994, p. 92). For Röpke, however, Keynesian theories concerning full employment were inextricably linked to the emergence of large
welfare states across America and Europe, and a casual view of inflation.
In Röpke’s view, the link was not just a matter of Keynesian economic
logic. It reflected a mindset marked by a technocratic approach to social
problems and a distrust of individual liberty.
After Keynes
121
FULL EMPLOYMENT AND KEYNESIAN
CONSEQUENCES
No-one, Röpke observes, regards mass unemployment as anything but
disastrous ([1942g] 1992, p. 170). In the 1950s, however, Röpke suggested
‘ “full employment” had become the slogan to justify almost every action
of government’ ([1952d] 1960, p. 363). Moreover, Röpke maintained,
Keynes’s insistence upon the necessity of large government borrowing and
spending to facilitate the type of demand that would sustain high employment had become the centerpiece of the new economics. Economic downturns were no longer explained ‘as the result of wrong prices or wages, as
an expression of a wrong distribution of factors of production’; rather
they were ‘explained only as a disproportion between the economic aggregates of the circular flow (saving and investment, income and expenditure,
decline and renewed creation of purchasing power)’ (Röpke [1952b] 1969,
p. 171). A deficiency of effective aggregate demand was thus the ‘real’
cause of mass unemployment. According to the new economics, government borrowing and spending was thus needed to create demand (ibid.).
Röpke accepted that mass unemployment can emerge from general
disturbances in money flows because of a prolonged breakdown in investment activities (Röpke [1952d] 1960, p. 371). As short-term measures
during secondary depressions, Röpke did not regard Keynes’s recommendations as extraordinary (ibid., p. 371, [1952b] 1969, p. 171). As a general
theory and permanent practice, however, Röpke regarded government
quests to realize and maintain full employment as a recipe for collectivism. Interestingly, Röpke first expressed alarm about such ideas prior to
World War II. National Socialist Germany was the first country to seriously attempt full-employment policies (Röpke, 1936b, 1939b), even if,
Röpke stressed, the theory ‘emanated from the Keynes School’ ([1944b]
1948, p. 217). Using Nazi Germany as a case study, Röpke argued that
once full employment was achieved via a state-induced credit expansion,
governments have three choices. One is to continue the credit expansion
to maintain full employment, but accepting that the expansion will now
have inflationary rather than compensatory effects. This means accepting inflation as a more-or-less permanent state of affairs. Another option
is to stop the credit expansion, thereby sparking an economic downturn.
This raises the issue of why the state embarked on the credit expansion in
the first place. The third possibility is to try and preserve full employment
while avoiding inflation by removing the capital needed for further investment out of the existing volume of general purchasing power – either by
persuasion (that is, raising loans) or force (taxes) (Röpke, 1939b, p. 167).
Allowing government-driven growth to continue (but funded by loans
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or higher taxes) while removing inflationary pressures from the economy
may work for a while. However, Röpke states, it also means ‘a real tapping
of the available capital resources and therefore a tightening of the money
and capital markets’ (ibid.). These are characteristics of an economy in
which recessionary tendencies are becoming evident.
Observing that not even Keynes denied that booms made the painful
readjustment of downswings unavoidable, Röpke claimed that fullemployment policies attempted to defy this reality. Instead, the state
assumes ‘full responsibility for the economic cycle’ (Röpke [1944b] 1948,
p. 211), and uses price, wage, capital, investment, consumption and
exchange controls to maintain full employment (Röpke, 1942c, [1944b]
1948, p. 210). The inflationary boom facilitating full employment can
only continue if the state represses every inevitable reaction to attempts
to maintain the boom indefinitely (Röpke [1942g] 1992, p. 172). Hence
Röpke concludes:
as long as the causes of the disturbed equilibrium continue to exist and are even
strengthened, every suppressed reaction must be replaced by a new, intensified
reaction, which then invokes even more stringent measures of suppression. A
policy of full employment will therefore lead to the piecemeal scrapping of our
economic system. (ibid.)
For the ‘school of full employment at any price’ (ibid., p. 171), nothing
is in principle excluded. Protectionism, exchange controls and other
manifestations of economic nationalism are used to suppress the external
shocks, while price, capital, wage and investment controls are employed
domestically (ibid., pp. 172–3). The economy is thus rendered increasingly inflexible. But this ignored the fact, Röpke commented, that free
prices were indispensible if people were to be able to make economic decisions that reflected economic reality. When prices are not permitted to
reflect this reality, bottlenecks ensue (Röpke [1947m] 1969, pp. 111–31).
Moreover, the means used to stabilize an economy in which full employment is maintained at all costs – heavy taxation, trade union monopolies
of labor, the routine granting of subsidies that undermine competition
and discourage innovations – dissuade entrepreneurs from risk-taking and
investing (Röpke [1937a] 1963, pp. 218–19, [1944b] 1948, p. 213, 1945f,
p. 112).
Not surprisingly, Röpke notes, most governments committed to fullemployment policies opt for continued credit expansion and cheap money
policies. Those whom Röpke describes as ‘business cycle engineers’ (that
is, rationalists) think that they can control the economy by continually
balancing wages, incomes, savings and the volume of investments to
guarantee full employment – regardless of what actually caused changes
After Keynes
123
in economic equilibrium, be it movements in consumer demand or technological innovation ([1942g] 1992, p. 171, 1945j). Above all they believe
that whatever the economy’s particular conditions, ‘purchasing power
must always be pumped up to a level ensuring “full employment” ’ (Röpke
[1942g] 1992, p. 171). Such doctrines are invariably popular inasmuch as
they claim to be able to avert a 1930s-like depression. This, Röpke claims,
is exacerbated by the fact that some economists (here Röpke singles out
Keynes) tell policy-makers that an unending boom is possible, thereby
diverting attention from underlying deeper causes upsetting equilibrium
(ibid., pp. 171–2).
Part of the problem is that ‘thinking in abstract total quantities – a
principal fault of the school influenced by Lord Keynes’ (Röpke [1944b]
1948, p. 202) – leads to flaws in understanding unemployment and therefore economic policy. In one sense, full-employment policies are blighted,
Röpke maintains, by the term’s sheer inexactitude. ‘Non-employment’
does not necessarily mean Depression-like mass unemployment. It can
include those experiencing short-term unemployment, those changing jobs
and seasonal workers. Röpke acknowledges that Keynes recognized the
reality of frictional unemployment as ‘an essential prerequisite of elasticity
in economic life’ (ibid., p. 216). But the aggregate-quantitative approach
also leads policy-makers to conceptualize ‘the labor market as one big reservoir, the level of which can be raised or lowered at will, whereas in reality
it is only a statistical abstraction’ (ibid., p. 217). The labor market’s true
nature is such that it ‘comprises countless individual reservoirs between
which no, or at least only an incomplete, balance is possible for short
periods’ (ibid.). High employment can occur in one category while low
employment manifests itself in another. Macroeconomic full-employment
approaches, however, embody ‘a mechanical policy of continuously
raising the total level’ (ibid.) that simply cannot address ‘disproportionalities and disturbances in individual cases’ (Röpke [1952d] 1960, p. 373).
In short, the new economics’ macroeconomic emphasis leads people to
imagine that cures lie in ‘total measures’ which ignore the fact that adaptability problems must be resolved at the microeconomic level (Röpke
[1944b] 1948, p. 203). It follows, Röpke adds, that ‘a policy measure is
good when it increases effective demand and bad when it threatens to
diminish effective demand’ ([1958f] 1998, p. 193). This, however, clashes
with the reality that ‘the problem of adaptability is far more of a qualitative nature, one that has to do with individual disproportions; individual
firms with workers producing the wrong things, firms producing uneconomically, or in the wrong place, or which have got into difficulties . . .
individual wages that are too high or too low, individual occupations
which are overcrowded or the reverse . . .’ (Röpke [1944b] 1948, p. 203).
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The new economics’ ‘evasion of adaptability’ and ‘determination to keep
up employment at all cost’ thus undermines the microeconomic forces of
spontaneous adaption by encouraging unproductive economic activity
and the use of ‘non-conformable’ means to postpone the ultimate reckoning (ibid.). Taken far enough, market economies are rendered incapable of
reaction, leaving policy-makers with two options: outright collectivization
or re-privatizing the economy (Röpke [1942g] 1992, p. 173).
This brings Röpke to the moral–political dimension of his fullemployment critique – the implications for liberty. For Röpke, Keynes
seemed unconcerned that full-employment policies imply political centralization. Moreover, Röpke insists that careful reading of Keynes’s General
Theory indicates that Keynes tacitly recognized that full-employment policies inevitably become ‘one of the supporting pillars’ of a collectivist and
inflationary economy (Röpke [1952b] 1969, p. 176).2 The loss of freedom,
Röpke specified, lay in the fact that a commitment to endless full employment entailed continuous growth in the state’s control of production and
investment, and the subsequent diminishment of incentives for citizens
to save voluntarily and thus acquire substantial private capital (1949k,
pp. 147–50, 1957b, [1958f] 1998, pp. 202–03) – a problem that he thought
was manifesting itself in West Germany in the 1960s (1965a). The result
is the gradual disappearance of economic freedom, with all its negative
implications for liberty more generally.
INFLATION, COERCION AND FREEDOM
Part of Röpke’s critique of Keynes’s full-employment objective was that it
effectively bestowed ‘the mantle of his authority on the chronic propensity
of all governments to inflate’ (Röpke [1937a] 1963, p. 222). Taught by
Keynes and his successors only to fear and combat deflation, post-war
Western governments followed ‘the banner of “full employment” right
into permanent inflation’ (Röpke [1958f] 1998, p. 194). Röpke’s negative
view of inflation was partly derived from experiencing Weimar Germany’s
hyperinflation between 1920 and 1923 (Röpke, 1933e, [1937a] 1963, p.
103). Röpke later acknowledged that his anti-inflationary views had also
been shaped by reading Mises’ Theorie des Geldes und der Umlaufsmittel
(1911) (later republished as The Theory of Money and Credit) (Röpke
[1954g] 1969, pp. 182). Agreeing with Mises that inflation had become the
opiate of the post-war world, Röpke also affirmed Mises’ view that the
gold standard was the best way to minimize the negative effects of government policies upon the value of money (ibid., p. 184). Under the tied
gold standard, the scarcity of money is fixed automatically by the scarcity
After Keynes
125
of the standard metal. This facilitates a monetary discipline stricter than
that typically favored by those who prefer a government-directed ‘untied
or manipulated standard’ (Röpke [1937a] 1963, pp. 99–100), precisely
because it makes the monetary system independent of governments’ ‘arbitrariness, ignorance, or weakness’ (Röpke [1958f] 1998, p. 195).
Röpke’s endorsement of Mises’ position was enhanced by what he
viewed as Keynes’s nonchalant attitude toward inflation. Like Mises,
Röpke acknowledged the negative aspects of deflationary policies (Röpke
[1954g] 1969, p. 185, [1958f] 1998, p. 195). But ‘Keynesian analysis’, Röpke
wrote, ‘will always look at the danger of inflation through a diminishing
glass and at the danger of deflation through a magnifying glass, and in
matters of economic policy, to change the metaphor, will always limp
with the inflation leg’ (Röpke [1952b] 1969, pp. 178–79). One reason for
West Germany’s economic successes, Röpke stressed, was the willingness
of its government and central bank to resist this temptation and defy the
prescriptions of the new economics ([1937a] 1963, p. 249, [1956h] 1969, pp.
190–91, 1957e). Between 1950 and 1960, West Germany’s annual inflation averaged 1.36 per cent. After peaking at 3.44 per cent in 1965, the
Bundesbank’s anti-inflationary policies brought inflation below 3 per cent.
Low inflation was typically regarded as a benefit of Erhard’s 1948 reforms.
In the immediate aftermath of the reforms, however, and despite a significant monetary contraction, producer prices rose at a 45 per cent annualized rate while consumer prices rose 33.1 per cent (Giersch et al., 1994, p.
42). By 1949, however, an accelerated price decline was underway. This
was accompanied by unemployment growth which reached two million in
March 1950 (Van Hook, 2004, p. 195) – 12.2 per cent of West Germany’s
workforce (Giersch et al., 1994, p. 46). This attracted criticism from
German and non-German Keynesians alike (Rittershausen, 2007, p. 25).
Röpke was not perturbed at these developments. A sudden increase in
short-term inflation following Erhard’s reforms was, he believed, inevitable given that the Nazis had frozen prices at unnaturally low levels, partly
because of the regime’s full-employment commitment. The ‘grave affliction’, Röpke wrote, affecting Germany’s economy in 1948 was ‘ “accumulated inflation”, i.e., a mixture of inflationary pressure and government
controls leading to the dominance of fictitious dictated figures and finally
depriving the whole of economic life not only of any direction but also
of its main expansive forces’ ([1950e] 1982, p. 41). Germany’s post-war
inflationary experiences proved that full-employment policies increasingly required governments to resort to market-corroding techniques
such as price controls to repress the economy’s natural reactions to the
inflationary impact of unending government-initiated credit expansion
(Röpke [1937a] 1963, p. 248, 1962h). Collectivism was thus both a cause
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of inflation and an instrument of its repression (Röpke [1947m] 1969, p.
112). The result was a lack of liberty but also extreme economic and social
disorder (Röpke, 1951e).
Röpke uses the phrase ‘repressed inflation’ to describe those situations in which prices are supposed to rise, but the state acts to prevent
monetary devaluation (Röpke, 1946g, 1947k, 1947l, 1947m). In these
circumstances, prices no longer reflect actual conditions of economic scarcity. The National Socialists, he states, ‘demonstrated that a determined
government can change an open into a repressed inflation by placing the
country in the economic straightjacket of a command economy’ ([1937a]
1963, p. 103). But repressed inflation, Röpke argued, is worse than open
inflation. Not only does money lose its function as a means of exchange
and measure of value; doubts about the worth of money means that the
prospect of increasing one’s monetary income becomes less of a stimulus
for the production and distribution of goods. Thus, Röpke surmises, ‘the
more fictitious the system of compulsory values, the greater will be the
economic chaos and the public discontent and the more threadbare . . .
the authority of the government’ ([1937a] 1963, p. 105, cf. [1947m] 1969,
p. 113). The high price for repressed inflation was therefore ‘the loss of
liberties formerly regarded as inalienable’, and a success ‘rendered more
and more doubtful by the steadily decreasing respect for the majesty of
the law’ (Röpke [1947m] 1969, p. 113). It illustrated, Röpke held, the
mutual dependence of liberty and order, as well as the positive connection
between the values of economic efficiency, economic freedom and political
liberty. Repressed inflation and repressive economic controls went hand in
hand. Disposing of one thus meant disposing of the other (Röpke [1937a]
1963, p. 248, 1959d).
Writing before Erhard’s 1948 reforms, Röpke attacked socialists and
non-socialists alike for failure to accept these facts and their normative
implications ([1947m] 1969, pp. 113–14). For full-employment advocates,
Röpke claims, mild inflation is seen as a price worth paying for avoiding
unemployment ([1952d] 1960, p. 380). This position is based, however,
on two fallacies. One is that we must choose between the social disaster
of unemployment or mild inflation. The second is that unemployment
is always catastrophic. Neither of these assumptions, Röpke states,
holds true. Unemployment sometimes reflects corrections in the market
economy. In that sense, it is not ‘catastrophic’. Politically, Röpke adds,
it is always necessary to consider inflation’s costs vis-à-vis other, less
liberty-damaging ways of combating unemployment (ibid.). The success
of Erhard’s reforms indicated that there were alternative paths to reducing
unemployment, such as restoring genuine market competition (Röpke,
1949d, 1953c).
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Just as repressed inflation was linked by Röpke to full-employment
policies and a decline in freedom, so too was what he regarded as the
greater danger by the 1960s: wage inflation (Röpke [1937a] 1963, p. 105).
Not all wage increases, Röpke acknowledges, have inflationary consequences. Many flow from factors such as technological change (Röpke
[1958f] 1998, p. 204); others come from marginal productivity improvements (ibid., pp. 207–9). Writing, however, in an era when trade unions
were establishing labor monopolies throughout parts of Western Europe,
Röpke claimed that this was pushing wages beyond the point where all
of an economy’s available workforce could be employed at current wage
rates. Unemployment ensues, despite the prevailing prosperity (Röpke
[1952d] 1960, p. 378). One way to resolve this problem is to allow wage
rates to adjust to demand (Röpke [1937a] 1963, p. 105). But this implies
removing unions’ monopolies of labor, resisting their demands, or pleading with them to be reasonable – the last option being something Röpke
regarded as increasingly unlikely as unions became more powerful ([1957f]
1987, p. 89).
Unfortunately, Röpke observed, governments and central banks
committed to full employment – sometimes by actual legislation
(ibid.) – usually choose to combat ‘by credit expansion this “prosperity unemployment,” which has been created by excessive wages, and
which outdistances increases in industrial productivity’ ([1952d] 1960, p.
378). Economic policy consequently degenerates into a permanent race
between an unemployment-creating wages policy and a credit policy
that seeks to counteract the wage policy by monetary expansion. A
vicious circle develops whose outcome is more inflationary pressures as
central banks find themselves compelled to adopt expansionist monetary
policies to keep the wage–price spiral in motion and prevent labor from
pricing itself out of the market (Röpke [1957f] 1987, p. 91, [1958f] 1998,
p. 211). Röpke employs the expression ‘trade union currency’ ([1957f]
1987, p. 90) to describe who is really in charge of monetary policy in
such instances.
Further complicating matters, Röpke argues, is the full-employment
school’s effort to keep interest rates as low as possible. This makes ‘a
permanent fixture of what is known as cheap money policy’ ([1948j] 1969,
p. 136). ‘Interest’, Röpke comments, ‘is the price of a certain scarce good,
namely the use of capital. If it is, like any other price, to fulfill its function
of ensuring the most rational allocation of a scarce good, it must accurately reflect the degree of scarcity at any given moment’ (ibid.). By definition, a government’s pursuit of cheap money policies does not allow this
to occur (Röpke, 1962c). Keeping interest rates artificially low in the name
of full employment, Röpke insisted, would result in inflation (1956f, pp.
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Wilhelm Röpke’s political economy
15–17, 1961g, pp. 12–15) and rob central banks of their most important
tool for fighting inflation (1952a). This forces governments ‘to employ
increasingly bizarre means in their battle against inflationary tendencies
. . . means that encroach more and more upon what little freedom is left
in the economy, and that threaten to become more and more reckless and
indiscriminate without thereby gaining in efficacy’ (Röpke [1948j] 1969,
pp. 140–41).
Breaking this nexus, Röpke states, requires tough monetary policies from central banks ([1957f] 1987, p. 85), ‘until the chain reaction
of overfull employment and trade-union power, wage increases, price
increases, and more wage increases is broken’ ([1958f] 1998, p. 213). In
some circumstances, governments may try running large budget surpluses
to produce the same results, thereby sparing central banks from having
to implement truly radical measures (Röpke [1957f] 1987, p. 85). A determined effort to reduce union power was also necessary (Röpke [1958f]
1998, p. 216). But in the long term, Röpke argues, it is necessary to stop
funding investment from expansionary monetary policies and instead
derive investment from voluntary savings. When governments pursue
credit expansion, they effectively conjure up money ex nihilo – a practice that Röpke denotes as ‘negative savings’ ([1957f] 1987, p. 87) – and
make loans available at artificially low interest rates. Entrepreneurs and
businesses begin investing and reallocating resources in the capital goods
market (Röpke, 1945f, p. 113, [1957f] 1987, pp. 85–6). They can hardly
be blamed for doing so (Röpke [1958f] 1998, p. 200). Inflation, however,
ensues because the total amount of real resources has not increased and
the construction of plants and machines is not matched by a corresponding immobilization of purchasing power through savings (Röpke, 1956c,
[1958f] 1998, p. 199). By contrast, if the increased investment comes out
of increased savings, then people must have consumed less by restricting their own purchasing power, thereby releasing the resources needed
for investment and production (Röpke [1957f] 1987, pp. 85–8). ‘Every
act of saving’, Röpke comments, ‘diminishes the pressure of demand on
available supplies’, thereby dampening inflationary trends ([1958f] 1998,
p. 201).
But, Röpke wondered, are enough people willing to save sufficiently
to allow this to occur? Röpke noted that it was increasingly difficult for
people to transcend the status of wage-earner in a welfare state precisely
because people’s ‘surplus’ income was heavily taxed in order to pay for
social welfare programs ([1958f] 1998, p. 170). Tax increases to fund
welfare programs, Röpke contended, had ‘developed into a colossal apparatus for dissaving and, at the same time, an apparatus of inflation and
growing compulsion’ (ibid., p. 202).
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FROM WELFARE STATE TO SOFT DESPOTISM
For all his criticisms of Keynes, Röpke did not suggest that pressures for
full employment and a disregard for its inflationary effects were entirely
attributable to Keynesian policies. He was concerned that many in Western
countries were increasingly inclined to sacrifice liberty for the apparent
security of full-employment policies. ‘Our inflation’, Röpke wrote, ‘is the
first to be marked . . . by the ideologies, forces, and desires of modern
mass democracy’ (ibid., p. 191). He also believed that it reflected a naivety
among Keynes and his successors concerning the political context in which
they operated. In mass democracies, pump-priming is welcomed and supported, but the same mass pressures make it harder to wind back inflationary investment policies. Even those governments and central banks not
legally compelled to embrace full-employment policies tend to do so under
the weight of public opinion (ibid., p. 214). By this, Röpke had in mind
Tocqueville’s insight that modern democracy – a form of democracy that
did not consider itself constrained by ‘the ultimate limits of natural law,
firm norms, and tradition’ (ibid., p. 220) – provided public opinion with
the means (universal suffrage) to force elected governments to pursue policies that diminished economic efficiency and reduced the liberties secured
by institutions such as private property (Röpke, 1950f, pp. 65–75). Midtwentieth-century Western attitudes toward inflation reflected, Röpke
stated, ‘a moral disease, a disorder of society . . . which can be understood
and remedied only in the area beyond supply and demand’ (Röpke [1958f]
1998, p. 192). Röpke thought it remarkable that even the 1871 Paris
Commune’s hard-line leftist leaders refrained from confiscating the Bank
of France’s gold reserves to finance their insurrection (ibid., p. 218). But
what Röpke denotes as the ‘counter-forces of a spiritual, moral, and social
nature’ that restrained the Commune from debauching France’s monetary
system were, he thought, waning in twentieth-century Western Europe
(ibid., p. 217).
Röpke was conscious that the global march toward welfare states
had begun in Bismarckian Germany (Röpke [1944b] 1948, p. 146). He
characterized National Socialist welfare programs as a continuation of
these policies. Though the post-war period saw West Germany embrace
relatively liberal economic policies, neoliberals were less successful in
countering expansions in welfare, partly because some neoliberals, such
as Müller-Armack, often supported extensive welfare measures. Over
time, Adenauer’s Christian Democrats came to vie with the Social
Democrats in terms of who could provide the most in terms of state pensions. Ironically, Röpke observed, this situation was not helped by the
fact that Germany’s liberalized economy furnished the government with
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Wilhelm Röpke’s political economy
large surpluses throughout the 1950s which many viewed as the means
to pay for greater welfare (Röpke, 1956c). Eventually the link between
pensions and contributions was broken in 1957 when Adenauer’s government indexed pensions to the earnings of those working. Wage increases
thus automatically triggered pension increases – a policy Röpke described
as ‘an alarming sign of the times’ ([1958f] 1998, p. 181). The new policy
helped the Christian Democrats–Christian Social Union achieve an absolute majority in the 1957 Bundestag elections. But it also necessitated
tax increases and higher social security contributions from employees.
Moreover, once the principle was established, it proved difficult to resist
its application to other areas, such as unemployment benefits. The result
was the state’s remorseless encroachment upon private income and future
private investment (Bark and Gress, 1993 pp. 396–7; Nichols, 1994,
pp. 350–55).
Not coincidentally, some of Röpke’s most impassioned critiques of
the welfare state were published in 1957. This reflected his failed effort to
convince Germany’s politicians of the long-term folly of the developments
noted above. In one sense, these writings elaborated upon concerns that
he expressed about the ‘social’ aspect of the social market economy in his
government-commissioned 1950 paper. Here Röpke insisted that West
Germany’s government had already exceeded ‘the ratio of the state’s utilization of the social product’ because ‘such a large segment of the state’s
expenditure has assumed a compulsory character because of the substantial social-welfare requirements’ ([1950e] 1982, p. 47). Left unchecked,
Röpke predicted that this would result in ‘the blunting of the impulse to
produce, to save and to invest; misinvestment by the state; a growing lack
of profitability in the taxation system; a trend toward inflationary coverage of the state’s financial requirements; and the constriction of that part
of the productive sector regulated by the market’ (ibid.). This led Röpke
to call for major cuts in public disbursements (ibid.) – seven years before
West Germany’s government did the opposite.
But Röpke’s concerns about welfare went beyond policy developments of the 1950s. Röpke was convinced that particular moral–cultural
problems were contributing to the welfare state’s growth in the West.
These manifested themselves, in his view, in the widespread embracing
of language such as Roosevelt’s ‘freedom from want’. This represented,
Röpke maintained, ‘demagogic misuse’ of the word ‘freedom’: a prisoner
is certainly free from material want, but hardly free in the sense of liberty
from unreasonable compulsion ([1958f] 1998, p. 172). Röpke did not
oppose some state assistance to those manifestly incapable of taking care
of themselves and truly alone in the world. ‘[A] survival of the fittest mentality’, Röpke contended, was antithetical to Western civilization’s other-
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regarding dimension ([1942g] 1992, pp. 163–4). Hence he was prepared to
accept old-age pensions, unemployment relief and sickness insurance ‘as
parts of a sound system of provision in a free society’ ([1957f] 1987, p. 58).
The question for Röpke was the degree, organization and spirit in which
they operated (1956g, [1957f] 1987, p. 59, 1958a, p. 13).
For this reason, Röpke wanted to see state welfare cease being regarded
as an ideal, but rather as a necessary evil ([1957f] 1987, p. 58, 1966b). Mass
social welfare that sought to protect ‘each individual from cradle to grave
against the vicissitudes of life’ was an ‘aberration’ inasmuch as ‘the more
the state takes care of us, the less shall we feel called upon to take care of
ourselves and our family’ (Röpke [1942g] 1992, p. 164). In such circumstances, the state became ‘a secular God whom . . . we may burden with all
our cares, and at the same time all true charity which can only thrive on
spontaneity and readiness to help . . . will die out’ (ibid.), thereby increasing recourse to social welfare (Röpke [1958f] 1998, p. 175) and facilitating
the state’s tendency to level everything in the name of equality (Röpke,
1950f, pp. 65–75). The center of life shifted from ‘natural and obvious’
mutual-aid associations such as families to ‘mechanized social welfare
which completes the disease symptoms of a collectivist society’ (Röpke
[1942g] 1992, p. 165).
Not only did this represent, Röpke insisted, profound moral decline;
it also relied upon economic fictions for its credibility. Drawing upon
Bastiat, Röpke observes that claims such as ‘the nation pays’ disguise the
economic reality that ‘we are really asking all our neighbours, and often
very rudely, to pay and give us a bit more’ ([1944b] 1948, p. 94). Over time,
it becomes increasingly harder to tell who is giving and who is receiving
(Röpke [1957f] 1987, p. 77). ‘Are we to call it progress’, Röpke asked, ‘if
we continuously increase the number of people to be treated as economic
minors and therefore to remain under the tutelage of the state?’ ([1958f]
1998, p. 155). In political terms, the vanishing sense of personal responsibility encouraged by extensive welfare opened the door in democracies
to demagogues appealing to people’s willingness to live at the expense of
others (Röpke [1944b] 1948, p. 95, [1958i] 1969, p. 204). To this extent,
Röpke believed that attitudes towards welfare reflected profound differences in social philosophy (1956e, [1957f], 1987, pp. 62–3). Writing in one
of Germany’s leading newspapers one year after West Germany’s 1957
pension policy changes, Röpke commented:
The basic distinction lies in which of two things we want: a helping hand to
those who really need it, or who may be presumed to need it, or public social
assistance as an instrument of a welfare state that deserves the attribute ‘socialist’ because it aims at the progressive socialization of the satisfaction of wants
and at economic and social redistribution, without regard to the income and
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Wilhelm Röpke’s political economy
wealth of the individuals encompassed by the welfare state. ([1958i] 1969,
p. 208)
Almost inevitably, Röpke suggests, welfare states lurch in the second
direction. Moreover, prefiguring what would later be called public choice
theory, Röpke suggested that there is an entire class of bureaucrats and
politicians whose self-interest lies in the welfare state’s infinite extension
(ibid., p. 206, 1958j), and no interest in this fact being discovered ([1957f]
1987, p. 78). In the conditions of mass democracy, this makes restraining
the expansion of welfare difficult (Röpke [1958i] 1969, p. 206, 1965–66, pp.
35–40). Like progressive taxation, once one accepts the basic principle,
there is nothing in the welfare state’s conception ‘to set a limit to it’ (Röpke
[1958i] 1969, p. 204). If politics becomes an exercise in attempting to
diminish life’s uncertainties by providing security for growing numbers of
people, then welfare’s expansion becomes easily justified and any attempt
at retraction very difficult (Röpke [1957f] 1987, pp. 75–6). Social security
effectively becomes politicized with large constituencies being created who
will vote against any attempt to reduce welfare (Röpke [1958f] 1998, p.
167, 1959e). Moreover, the high taxation required to maintain welfare
payments progressively undermines the middle class (Röpke [1944b] 1948,
p. 147), who might be expected to support alternative policies. Finally,
the shift in gravity away from families towards the state when it comes
to welfare provision facilitates increased political centralization under
the aegis of large impersonal bureaucracies, thereby further facilitating
society’s collectivization (Röpke [1958f] 1998, pp. 162–3, 1966b).
Economically, Röpke associated the welfare state’s growth with
Keynesian full-employment policies and the temptation of inflation.
Crucial in this connection is the Keynesian concept of aggregate demand.
By increasing aggregate demand through deficit spending, Röpke claimed,
Keynesians thought it was possible to realize full employment alongside
‘an immense social wealth . . . to some degree paralyzed by insufficient
final demand’. Since this wealth had been ‘rescued’ for everyone via state
action, it could be used to fund social welfare ([1957f] 1987, p. 78). Such
reasoning, Röpke insisted, was illusionary. First, the welfare state had
proved, as early as the 1950s, to be a major drag on productivity, not least
because of the massive diversion of private capital into state expenditures.
Second, far from tapping ‘unearned’ or ‘functionless’ income, the welfare
state’s costs necessitated spreading income-leveling taxation to ‘incomes
which have their origin in genuine productivity’ (Röpke [1957f] 1987, p.
79, [1958f] 1998, p. 170). This created immense disincentives to creating
real wealth (Röpke [1957f] 1987, p. 79, [1958f] 1998, p. 170). It also ignored
the fact that the ‘surplus income’, as redistributionists labeled it, provided
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the foundations for savings, capital formation and investment – not to
mention the basis of philanthropic activities such as patronage of the
arts. With private capital increasingly diminished by taxes to support the
ever-growing welfare state, Röpke surmised that the only alternative for
sustaining these economic and non-economic activities was for the state
to undertake them. Yet again the result was further social collectivization and centralization of state power (Röpke [1957f] 1987, pp. 79–80,
1966b), not to mention the inflationary effects of the state compensating
for the growing depletion of private savings by pumping more money
into the economy to maintain ‘total demand’ (Röpke [1957f] 1987, pp. 67,
79). Citing Tocqueville, Röpke states that the welfare state’s growth was
such that ‘ “it presses every nation to the point where it becomes nothing
more than a herd of frightened beasts of burden whose shepherd is the
government” ’ (ibid., p. 82).
AVERTING LEVIATHAN
Röpke had no illusions that avoiding this scenario would be easy. The economic downturns integral to boom–bust cycles fostered popular pressures
for economic policies that, in their own subtle way, undermined freedom.
Unlike Keynesians and some Austrian economists, Röpke was less concerned with escaping the business cycle’s vicissitudes than with facilitating
a society capable of absorbing business-cycle upheavals, thereby reducing
opportunities for political adventurism or soft despotism. The question
is whether the means that Röpke proposed to employ to this end were
compatible with his commitments to the market economy.
To limit welfare, Röpke argued that social payments must be covered
by current production and attentive to the fact that the size of current
production is partly determined by previous investment. If this investment
were not to be inflationary, it had to come from savings (Röpke [1958f]
1998, p. 180). Attention by policy-makers to the savings rate was thus
one way to inhibit welfare expenditure and create an inbuilt resistance
to inflationary welfare tendencies. Röpke also stressed that meaningful
welfare reform should require a high burden of proof being met before
any extension of welfare ([1958i] 1969, pp. 205–6). In no circumstances,
Röpke insisted, should people believe that it is impossible in modern times
to have first resort to self-provision and voluntary mutual aid, both of
which would help reduce state welfare to ‘a subsidiary minimum’ ([1958f]
1998, pp. 177–8). One test, Röpke argued, was to identify the point when
state welfare weakened voluntary self-help. Röpke cited Switzerland as an
example of a country where the introduction of old-age pensions in 1946
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Wilhelm Röpke’s political economy
had been kept within bounds sufficient not to inhibit an ongoing rise in
private insurance companies’ capital and savings ([1957f] 1987, p. 60). A
side-benefit of this trend, he added, was that future growth would rely less
on inflationary investment and more upon private savings ([1958f] 1998,
p. 179, 1963k). High mass and real savings, Röpke cautioned, depended
upon high mass and real income. This in turn relied upon investment
being financed out of genuine savings rather than inflation (Röpke [1957f]
1987, p. 66, 1966a). In these circumstances, money generally retained its
value. This was essential if people were to have confidence that private
savings and insurance was the optimal way to ensure their security during
unemployment or old age (Röpke, 1956g, [1957f] 1987, p. 67).
These measures for reducing welfare expenditures while simultaneously
creating incentives for people to secure their own futures and diminish inflationary investment in the economy were of a voluntary nature.
Röpke recognized that they were predicated upon a high degree of selfresponsibility from the citizenry. How then were people to be encouraged to accept this responsibility in modern democracies? On numerous
occasions, Röpke indicated that he viewed democracy’s emergence as an
ambiguous development. To the extent that it represented the diminishment of absolutism and caste-power, Röpke considered democracy a positive development. He had, however, thoroughly absorbed Tocqueville’s
warnings about modern democracy’s potential to develop into ‘a centralized mass democracy of Jacobin complexion’ ([1958f] 1998, p. 7). Here
Röpke had in mind, first, the manner in which the French revolutionaries
had effectively established – in the name of Rousseau’s ‘General Will’ or
‘the people’ – a centralized tyranny more powerful and arbitrary than
absolutist monarchs; and second, the sheer force of mass opinion in
societies with universal suffrage. These tendencies produced a mentality
intensely suspicious ‘of any manifestation of independence and autonomy
. . . whether it be the free market, free local government, private schools,
independent broadcasting, or even the family itself’ (Röpke [1958f] 1998,
pp. 226–7), and which often condemned these institutions in democracy’s
name (Röpke, 1963d). The same outlook lent itself to a growing welfare
state, full-employment policies, and a willingness to employ inflationist
policies – again, in the people’s name.
To counteract these trends, Röpke advocated neither enlightened
absolutism nor a benevolent aristocracy of talent. Instead he drew upon
the social–economic dimension of his neoliberalism. Röpke sought not
to overcome democracy, but rather to build up economic, cultural and
political bulwarks against its potential for Jacobinism and soft despotism. Politically, Röpke believed that a state’s capacity to pursue dirigiste
policies could be constitutionally limited. This meant that those concerned
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about political and economic liberty had to align themselves with the
cause of political decentralization (Röpke, 1952h). To achieve this end,
Röpke underscored Montesquieu’s emphasis upon fragmenting political
power by separating executive, judicial and legislative power ([1958f] 1998,
p. 226). Second, he advocated implementing federalist structures along
Swiss lines (1946f, 1946h, [1958f] 1998, p. 227). Collectivists of all types
– communists, socialists, fascists and left-wing democrats – understood
that economic collectivism presupposes a centralized state. Hence, Röpke
argued, they all regarded federalism as endangering their plans, as evidenced by the post-war German Social Democrats’ opposition to a federal
German state (1946c, p. 257).
Third, Röpke recommended adherence to the principle of subsidiarity
as expressed in Catholic social doctrine ([1944b] 1948, p. 90): that is, a
problem should be addressed by those communities closest to it, unless
they were incapable of doing so, at which point a higher community
should assist until the lower community could resume its responsibilities. Fourth, Röpke specified that central banks and pension funds had
to be independent of centralized government ([1958f] 1998, p. 227). Fifth,
perhaps because he had witnessed how quickly they had succumbed to
the Nazis, Röpke stressed the independence of universities, the judiciary
and the press from governments and mass sentiment so that they could
properly scrutinize executive and legislative power ([1944b] 1948, pp.
117–27). A combination of these principles, Röpke held, would help create
or reinvigorate a hierarchy of non-state communities and governmental
bodies with their own spheres of liberty and responsibility that, by definition, would impede political centralization ([1944b] 1948, p. 90, 1960d,
pp. 100–102).
Many critiques can be offered of this general schema. It is not clear,
for example, that the principle of subsidiarity has ever proved sufficiently
stable to provide firm enough limitations to centralization. The word itself
is derived from the Latin subsidium, meaning ‘to assist’. Assistance does
not imply assuming complete responsibility for those in subordinate or
weaker positions. Assistance means to assist. Determining, however, when
assistance has morphed to the point of subsuming another’s responsibilities is very dependent upon circumstances. Those rendering or receiving
the assistance may not always be able to judge when this has occurred.
Nor, in hindsight, do Röpke’s exhortations of Switzerland as a model
for resisting centralization seem convincing. As the economist Victoria
Curzon-Price remarks:
Switzerland has in fact introduced an extensive welfare-state and an efficient
new value-added tax (VAT) at federal level. Increased taxation and growing
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Wilhelm Röpke’s political economy
centralization have occurred despite direct democracy and strong constitutional limits on central power. We must therefore assume that the Swiss electorate, enjoying possibly the most democratic system in the world, has consciously
or not chosen this path, or allowed itself to be pushed along it by the political
process. (2004, p. 31)
A third criticism of Röpke’s decentralization proposals derives from a
central concern of his own neoliberalism: the state must be strong enough
to resist interest-group capture. It is possible that Röpke’s proposed
fragmentation of state power might actually make such resistance harder.
Possibly anticipating this criticism, Röpke stressed that his decentralization policies were not designed to unduly weaken the state. A degree of
differentiation in the state’s responsibilities was, he held, inevitable in
any political arrangement. The question was whether these separations
were harmonious with the preservation of liberty. Freedom, political
decentralization and a strong state were not, Röpke believed, necessarily
incompatible ([1944b] 1948, p. 91, 1961e, p. 627).
Perhaps, however, because he recognized that purely political barriers to centralization were insufficient for preserving liberty and resisting
Keynesian policies, Röpke underscored the need for social policies that
would impede economic collectivization and political centralization. He
consistently argued for reducing population growth on the grounds that
this would help ‘de-massify’ society and reduce pressures on the economy’s
capacity to satisfy people’s needs ([1942g] 1992, pp. 13–16, [1958f] 1998,
pp. 39–52). Röpke also encouraged the revitalization and maintenance of
a strong peasant-based agricultural sector as an anti-collectivist bulwark
([1942g] 1992, pp. 201–12, [1944b] 1948, pp. 182–93). Convinced, moreover, that large businesses tended to collude with governments to reduce
market competition, Röpke advocated encouraging the development
of small businesses over large corporations, primarily through indirect
means such as tax breaks ([1944b] 1948, pp. 169–81). Röpke also wanted
the state to undertake on behalf of small business the type of technical
research that he presumed only large businesses had the means to pursue.
In addition, Röpke contemplated extensive intervention in the process of
credit distribution so as to increase the capital supply for small business
([1942g] 1992, p. 222).
Closely connected to these ideas was Röpke’s stress upon a general
expansion of property ownership ([1944b] 1948, pp. 156–9). In certain
instances, he was willing to contemplate property redistributions (ibid.,
p. 158). This may owe something to Röpke’s abiding hostility to the
large Junker-owned East-Elbian agricultural properties that successfully
lobbied for subsidies from the German state after 1870 (Röpke, 1934a, p.
40). The efforts of Chancellors Heinrich Brüning (1885–1970) and Kurt
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von Schleicher (1882–1934), Röpke implied, to reduce this aid and investigate instances of corruption surrounding its distribution helped soften
resistance in Prussian Junker circles around Weimar’s last president, Paul
von Hindenburg, to Hitler becoming Chancellor (ibid., p. 42, 1945a). But
Röpke also favored land redistribution in some instances because he was
convinced that land-ownership gave people a degree of non-state-based
economic security beyond wages ([1944b] 1948, p. 159, 1956g). Indeed he
believed that wider property ownership would awaken awareness of the
importance of property rights, while simultaneously contributing to society’s cultural and economic ‘deproletariatization’ ([1944b] 1948, p. 159).
However one views the validity of these suggestions, many of these proposals contradict each other. Increasing appreciation of property rights,
for instance, is unlikely to be facilitated by the state effectively overriding
such rights on the scale required by widespread redistribution. Moreover,
many of Röpke’s specific ideas are open to criticism from the two camps
that his later works appear to be attempting to reconcile. ‘Classical liberals’, for instance, would question some of the economic premises underlying some of Röpke’s recommendations. Röpke himself concedes the
un-provability of his claim that small businesses are more efficient than
large enterprises ([1944b] 1948, p. 174). More generally, classical liberals
would object, as Sally notes, to these interventions because they
inevitably involve favoring one group over another by means of discretionary state power, thus posing problems for the general rules of conduct in the
classical conception of the law. And second, the state, or any other actor for
that matter, does not have the foreknowledge to plan structural change from
one situation to another in the market. This can only be ‘discovered’ by the
market actors themselves in the process of engaging in competition. (1998,
pp. 120–21)
By contrast, some ‘conservatives’ would praise a number of Röpke’s
cultural–economic proposals on the assumption that such policies enhance
the ability of long-standing social traditions to reintegrate society over
and against what Röpke considered competition’s socially disintegrative
side-effects ([1942g] 1992, p. 181).
At the same time, some of Röpke’s proposals would be criticized by
social conservatives and economic liberals alike. Many classical liberals
would argue that Röpke’s warnings about population growth – some of
which verge on the catastrophic (Röpke [1958f] 1998, p. 43) – are fallacious inasmuch as the spread of markets and subsequent prosperity tends
to reduce population growth. Moreover, entrepreneurial ingenuity has
invalidated Malthusian warnings about finite resources (Simon, 1981).
Some conservatives might argue that large families actually contribute to
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Wilhelm Röpke’s political economy
the spread of mutually supportive networks that in turn reduce the need
for welfare (Carlson, 2009, p. 28). For different reasons, both groups
would be concerned about the government having a direct role in matters
of population control.
Part of the difficulty is that Röpke’s cultural–economic propositions
often appear to contradict his free-market commitments. This is especially
evident in his treatment of agriculture. On numerous occasions, Röpke
argued against agricultural protectionism and subsidies, describing these
as instances of ‘agricultural nationalism’ (1942h, pp. 132–49, [1944b]
1948, pp. 185–7).3 They often damaged particular agricultural industries
(Röpke, 1934a, pp. 58–63) and did much ‘to poison the international
atmosphere of commercial policy’ (ibid., p. 65). Later in life, Röpke condemned the European Economic Community’s agricultural policies as
amounting to ‘agricultural autarky’ (1964f, p. 243). Röpke was fond of
noting that European agriculture enjoyed its greatest prosperity during the
nineteenth-century period of economic liberalization. Danish, Dutch and
North-West German farmers were among economic liberalism’s strongest supporters until their position was undermined by the establishment
of particular agricultural monopolies (1937b, pp. 49–50, [1944b] 1948,
pp. 185–6, 194).
On other occasions, however, Röpke expressed reservations about
applying market principles to agriculture:
Agriculture is that part of the national economic system to which the principles
of a free market economy could always be applied only with broad reservations
. . . Especially in this sector, then, a particularly high degree of far-sighted, protective, directive, regulating and balancing intervention is not only defensible,
but even mandatory’. ([1942g] 1992, p. 205)
Agriculture was especially subject, Röpke argued, to the seasons’ effects,
certain supply and demand peculiarities, an idiosyncratic labor market
(1934a, pp. 49–52, [1942g] 1992, pp. 244–5), and radical price fluctuations
([1944b] 1948, p. 187). Insofar as tariffs might temporarily alleviate some
of these problems, Röpke thought that they could be justified for short
periods of time.
Yet for all his concern for agriculture and his often-lengthy treatment of details such as the cultivation and promotion of certain crops
(Röpke, 1942h, pp. 132–61), Röpke’s prescriptions for agriculture remain
rather vague. In describing a ‘third way’ between laissez-faire and agrarian collectivism, Röpke advocated acting decisively against agricultural
monopolies, encouraging means of agricultural self-assistance compatible
with market competition,4 and enlisting farmers’ advice on how to reduce
tensions between preserving certain agricultural lifestyles and the demands
After Keynes
139
of free markets ([1944b] 1948, p. 193). Beyond these general principles,
however, Röpke rarely elaborates. He claimed that, over the long term,
fully exposing agriculture to a free trade regime was likely to result in
economic growth and stability for rural industries (1934a, p. 63, 1942h, p.
152). Nevertheless, Röpke thought that the social and cultural cost might
be so high that it would be better to proceed in a ‘middle-of-the-road’
manner (1942h, p. 152).
Inevitably the question arises of why Röpke advocated economic–
social positions which seem difficult to reconcile with his free-market
ideas. No doubt, biography played a role. Röpke cherished the memory
of his upbringing in the small town of Schwarmstedt in lower Saxony
(Brandt, 1966, p. 247). Röpke also had a life-long aversion to ‘bigness’
([1942g] 1992, pp. 62–71), something accentuated by impressions he
formed of the United States (1964f, p. 244) during his Rockefeller
Foundation-sponsored visit of 1926–27. Then there was his experience
of living in Switzerland for 29 years – a country that seemed to epitomize integration of a decentralized political order, a market-orientated
economy and a vibrant agricultural sector. Nor should we dismiss the
fact that there was – and remains – a long tradition of valuing ‘closeness to the land’ among many German, Austrian and Central European
intellectuals. This has embraced tendencies as disparate as Prussian
Lutheran monarchist–conservatives, Austrian Catholic corporatists and
völkish-nationalists. Indeed the core reasons that Röpke offered for providing special help to agriculture were extra-economic. He considered it
unlikely, for example, that peasant agriculture would long survive all the
market’s disciplines ([1944b] 1948, p. 193). But his primary justification
for certain forms of state assistance to peasant agriculture was Röpke’s
conviction that the small farmer–peasant lifestyle helped to maintain
a culture that preserved certain values, and inhibited the progress of
proletariatization: the detachment of large numbers of people from
forms of community such as the village and parish, and their subsequent
‘rootlessness’ as a consequence of the move to find employment in urban
industrial settings. Like many twentieth-century social conservatives and
German neoliberals, Röpke believed this created large urban masses
susceptible to the temptations of political extremists or mass democracy,
with all of their liberty-negating potential. From Röpke’s standpoint, the
benefits of averting these trends made worthwhile the economic cost of
assistance. Röpke admitted that some of his views on these matters might
be perceived as ‘naïve or “romantic” ’ ([1944b] 1948, p. 169, 1965d). But
there was at least one market-friendly purpose to Röpke’s schemes. He
was trying to nurture a social cohesion ‘from below’ that would help
nullify some of the reasons why intellectuals, politicians and the broader
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Wilhelm Röpke’s political economy
citizenry became attracted to full employment, welfare and inflationary
investment policies in the first place. Growing self-responsibility was, for
instance, an indispensible prerequisite for reducing state welfare (Röpke
[1958f] 1998, p. 155) and a corresponding growth in private economic
activity.
In the end, however, Röpke’s cultural–economic ideas underline an
unresolved tension in his thought. In the name of renewing the market
economy and the moral, social and political culture that he thought
necessary to restrain collectivist tendencies, Röpke was prepared to contemplate economic interventions that had the potential to undermine
important corollaries of economic freedom, such as businesses’ liberty to
exceed an impossible-to-determine ‘optimal’ size. The contradiction is not
resolvable by reference to Röpke’s neoliberal theory as this does not offer
ways to reconcile the demands of framework and market policy, with the
implications of pursuing an active economic–social policy. At an even
deeper level, it may also reflect conflict between Röpke’s ‘conservative’
attachment to preserving traditions that facilitate social cohesion and
his ‘classical liberal’ prioritization of freedom, especially in the economic
realm.
FROM THE DOMESTIC TO THE INTERNATIONAL
Issues such as the origins and nature of full-employment policies, inflation and the welfare state are generally discussed within the context of
the nation-state. For most of the twentieth century, this was true of most
participants debating these subjects. It was rare for economists to reflect
upon such questions in the context of the international economic order.
While willing to comment upon international economic issues, classical
liberals such as Hayek and neoliberals such as Eucken generally confined
their economic analyses to the domestic level.
Röpke was one of the few market-orientated economists in the twentieth century to explore international economic issues in the context of his
political economy. He was concerned, for instance, about what he called
the dilemma of imported inflation: ‘alongside domestic credit expansion’,
Röpke wrote, ‘external economic relations have proved to be another
dangerous source of inflation’ ([1956h] 1969, p. 188). But Röpke’s analysis of the international economy goes beyond debates about issues such
as the merits of free trade to develop a nascent theory of international
political economy that seems more explicitly classically liberal in character
and less attached to the neoliberal ideas that he prescribed for national
economies.
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NOTES
1. Even while living in relatively isolated Switzerland during World War II, Röpke had
drawn attention to the growing anti-collectivist sentiment in Britain and the United
States (1942b, 1942f).
2. Röpke cannot, however, resist stating that ‘in his [Keynes’s] introduction to the German
translation of his latest magnum opus [The General Theory] he addressed himself with
sympathy to his National Socialist readers’ ([1944b] 1948, p. 217).
3. Röpke vehemently opposed agricultural collectivization, and underlined the parallels
between the National Socialist and Soviet regimes’ agricultural policies (1935a, p. 99,
[1944b] 1948, p. 194).
4. To illustrate this point, Röpke used the example employed by Rüstow in 1932 to show
how a compatible intervention into a struggling agricultural industry could occur
without undermining market competition (Röpke [1942g] 1992, pp. 188–9).
7.
A liberal international economy
It is, indeed, doubtful whether the development of modern world economy can
be satisfactorily explained without due reference to the Pax Britannica . . . But
parallel to the rise of the British Empire went a much more important development, which really explains why the international economic integration of our
time has been possible in spite of the absence of a world state and its powerful
socio-political framework. This is the spread of a commonly accepted ordre
public international, based on international standards of conduct in peace and
war, and a network of international treaties or unwritten rules of international
law, which were respected because there was an undisputed moral code behind
them.
Wilhelm Röpke (1942h, p. 73)
The history of economic liberalism embodies an ambiguous view of international political economy. Razeen Sally contrasts the centrality of international economic relations to eighteenth-century thinkers such as Smith
who devoted Book IV of his Wealth of Nations to this subject, with its
relatively peripheral treatment by twentieth-century classical liberals such
as Hayek (1998, pp. 4–5). Among twentieth-century economic liberals,
Röpke stands out for his detailed attention to international economic relations, but also for his immersion of these issues in reflections upon political
thought, contemporary developments and the history of ideas.
This may reflect Röpke’s extraordinary range of intellectual interests,
his command of classical and modern languages, and his sociological inclinations. Then there was the impact of personal experiences. ‘My adult life’,
Röpke wrote retrospectively, ‘began with a crisis of international society’
(1959f, p. 228). His experiences in the trenches of Picardy left him with
an abiding distaste for nationalism. Like Keynes, Röpke was involved in
shaping war reparations policy after 1918, and believed that nationalistic
sentiment had undermined any sane resolution of this question. Finally,
Röpke lived for long periods of his life outside his native Germany. His
years in Turkey placed him at a major crossroads of Europe and Asia.
In Switzerland, Röpke witnessed several language groups living together
in relative harmony. Hence, it is not surprising that, as Röpke observed in
a moment of self-reflection, ‘The tendency of my thought . . . has always
been international, seeking to examine the larger relationship between
countries (1959f, p. 228). Even before serving in the Kaiser’s army, Röpke
had been fascinated by the nation-state’s relative absence from medieval
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143
Europe’s cultural landscape, in which most people primarily identified
themselves first as Christian, then as members of relatively small communities (1966c, p. 119). And while Röpke stressed that his Turkish years had
underlined his consciousness of his essential Europeanness, this did not
inhibit his study of international economic relations from embracing the
non-Western world (1959c, pp. 115–34, 165–221, 1960a, 1965c).
This chapter explores Röpke’s approach to international political
economy by analyzing his historical account of the rise, fall and struggling reemergence of a global economy; his prescriptions for an essentially
liberal international economic order; and his reflections on European
economic integration. Just as he believed that freedom and order should
be the primary values embodied by domestic political economy, Röpke
thought that the same moral goods should be central to international
economic relations. There are, however, crucial differences between the
ways that Röpke thought these values should be realized at the domestic
and international levels. This raises questions about the extent to which
Röpke believed that aspects of his neoliberalism applied to the international order. While Röpke insisted that governments had a proactive
albeit limited role in ordering a country’s economy, his vision of the
international economy focused upon order arising from below over time.
It was also characterized by a negative view of state-like international
institutions assuming anything like the functions that Röpke envisaged for
governments at the national level.
INTEGRATION, DISINTEGRATION, CONFUSION
Throughout Röpke’s writings on world economic history, the theme of
relatively spontaneous emergence, rapid collapse and faltering renewal
prevails. No-one and no country, in Röpke’s view, ‘planned’ the growth of
economic relationships beyond national boundaries. The global economy
emerged ‘from below’. In part, this flowed from late-eighteenth- and
early-nineteenth-century technological developments that expanded the
possibility of widespread economic exchanges between nations and continents (Röpke, 1959c, pp. 13–17). Industrialization, the rationalization
of economic production on the basis of competition and an international
division of labor necessitated the search for markets to which goods could
be exported (Röpke, 1931m, pp. 10–12). Indeed Röpke believed that an
international division of labor was essential to sustain a growing population across the world (1930b). It also facilitated a corresponding impatience with barriers to export markets (Röpke, 1934a, p. 9, 1959c, p. 12).
Röpke also underlines the impact of the powerful intellectual case made
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for free trade by Smith upon early nineteenth-century European elites
(1930–31, 1934a, p. 15).1 Taken together, Röpke states that these factors
created such a powerful dynamic that Marx was convinced as early as 1848
that the production and consumption of goods and services had assumed
a truly cosmopolitan character. National economies became integrated
into an international economy in the sense that people could buy and sell
goods relatively unhindered throughout the world. Multilateralism was
generally the rule for free trade, which remained largely free of prohibitive
import duties. This freedom of movement of goods was paralleled by the
free international movement of capital and people (Röpke [1954d] 1959,
pp. 155–9).
Röpke insisted, however, that no economic integration can extend
‘further than the sphere of political, social and moral integration which
guarantees a minimum of law, order, security, and dependable ethics’
([1942g] 1992, p. 238). The nineteenth-century trend toward global economic liberty did not occur against an empty backdrop. It emerged on the
basis of an international order of moral norms and legal principles that
owed nothing to dreams of world government (Röpke, 1936g). Rather it
reflected the accuracy of the insight of the Scottish Enlightenment philosopher, Adam Ferguson (1723–1816), concerning institutions which emerge
as a result of human action but not human design (Röpke [1954d] 1959,
pp. 76–7). The fact that Britain – the nineteenth century’s pre-eminent economic and naval power – committed itself to free trade in the 1840s was,
in Röpke’s view, crucial for the spread of international trade and industrialization ([1946k] 1969, p. 104). Equally important was the appearance
of the gold standard as a universal basis for monetary stability and a
global payment community (Röpke, 1923b, 1942h, pp. 75–6). Neither of
these developments was ‘planned’, let alone directed by an international
institution seeking to construct an international economy.
But beyond these specific circumstances, Röpke stressed, the foundations of the norms, laws and conditions that facilitated international
economic integration had been in the process of formation since the late
tenth century. Drawing upon German, French and Anglo-Saxon scholarship, Röpke describes the emergence of a normative and legal framework
– the Res publica Christiana – which encapsulated the communities of
medieval Europe, and whose roots lay in the thought of Aquinas. This
occurred alongside growing transnational acceptance of norms and codes
governing international economic exchange embodied in the practices and
customs of medieval bankers and merchants (Röpke [1954d] 1959, pp. 74,
89, 1959c, pp. 48–9) – the lex mercatoria – which themselves were necessitated by the growth of what Röpke called the ‘medieval world economy’
([1942g] 1992, p. 238).
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Despite early-modern Europe’s splintering in the wake of growing
national absolutism and Western Christianity’s sixteenth-century schisms,
Röpke underlines that this framework of international law acquired
further precision through the work of late-scholastic Spanish theologians
such as Francisco Suarez, Luis de Molina and Francisco de Vitoria as well
as Protestant natural law scholars such as Hugo Grotius and Jean-Jacques
Burlamaqui (Röpke [1954d] 1959, p. 89, 1959c, p. 50). Röpke identifies
Vitoria as establishing free trade as a right derived from natural law and
the law of nations (ius gentium), with all its binding force on human consciences. This idea subsequently underwent secularization at the hands
of Hume and other Enlightenment figures (Röpke, 1959c, p. 50). The full
fruits were not realized until the nineteenth century in accordance, Röpke
suggests, with his law of historical interference ([1954d] 1959, p. 75).
In this open international order, the liberal principle of separating government and public law (imperium) from the market economy and private
law with its emphasis upon protecting private property rights (dominium)
reigned. The power of sovereign governments over international economic
affairs was subsequently reduced. It tended to be limited to what Röpke
called (in a rare application of his neoliberal vocabulary to describe international economic relations) ‘compatible’ policies such as mild tariffs
([1942g] 1992, p. 237). Capital, labor and trade moved relatively unhindered across national boundaries. This ordre public international was symbolized by the international gold standard, itself based upon the unwritten
agreements of nation-states ‘to behave in matters of monetary and credit
policy in such a way that this fixed and free coupling remained an undisputed permanent institution, irrespective of trade fluctuations’ (Röpke
[1954d] 1959, p. 76).
Economic liberals are often portrayed as offering a romantic vision of
the pre-1914 global economy and the accompanying international norms
and law underpinning it. Röpke himself seems to play down internal
disputes over economic policy that characterized many countries in the
nineteenth century as well as powerful disturbances of the international
order established by the Congress of Vienna in 1815, such as Bismarck’s
wars of aggression against Denmark, Austria-Hungary and France.
Röpke may also have underestimated the degree to which the European
balance-of-power was maintained after 1815 by inter-governmental negotiations rather than informal adherence to the previously described metaeconomic order.
Röpke was certainly fond of quoting Keynes’s famous idyllic description of the pre-war London gentleman to capture the ethic pervading the
globally integrated economy that imploded in 1914 (Röpke, 1959c, pp.
16–17). But it is unfair to describe Röpke as romanticizing the pre-1914
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Wilhelm Röpke’s political economy
international economy. He stressed that its collapse was partially facilitated by a gradual dissolution of the ordre public international. This flowed
from increased assertiveness by nation-states from the 1890s onwards
(Röpke, 1935d, 1942h, p. 76) and their gradual violation of liberal economic principles at the domestic level. Nationalism’s insistence upon the
nation’s primacy above all else, Röpke argued, led to an increased willingness to prosecute war. In the Great War’s case, this instantly reduced
the hitherto highly integrated world economy into military–economic
blocs, symbolized by the gold standard’s suspension by most nation-states
during the war (1923b, p. 25). The same domestic developments led to
governments gradually disregarding any general principles governing
international economic relations (Röpke, 1938d). This, Röpke explains,
had immediate implications. Governments, for example, accorded fewer
protections to foreign-owned property and ignored failures to repay loans
to foreign banks (Röpke, 1942h, p. 77, 1946e, p. 203). The growth of international trade, Röpke wrote, could be explained in economic terms such as
comparative costs and an increasing division of labor (1923b, p. 5, 1925b,
pp. 55–102). But students of economics, he added, needed to understand
that international free trade ultimately depended upon promise-keeping
and protecting property rights, irrespective of the nationalities of those
involved (1925a, pp. 1–10, 1943c). Flouting these moral and legal norms,
Röpke stated, undermined critical elements of an integrated global
economy such as free international capital movements (1966c, p. 121).
These developments were exacerbated by steadily increasing interventionism by several Western governments in domestic economies from the
1890s onwards which dissolved the relatively new separation of imperium and dominium, thereby steadily politicizing international economic
exchanges. As observed, Röpke regarded Germany between 1879 and 1934
as exemplifying such trends (1924c, 1934a). With governments increasingly
inclined to employ interventionist policies in pursuit of the ‘national interest’, it was hardly surprising, Röpke wrote, that international economic
relations continued on their downward spiral after 1918, and accelerated
with the Great Depression. Many interwar governments’ inflationary–
investment policies put unprecedented stress on the balance of payments
(Röpke, 1948c). Governments sought to correct this by imposing high
tariffs and exchange controls in an effort to diminish national economies’
exposure to international exchanges, and using import bans and credit
restrictions to reduce foreign investment (Röpke, 1922b, p. 132, 1928a,
pp. 244–5). This implied abandonment of the gold standard and the end of
a truly international monetary system (Röpke, 1942h, pp. 191–7). It also
gave impetus to top-down economic planning, not least because exchange
controls are integral to planned domestic economies (Röpke [1954d] 1959,
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147
p. 216). Protectionist policies became the norm, as exemplified by the
growth of government-controlled trade monopolies and extensive export
subsidies (ibid., p. 161). In such an atmosphere, Röpke claimed, international trade, capital and labor movements inevitably declined (1931b,
1942h, p. 79), cost rigidities increased, prices ceased conveying accurate
information (1942h, p. 224), multilateralism was replaced by bilateral
commercial relations, and foreign trade become more subject to centralized state controls ([1954d] 1959, p. 163). In some cases, these economic
nationalist policies culminated in governments formally adopting autarkic
goals. It was not coincidental, Röpke observed, that interwar radical
German nationalists invariably embraced autarkic language, even before
the National Socialists came to power (1934a, pp. 22–3).
These reflections led Röpke to conclude that ‘national changes’ were
‘the really strategic factor which is ultimately responsible for having
started the vicious circle’ (1942h, p. 224). Economic protectionism and the
closed bloc approach thus reflected deformations in the domestic political
and economic order, as national governments become subject to the
whims of interest groups. This rendered ineffective ‘top-down’ attempts
to reestablish an ordre public international through international organizations such as the League of Nations (Röpke [1942g] 1992, p. 239). Instead,
international economic relations became characterized by the development
of closed blocs, such as Hitler’s economic Grossraume, linked together
by imperialistic claims, compulsory bilateral economic agreements and
autarkic aspirations (ibid., pp. 239–41). This combination enhanced the
probability of war because increased imperium was a sure way of increasing a bloc’s or a nation’s dominium (Röpke, 1942h, p. 96). This trend was
compounded by the tendency of autarkic policies to associate increases in
a country’s square mileage with increases in purchasing power – a position
which ignored the ability of capitalist economies to grow in ‘depth’, as evidenced by physically small countries such as Belgium and the Netherlands
(Röpke, 1934c, 1944a).
Efforts to revive a truly international economy after World War II
much occupied Röpke’s post-war thought. The picture emerging from
Röpke’s writings was one of collectivism being pursued in the Communist
bloc and much of the developing world, while most Western governments
embraced policies that produced international economic integration in
some areas and disintegration in others. On one level, Röpke thought that
particular efforts at trade liberalization and various attempts to establish
currency convertibility were facilitating some global reintegration (1950g,
1960e, 1964b). At the same time, Röpke insisted that interventionist
domestic policies had profoundly disintegrating overflow effects. Röpke
was conscious that the Bretton Woods agreements had permitted the use
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of capital and exchange controls (1950a, p. 22). This gave governments all
they needed to pursue interventionist–protectionist agendas. Nor, Röpke
observed, could the impact of inflationary investment policies be confined
to the countries in which they were pursued. The resulting inflationary
pressures created balance-of-payment dilemmas for strict anti-inflationist
countries such as West Germany and Switzerland (Röpke, 1966a). They
were often forced to choose between altering their exchange rate, softening their currency’s purchasing power, adopting capital import controls
(Röpke, 1952f, 1967a), or – worst of all – giving up and effectively placing
their monetary policy, as Röpke stated somewhat polemically, ‘at the
mercy of the American steelworkers, the election tactics of the Republican
party, the trade unions of England, and the confusion of political factions
in France’ ([1956h] 1969, p. 192).
Nor was Röpke impressed with post-war ‘top-down’ approaches to
resolving international economic problems (Röpke, 1959c, p. 39). This
skepticism flowed from Röpke’s sense that many post-war international
organizations had been captured by Keynesian ideas and subsequently
committed to full-employment policies (Röpke [1952d] 1960). More
generally, it reflected Röpke’s doubts about the effectiveness of interventionist planning. He consistently maintained that organizations such as
the International Monetary Fund and endeavors such as the Marshall
and Schuman plans had not been engines of economic progress (Röpke
[1954d] 1959, p. 224). For example, he viewed the economic principles
guiding the World Bank’s lending policies as a recipe for failure insofar as
it was charged with lending to countries which had no reasonable prospect
of attracting private capital and yet were somehow deemed to have a reasonable chance of repaying a loan (1959c, pp. 209–10).2 Like all instances
of non-market formation of capital (or what Röpke called ‘socialized
capital formation’), the World Bank was effectively commissioned to
ignore the investment guidance provided by free prices, a market rate of
interest, and the demand schedules and capital returns conditioned by
free competition (Röpke [1952e] 1969, p. 165). Röpke also considered as
absurd recurring proposals to replace gold as the international ‘definitive
money’ with a world central bank whose directors would decide the allocation of international liquidity. Röpke’s core objection was not that of
a Hayekian: that the directors of such a bank would require superhuman
powers of observation to perform such a task successfully. Rather Röpke
held that the post-war Keynesian climate ensured that such a bank would
be pressured to pursue inflationary policies and, because of its inevitable
politicization, ‘would have to serve the liquidity requirements of its more
unsound clients’ ([1961i] 1969, p. 227).
The same skepticism manifested itself in Röpke’s view of international
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149
aid programs. Concerning one such exercise – the Marshall Plan – Röpke
argued that Europe’s problem was not so much a lack of resources, but
rather the absence of market economies. Without a restoration of free
markets, Röpke doubted that Marshall Aid would amount to much,
except help maintain the dirigiste systems then emerging throughout
Western Europe ([1947j] 1969, p. 123, 1947o, 1949b). Any positive effects
that might have proceeded from the Marshall Plan, Röpke stated, were
compromised by the failure of many post-war European governments to
address a fundamental problem characterizing their economies: excessive planning and repressed inflation (1949c, pp. 362–5). Countries such
as Italy, Röpke noted, used American aid to facilitate the dismantling of
fascist-era economic controls and reduce the overexpansion of bank credit
and deficit spending, thereby diminishing repressed domestic inflationary pressures (Röpke [1947j] 1969, pp. 126–7). Other European nations,
however, used Marshall Aid to fuel inflationary investment. This was
not helped, Röpke claimed, by the fact that the Americans who designed
and administered the Marshall Plan were themselves thoroughly imbued
with New Deal planning notions and believed that inflationary spending to maintain full employment was necessary and desirable (ibid., pp.
127–8). Consequently, Röpke observed, Marshall Aid had been used to
give ‘almost dogmatic force to the belief in the necessity of the planned
guidance of capital use’ ([1952e] 1969, p. 165).
Röpke likewise argued that the economic nationalist or socialist policies
followed by most post-colonial developing nations fatally handicapped
their integration into a global economy. This was often, Röpke claimed, a
result of their governments following the prescriptions of economists such
as Gunnar Myrdal (1898–1987) who advocated welfare states, nationalization and inflationary investment policies in their own countries (Röpke
[1958f] 1998, pp. 182–3, 291, 1960a). It was not, Röpke cautioned, that
underdeveloped nations had nothing to complain about. He was acutely
aware of colonialism’s dark side (1937b, 1959c, p. 176). Implementing
collectivist policies at the domestic level, however, guaranteed that these
countries would experience a progressive decline of domestic and foreign
private capital investment (Röpke [1958f] 1998, pp. 188–9, 1960b, 1964g,
p. 190). Exchange controls, he stressed, invariably hindered the movement
of international private capital to developing nations ([1954d] 1959, p.
241, 1962e, p. 29). These nations compensated for the dearth of private
capital with what Röpke called ‘political capital’: that is, a combination
of inflationary monetary policies and extensive foreign aid obtained from
Western nations through threats or propaganda ([1958f] 1998, pp. 188–9,
1961b, p. 212). Röpke strongly counseled Western governments against
acceding to such demands (1953h, p. 105), not least because such aid could
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only come ‘by way of the compulsion that Western governments have to
exert upon their taxpayers in order to raise the required capital’ ([1958f]
1998, p. 189). But Röpke also viewed this aid as morally dubious. The
drying up of foreign private capital, he argued, was partly attributable
to developing nations adopting demonstrably failed policies and their
refusal ‘to pay in interest, dividends, and salaries the price without which
no capital aid can be offered even in the most favorable case’ (ibid.). He
contrasted this with those developing countries that create ‘the necessary
conditions . . . for private investment’ and subsequently ‘obtain Western
capital through the market’ (ibid., p. 189, cf. 1963i, pp. 40–43). Röpke was
especially disturbed by the willingness of many developing nations and
Western developmental economists to invoke terminology erringly similar
to the class-war language used by Marxists and National Socialists when
describing the international economy ([1958f] 1998, pp. 182–3, 1959b).
Highlighting the question of values, Röpke noted parallels between
the attitude of many developing nations and the mindset underpinning
modern Western welfare states ([1958f] 1998, pp. 182, 189), especially a
fixation with realizing and maintaining sameness of economic conditions
at all costs (ibid., p. 182).
UNILATERAL LIBERALIZING
How, then, did Röpke envisage the creation of a new liberal international
economic order without a global organization to make the type of fundamental decisions described in his neoliberal theory in favor of market exchange?
In the post-war period, most economic liberals departed from the traditional
classical liberal position in favor of unilateral liberalization. Instead they
advocated intergovernmental collaboration, negotiations and agreements
(Sally, 1998, p. 98). But, just as the nineteenth-century open global economy
had emerged without any supranational organization masterminding its
appearance (Röpke, 1959c, pp. 11–27), Röpke held that a modern revival
had to come via unilateral liberalization at the national level:
International order can only be a wider projection of the order prevailing
within nations, and if today, as in the immediate past, we find ourselves more
engaged with the problems of international order, that is because international
relations are a screen upon which the internal phenomena of a disintegrating
society are thrown and enlarged, making them visible long before they become
evident within the various nations. (1959f, p. 232)
It followed that a return to market-orientated domestic policies would
gradually produce an open international economy (Röpke, 1944d). This
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assumes a type of institutional competition in which successful domestic
policies of monetary discipline and open markets ‘drive out’ inefficient
collectivist policies. Röpke may have underestimated the willingness of
governments to continue pursuing flawed policies long after the failures
have manifested themselves. As noted, Röpke was conscious of the difficulty of shifting domestic public opinion on these matters, especially
after large welfare states were in place. But the model that Röpke had in
mind was West Germany. He was convinced that the fruits of its unilateral
economic liberalization, disciplined monetary policies, and single-minded
pursuit of currency convertibility had provided such tangible evidence
of the wisdom of these policies that many European countries, including
ultra-dirigiste France, were persuaded to adopt aspects of the neoliberal
program ([1937a] 1963, pp. 248–50, 1964f, p. 238). Röpke’s is thus a
dynamic argument: unilateral liberalizing reforms certainly proceed from
commitments by governments, but these reforms have continual effects
by helping to facilitate environments conducive to economic growth over
long periods of time.
Though Röpke’s vision of international political economy had no
place for creating an international organization that fulfills any of the
functions assigned in Röpke’s neoliberalism to the state at the national
level, Röpke identified three decisions essential to restoring a truly integrated international economy. Consistent with Röpke’s neoliberalism,
two of these decisions involved national governments making some basic
ordering choices about domestic economic life. The first decision was a
commitment by national governments to restore a genuinely international
monetary order. This translated into a fundamental choice, Röpke held, to
unilaterally abolish exchange controls and restore free currency convertibility (1949a, 1950a), thereby removing a major obstacle to international
capital movements (Röpke [1954d] 1959, p. 244). Individuals and businesses throughout the world could subsequently access greater amounts
of private capital. This would simultaneously reduce the danger that those
countries with domestic capital shortages would resort to inflationary
investment policies to facilitate development (ibid., pp. 244–5). The same
reforms would also create conditions in which free trade, free prices and
market competition could emerge to take hold at an international level,
because convertibility implied that ‘quantitative (collectivist) foreigntrade controls must cease to be the chief means of controlling the balance
of payments’ (ibid., p. 247).
Reestablishing a true gold standard was, according to Röpke, essential
for international monetary reform (1944c, [1961i] 1969, pp. 231–3). Such a
restoration had to begin with a nucleus of countries agreeing to adhere to
it, much as this had happened somewhat spontaneously in the nineteenth
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century through a process of unilateral decision-making by individual
countries. Once this had occurred, adherents of a reinstated gold standard
had to insist upon all members maintaining maximum monetary discipline
as well as freedom and stability in the foreign exchange market. Countries
unable or unwilling to adhere to these rules should not be admitted to the
‘club’ (Röpke [1961i] 1969, p. 231). Previous failures to maintain the gold
standard had permitted governments and central banks, either under pressure from pro-inflationary groups or because of their own interventionist
convictions, to pursue inflationary policies without being restrained by
the international ‘golden brake’ (ibid., pp. 225–30). By contrast, the old
liberal economy’s gold standard had integrated the essential components
of an international monetary standard – unity, stability and freedom – and
united all countries in an international payments system unparalleled in
history (Röpke [1954d] 1959, p. 252).
The second ordering decision that Röpke believed national governments had to make if an open international economy was to be realized
was to minimize contacts between the liberalizing segment of the world
economy and the Communist bloc. Calling it ‘the foreign body of collectivism in the world economy’ (Röpke [1954d] 1959, p. 232), Röpke held
that the Soviet bloc’s very workings – especially its collectivist approach
to foreign trade (1954a, 1956d) and its militarist–expansionist tendencies
(1961h, pp. 59–65) – constituted ‘a chronic sickness in the world economy’
([1954d] 1959, p. 233).3 By definition, Communist countries were not
interested in allowing an international division of labor as envisaged by
Smith and Ricardo (Röpke, 1950b, 1959c, p. 120). But it was not just the
Soviet bloc’s internal refusal to adhere to the workings of free exchange
and prices that was problematic. Even more dangerous, Röpke believed,
was the inability of Communist states to accept the rules underpinning a
liberal global economy (1954a, [1954d] 1959, p. 233). Such regimes did
not consider themselves bound to the moral values underpinning rules
such as monetary stability. ‘In the last resort’, Röpke wrote, the efficacy
of international free trade rested upon the principle ‘Pacta sunt servanda
– treaties are to be kept’ (1966c, p. 121). Communist nations’ adherence
to Marxist–Leninist ideology meant that they did not consider themselves
bound by such normative imperatives (Röpke, 1951c, 1954a). Röpke
therefore recommended that governments in an emerging liberalizing
international economy apply to Communist countries ‘the methods of
an enforced bilateralism’. The objective was to prevent the Soviet bloc’s
collectivist methods and disregard for a renewed ordre public international
from infecting the international economy (Röpke [1954d] 1959, p. 234,
1955d, 1956b, p. 50).
Röpke acknowledged that this would require ‘the liberal countries’ to
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show ‘a minimum of solidarity in matters of foreign trade’ ([1954d] 1959,
p. 234) to prevent the Soviets from playing one off against the other. This
implied that liberalizing governments had to establish intergovernmental
agreements to work together in certain areas. This may explain Röpke’s
generally positive view of the General Agreement on Tariffs and Trade
(GATT). Given its modest objective of creating a forum for pressing the
case for multilateral trade liberalization, Röpke believed the GATT could
help solidify already liberalized trade policies and encourage other countries to see their benefits ([1954d] 1959, p. 224, 1959c, p. 40), especially
when it came to tariff reduction and undermining ‘the agricultural autarky
of the ECC’ (1964f, p. 243, 1964a).
The difficulty with this aspect of Röpke’s prescription for restoring a
liberal international economy is that the very existence of a collectivist
bloc appears to make realization of a truly world market economy impossible. Nor is it clear how bilateralism would have prevented the collectivist
infection from entering the liberalized segment of international economic
relations. Röpke also seems never to have considered that freely trading
with Communist nations might have introduced a liberal ‘virus’ into collectivist economies, or alerted those subject to Communist regimes to the
market’s superior wealth-creating capacities. One explanation for these
deficiencies may be that Röpke never ceased to put post-war economic
relations in the context of the West’s need to combat the Soviets’ stated
aim of global dominance (1955b, 1959c, p. 117). Indeed he was very critical of those self-described antifascists who failed to see that the totalitarian
instinct was just as integral to Communism as it was to Nazism (1963b).
Every economic transaction with the ‘Communist empire’, he stated, was
‘an act of international politics’ because every economic exchange sanctioned by Communist regimes should be understood as part of their pursuance of global dominance (1955b, pp. 118–19). This may seem extreme,
but it should be understood that Röpke viewed the Soviet bloc as being in
a virtual state of war with free nations. In this light, a mutual agreement by
non-Communist states to limit their economic contacts with Communist
regimes was, from Röpke’s standpoint, justified.
Beyond quarantining Communist states, Röpke stressed that a third
element for international economic integration lay in the realm of political morality ([1954d] 1959, p. 246). A commitment by governments to
adhere to the gold standard as the basis of international monetary order
assumed their free acceptance of ‘a stable framework of political, moral
and legal standards’ so that the realm of dominium was truly respected at
the international level (ibid., p. 256). A restoration of the pre-1914 ordre
public international was thus indispensible. If governments did not adhere
to basic norms of trust and honesty, failed to uphold the principles that
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the gold standard required of all its participants, or proved unwilling to
incorporate the gold standard’s often difficult demands into domestic
economic policy, then it could not work as an international monetary
standard (ibid.). The old gold standard broke down, Röpke observes,
precisely because governments failed to observe the rules and political,
moral and economic convictions indispensible for its workings (ibid., p.
16). Upholding order in the realm of money and credit and maintaining a
commitment to free trade, for example, required governments to acknowledge the moral problems associated with, for example, arbitrarily interfering with the value of money or unduly restricting the right of freedom of
association that underlies free trade (Röpke, 1924b, 1944g).
Röpke’s views on the integration of developing nations into a liberal
global economy were dominated by his sense of the indispensability of
particular pre-economic preconditions that allow market economies to
grow and flourish. As early as the late 1920s, Röpke had disputed the
notion that one nation’s growth was necessarily at the expense of others
(1929a). Urging developing nations to eschew the priorities and rationalist outlook of ambitious planners, well-intentioned but uninformed social
reformers, and Western engineers (Röpke [1954d] 1959, p. 235),4 Röpke
suggested that they should recognize that the secrets of wealth-creation
were ultimately found
not in ‘capital’, machine models, technical or organizational recipes or natural
wealth, but in a spirit of order, foresight, combination, calculation, enterprise,
human leadership and the freedom to shape life and things, also in citizenship,
responsibility, loyalty to work, reliability, thrift and the urge to create, and in a
civil middle class, providing the humus for all this – things, in short, which can
neither be conjured up from the soil, nor imported. (ibid., p. 236)
Failure to grasp this resulted in the ‘tragically paradoxical’ situation that
many developing nations’ emancipation from colonialism was assuming
forms guaranteed ‘to shatter the legal, political, and monetary conditions
which alone could attract Western capital’ (ibid., p. 238). Röpke was
thinking of such countries’ embrace of collectivist policies and the subsequent abandonment of many institutions and practices introduced by
Western colonialism.
Unfortunately, Röpke does not indicate how developing nations are supposed to develop all the habits of action noted above. How can a nation’s
integration into a global economy begin from below when the necessary
habits do not, in large measure, exist at national or local levels? Röpke was
unafraid to argue that these habits and their integration into market institutions were unique products of centuries of Western civilizational development – much of which was then being rejected by post-colonial nations.
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Western nations could, Röpke stated, gently urge developing nations to
adopt certain policies while simultaneously critiquing those decisions that
might reduce the possibility of foreign private capital investment. But their
status as the former masters, Röpke acknowledged, limited their ability to
do this. Perhaps, Röpke wrote, both developed and developing nations
had to accept that, even assuming that underdeveloped nations acknowledged the need to develop these habits and institutions, the economic
integration of these countries into a liberalized global economy was likely
to be slow (Röpke [1954d] 1959, p. 235). From Röpke’s standpoint, this
reflected economic, legal and moral realities in developing countries. The
capacity, however, of Röpke’s stance to compete with the promises of the
planners, social reformers and engineers was surely limited.
AN ECONOMY FOR A EUROPE OF NATIONS
Post-war Western Europe’s situation differed greatly from post-colonial
developing nations. The former still possessed much of the ‘humus’ that
Röpke considered essential for any country’s successful integration into
a liberalized global economy (Röpke, 1952c, p. 2), despite Europe’s shift
towards socialist policies (Röpke 1949i). For Röpke’s purposes, his analysis of trends in post-war Western European economic policies – especially
the push for economic integration – allowed him to illustrate the follies of
‘integration from above’ compared to the successes of ‘integration from
below’, and to answer the obvious criticism that it was unrealistic to rely
on the latter. Of all the world’s regions, Europe provided the setting in
which his theories about reintegrating national economies could be best
tested. Europe as a civilization, Röpke maintained, was ‘a real cultural
unit’ (1964f, p. 233). Reflecting on this matter in the immediate post-war
period, Röpke argued that the success of any proposal for European
economic integration depended upon accurate recognition of Europe’s
sociological identity and history (1948g, 1948i, 1948k, 1948l).
A primary political context for Röpke’s thoughts on this subject was an
internal debate within West Germany’s government concerning its attitude toward the European Economic Community (EEC). In 1947, Röpke
suggested that if Germany moved in the direction of embracing the market
economy, it could help ‘create in Western Europe once again a core area
of economic, moral and political health’ ([1947f] 1964, p. 176). Five years
later, Röpke warned against the protectionist tendencies that he associated with the Schuman Plan’s proposal to place French and German coal
and steel production under a common High Authority within the framework of an organization open to other European countries (1952d). Then
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in 1956, Konrad Adenauer indicated his willingness to compromise the
Federal Republic’s market-orientated policies in the interests of building a
wider European economic unit, Franco-German post-war rapprochement,
and West European solidarity in light of Soviet expansionism (Nichols,
1994, pp. 244–6). Though Ludwig Erhard was at one with Adenauer (and
Röpke) in underscoring the need to resist Soviet aggression, Erhard (and
Röpke) increasingly viewed such economic projects as a backdoor to
reintroducing dirigiste policies into West Germany. While Erhard fought
– and lost to – Adenauer at the level of government policy, Röpke pressed
the case against the EEC among other German economic liberals. This
culminated in Röpke’s public attack on the EEC at a 1957 meeting of
the Aktiongemeinschaft Soziale Marktwirtschaft (Röpke, 1957a; Nichols,
1994, p. 346), and his pursuit of the free-market case against the EEC in
the pages of the journal Ordo (Röpke, 1958e).
Röpke’s hostility to nationalism is well documented. The tendency of
nationalists to associate themselves with anti-market economic policies
reinforced this perspective in Röpke’s thought (1925, pp. 97–105, 1945e,
1945i). But diminishing nationalist tendencies did not imply, Röpke
stated, reducing national sovereignty though establishing authoritative
supranational institutions (1966c, p. 122). Instead, post-war Western
Europe’s economic reintegration should proceed from the premise of
‘unity in diversity’ (Röpke, 1956j, p. 30). ‘European integration’, Röpke
wrote, must ‘respect the national personality and cultural individuality
of the countries of the continent if it was not to betray the real meaning
of Europe’ (1964f, p. 234).5 Politically, this vision of ‘l’Europe des patries’
– an idea, Röpke noted, articulated by modern Europeans ranging from
Montesquieu to Charles de Gaulle (Röpke [1954d] 1959, p. 52, 1961d, p.
15, 1964f, p. 235) – translated into a federalism which maximized individual nations’ autonomy (Röpke [1954d] 1959, p. 56). Economically, it
precluded any kind of ‘international planning’ and any economic intervention incompatible with a highly ‘decentralized form of political union’
(Röpke, 1964f, p. 234).
As a practical example, Röpke characteristically invoked Switzerland as
‘a model of unity in diversity’ and ‘a Europe en miniature’ (ibid., p. 233). A
nation composed of four linguistic groups, based on a federalist constitution, and able to derail attempts at centralization through regular recourse
to direct democracy (ibid., p. 241), the Swiss saw no incompatibility
between maintaining these identities and being Swiss patriots (Röpke,
1966c, p. 125). Moreover, Switzerland had abolished its internal customs
barriers as early as 1848, and gradually opened itself economically not just
to the rest of Europe but also to the global economy (Röpke, 1944e, 1964f,
p. 235).
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According to Röpke, the sociological preconditions for reintegrating
Western Europe’s economies lay not in new supranational structures like
the EEC, but rather at the level of shared values. ‘What holds Europe
together’, he argued, ‘in the widest sense is something of a spiritual nature:
the common patrimony of Humanism and Christianity’ (1964f, p. 234).
By ‘humanism’, Röpke did not mean all the various Enlightenments. His
vision was one of thinkers embracing pagans such as Aristotle, medievals
such as Aquinas, Christian Renaissance figures such as Sir Thomas More,
as well as early- and late-modern scholars writing in the grand liberal
tradition including Burke, Smith, Tocqueville and Acton. For Röpke,
‘more important than international institutions and legal documents are
the moral political forces behind the market that are only really effective
within nations’ (1962b, p. 239). No amount of bureaucracy or top-down
planning could substitute for the unity proceeding from Western Europe’s
moral–cultural patrimony of Enlightenment and Judeo-Christian values
(Röpke, 1964f, p. 234). An obvious link exists here with Röpke’s insistence that sustaining a genuinely liberal global economy depended upon
nations freely adhering to the ordre public international, which itself proceeded from Enlightenment thinkers’ secularization of the Res publica
Christiana.
Röpke was too erudite not to recognize that alternative philosophical
outlooks were embedded in West European culture that might be drawn
upon to shape European economic integration in ways that he considered
politically, economically and morally detrimental. Unfortunately, Röpke
commented, much of the EEC integration project was driven by a vision
of ‘a Europe une et indivisible, a Jacobinical, Saint-Simonian Europe, which
might steamroll out of existence everything that is individual in the realm
of political, cultural and social order’ (ibid., p. 240). Economically, Röpke
claimed that this translated into a closed European integration inspired
by rationalist–scientistic philosophies and was expressed in the growth
of highly bureaucratic supranational institutions and the promotion of
what amounted to a ‘bloc economy’ opposed in practice (if not in principle) to the idea of a Europe of nations (1964d). He portrayed claims that
the EEC’s closed integration model represented the inevitable ‘wheels of
history’ as nothing more than an attempt to intimidate opposition to the
spread of protectionist policies across Europe (1959h, pp. 70–73, 77–85).
There were, Röpke noted, precedents for this type of European economic
integration. Attempts to develop a closed European bloc economy had
been made by Napoleon and, in his own way, Hitler, ‘who even used the
same term, Grossraume, which we hear today from our Common Market
Europeans’ (Röpke, 1966c, p. 126). Röpke described the bloc economy
as ‘the collectivist form of international economy’ ([1944b] 1948, p. 228).
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In these instances, economic transactions were confined to a defined
and limited geographical space and subject to highly centralized control
(Röpke, 1951d). The same bloc was also effectively extracted from ‘that
community of price, market, and settlement which formerly the whole
world represented’ (Röpke [1944b] 1948, p. 231).
While Röpke never suggested that the EEC was akin to Napoleon’s
Continental System or Hitler’s Grossraume, he did underline those features of the EEC that, in his view, reflected a bloc economy of the type
similar to the ‘closed Commonwealth economy’ of Lord Beaverbrook’s
‘Empire Free Trade’ (Röpke, 1958d, p. 171). The first was that, for all the
EEC’s claims to be a free-trade community, this was only true in a limited,
even detrimental sense. While the EEC aspired to abolish regional trade
barriers between its members, this was not the same as a general abolition
of tariffs. ‘Thus’, Röpke commented, ‘the price of the integration of the
Six becomes less integration vis-à-vis the rest of the world’ (1958b, p. 17);
the EEC’s closed economic regionalism thus amounted to ‘discrimination
against the rest of the world’ (1964f, p. 239). Moreover, the benefits of
removing regional trade barriers were offset by ‘the extent to which barriers are erected against third countries’ (Röpke, 1958d, p. 171, 1964f). The
very existence of a high tariff wall between EEC members and non-EEC
European states, Röpke stated, would actually further economic disintegration across Europe (1964f, pp. 240–41). There was, for example, every
reason to assume that the EEC’s common external tariff would be higher
than those hitherto maintained by member countries. This would be the
price of membership demanded by the EEC’s stronger, more protectionistinclined nations – most notably France (Röpke, 1958d, p. 171, 1964d),
despite Jacques Rueff’s relative success in restoring monetary discipline
and considerable elements of the market economy following de Gaulle’s
overcoming of ‘the near political anarchy of the Fourth Republic’ (1964f,
p. 238). Röpke conceded that a regionally limited free market might be a
politically expedient first step towards a liberal international economy.
But, he noted, ‘there is a conflict between liberal principles and regionalism, for regionalism does not make sense unless it creates some kind of
preferential arrangement’ (1958b, p. 12).
A second characteristic of the closed Western European integration
model was, Röpke commented, the emphasis on harmonization in the
sense of ‘the leveling upwards, not downwards, of costs’ (ibid., p. 15).
This especially concerned labor costs and social welfare which, Röpke
stressed, was reflected in the position of successive French governments
when it came to negotiating the terms of any European economic integration (1958d, p. 174). This effectively meant ‘the harmonization of inflationary pressures’ (Röpke, 1958b, p. 15, 1958d, p. 175), not least because
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France’s high labor and social costs had nothing to so with superior
economic productivity and everything to do with interest-group pressures
(Röpke, 1950h, 1958b, p. 15, 1958d, p. 174). In this light, there was considerable danger that ‘the “common market [could] turn into a “common
dirigisme” ’ (Röpke, 1958d, p. 174). Strictly speaking, Röpke stated, the
efficacy of free trade did not require equality of costs of production; it was
free trade that actually reduced the differences (1958b, p. 15, 1959g). There
was, however, one ‘downwards’ harmonization associated with closed
integration. Participants, Röpke thought, would tend to oscillate toward
the monetary policy of the least disciplined but most powerful members
(1958b, pp. 14–15).
Given Röpke’s opposition to the closed integration model that he
associated with the EEC, it seems puzzling he was such an enthusiast of
another earlier ‘closed integration’ – the 1834 Zollverein, which, after all,
maintained tariff barriers with non-Zollverein states. Röpke was aware of
the apparent contradiction (1958d, 1963h) and devoted considerable effort
to illustrating why the Zollverein was different. One crucial difference lay
in the realm of ideas. The Zollverein, Röpke stressed ‘was set up in a liberal
era, in a liberal spirit and under the leadership of one country, Prussia,
which, at that time, was pursuing a liberal commercial policy based on
the famous Prussian tariff of 1818, which was a free trade tariff avant la
lettre’ (1964f, p. 235). By contrast, the intellectual context of the EEC’s
development was one of interventionism, dirigisme, and Keynesianism.
The EEC’s permanent heads in 1964 were, Röpke claimed, ‘mostly socialists and ingrained interventionists’, as were most member countries’ heads
of government (ibid., p. 236). The Zollverein’s economic regionalism was
thus part of and a momentum for an accelerating economic liberalization in depth and breadth across the world (Röpke, 1958d, 1964f, p. 237).
Conversely, the EEC’s free-trade commitments were strictly limited and
accompanied by dirigiste pledges.
Then there were the differences in policy settings. The Zollverein was
‘an economic union of countries quite similar in their economic structure
and economic policies’ (Röpke, 1964f, p. 236). The EEC, however, was
attempting to integrate nations with different framework policies, such
as relatively free-market Germany and dirigiste France (Röpke, 1957c),
and countries with dissimilar approaches to welfare (personal responsibility versus extensive state assistance). Further complicating matters were
crucial monetary differences. The Zollverein’s members had all used a
metallic standard. This permitted instant and frictionless adjustment of
disequilibria. The Treaty of Rome, however, allowed EEC members to
revert to exchange controls and other economically disintegrative measures when faced with balance-of-payment troubles. Nor did the EEC
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possess any mechanism to punish fiscally irresponsible members (Röpke,
1964f, p. 236). France, Röpke noted, had refused to accept the EEC’s
authority on such matters as early as 1965 (1966c, p. 123). Despite the
establishment of currency convertibility throughout much of Western
Europe in 1958, the EEC lacked a common money and credit policy,
because monetary policy remained meshed in each state’s particular
economic and financial policies. Resolution of this issue required either
the establishment of a supranational European state that could impose a
uniform monetary system (Röpke, 1958g, p. 58, 1966c, p. 123) or the reestablishment of something like the gold standard.
Consistent with his distrust of top-down international planning,
Röpke’s opposition to a closed integration strategy for European economies went hand in hand with his deep skepticism of the establishment
of supranational European institutions. The European Coal and Steel
Community created by the Schuman Plan6 had produced large bureaucracies (Röpke, 1955c, pp. 75–80), only to be surpassed, Röpke argued, by
the European Economic Commission, which he labeled ‘an enormous
administrative machine’ (1964f, p. 238). Röpke was not opposed to the
non-economic dimensions of the Schuman Plan and the Treaty of Rome,
especially their furtherance of Franco-German reconciliation. He was
simply dubious that the closed integration models would contribute to
this end. Röpke’s reservations, for example, about the ‘shelter of the
quasi-autarchic system of the EEC against agricultural imports from third
countries’ (ibid., p. 240) was not only based on its damaging effects upon
international economic integration. He also thought that one of the goals
of this policy – to establish Germany as a guaranteed outlet for growing
French agricultural surpluses – would eventually produce conflict between
the French and German agricultural sectors: ‘Either the French win, in
which case many thousands of German farmers will know that they owe
their ruin to the French, or the Germans win, in which case the French
farmers will curse out the Germans’ (ibid.). Such was the logic and cost
of making imports of non-European agricultural products prohibitively
expensive.
A DIFFERENT EUROPEAN INTEGRATION
The form of economic integration that Röpke preferred for Europe
conformed to his preference for a ‘bottom-up’, open and associative
integration model. A small number of European countries such as West
Germany and Switzerland, Röpke argued, had ‘achieved equilibrium with
the rest of the world and thus a de facto convertible currency’ through
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tight monetary policy and unilateral economic liberalization ([1954d]
1959, p. 263, 1964h, pp. 187–98). Röpke acknowledged that such policies
were often difficult to implement and less popular than protectionism and
welfare states (1962f, pp. 35–6). But neither market economies nor monetary discipline, he insisted, should be ‘sacrificed on the altar of Europe’
([1954d] 1959, p. 264).
Röpke was not opposed in principle to loose international structures
that might help European countries down the path of economic integration. Structures such as the Organization for European Economic
Cooperation (OEEC) and the European Payments Union (EPU) were
not, from Röpke’s standard, perfect. The EPU, he suggested, emerged
because exchange controls meant that European countries required a
means of settling balance-of-payment issues until European and world
currency convertibility was achieved, thus rendering the EPU superfluous
(ibid., pp. 231–2, 262, 1954f, 1959a). Crucially, however, the EPU lacked
the EEC’s inclination to bureaucratic dirigisme (Röpke, 1958e, pp. 35–45).
Likewise, the OEEC lacked the Coal and Steel Community’s complicated
structure, thereby allowing the former to ‘move, when it is desired, from a
preferential to a general non-discriminatory system’ (Röpke [1954d] 1959,
p. 262). Moreover, given its focus on securing free trade (Röpke, 1958h,
p. 173), the OEEC was not concerned with raising a high common tariff
of European economies against other countries (ibid., p. 171). In both
regards, the OEEC and the EPU represented a kind of ‘open regionalism’;
each sought to build bridges from regional to universal economic integration in ways foreign to the EEC’s closed-regionalist approach (Röpke,
1960h, 1964f, p. 238).
Throughout Röpke’s writings on international political economy, one
senses his essential discontent with virtually all forms of international
economic integration that do not closely replicate the manner in which
European economies became liberalized and integrated in the nineteenth century. Like Erhard, Röpke endorsed the European Free Trade
Association (EFTA) – of which Switzerland was a member – as a preferred structure for economic integration (Nichols, 1994, p. 346), not least
because it focused on free trade, lacked a large bureaucracy, and refrained
from interfering with its members’ domestic economic policies. The
EFTA’s genius, according to Röpke, was that it embodied a ‘liberal’ ‘associative’ non-political approach that focused on coordination instead of
the EEC’s ‘imperial’ political model of subordination and discrimination
against non-members (Röpke, 1964f, pp. 241, 243). France’s 1963 veto
of Britain’s entry into the EEC, for example, had proceeded largely from
de Gaulle’s particular political concerns about Britain (Röpke, 1963f,
1966d). Thus, Röpke noted, the EEC’s political character had inhibited a
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Western European country from being integrated into the EEC’s economic
structures. ‘If it had been a question of admitting Great Britain into the
definitely non-political club of the EFTA’, Röpke observed, ‘it is hard to
imagine that France, supposing she was a member of this group, would
have raised strong objections’ (1964f, p. 242).
A potential weakness in Röpke’s preference for free association is that
it left the authority of nation-states untouched. This seems at odds with
Röpke’s oft-expressed concerns about the nation-state’s power which
manifested itself most obviously to him in the form of war in international relations and collectivism in domestic economic affairs. Such criticism, however, fails to recognize that Röpke had no reservations about
sovereignty per se. Neither war nor economic nationalism, in Röpke’s
view, flowed from the fact of sovereignty. ‘To be for or against national
sovereignty’, he wrote, ‘is immeasurably less important than to be for or
against ideas and policies likely to emphasize or diminish the practical
importance of sovereignty’ (1966c, p. 126). The real problem was how
some governments had exercised the powers associated with state sovereignty. Since the Renaissance, this had been powerfully shaped by what
Röpke called ‘Machiavellism’. This implied that states should only follow
treaties as long as it appears immediately advantageous, and not refrain
from lying, breaching contracts, and using force to achieve national ends.7
Throughout history, Röpke recognized, many politicians had lied and
cheated in the pursuit of national interest (1953g, p. 6, [1954d] 1959, p.
33). There were, he remarked, ‘few rulers who, like Louis IX, also deserve
the title of Saint’ ([1954d] 1959, p. 42). But ‘Machiavellism’ concerned the
formal abandonment of any sense of moral constraint and the justification of such acts by a type of ‘scientific positivism’ that tried to prove that
these choices – often couched in terms of ‘reasons of state’ – were justified
by allegedly objective facts such as ‘constant historical values’ or ‘lines of
geographical force’ (ibid., p. 33).
For Röpke, this is not only bad morality but also bad politics.
Machiavellism’s claims to being realistic were belied by the fact that it
seemed to lead inexorably to ‘a heap of ruins’ (Röpke, 1953g, p. 9) and
reduced the state, ‘in the words of St. Augustine’, to ‘nothing more than
a great band of robbers’ (Röpke [1954d] 1959, p. 36). This did not mean
that Röpke adhered to the idealist school of foreign affairs. Idealism, he
argued, tended to result in ‘impractical optimism and moralistic doctrinarianism’ (ibid.).8 It turned modern wars into ideological expeditions,
and, in the name of justice and democracy, tended to so disturb ‘the sensitive political equilibrium that bad has turned to worse’ (ibid., pp. 36–7).
Sovereignty, Röpke held, would cease to be an issue if each national
government freely subordinated its action in the international sphere to
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163
‘the rules of international law and the community of civilized nations’ and
the obligations established by international treaties, all of which involved
‘observing the first principle of international law which declares: pacta sunt
servanda’ (1966c, pp. 125–6). The ordre public international thus formed the
indispensible normative basis for a liberalized and truly global economy
of sovereign states. It is here that one might perhaps find an answer to
Sally’s suggestion that Röpke does not really address the question of
how unilateralism and reciprocity can fruitfully connect (1998, p. 147).
The reciprocity lies in sovereign states’ voluntary agreement to adhere to
certain international moral and political rules that govern the economic
exchanges into which agents based in different sovereign states enter.
In this sense, Röpke’s view of international political economy could be
described as that of an idealist. He believed that nation-states are capable
of freely embracing these rules in the interests of restoring a positive nexus
between the free movement of things, capital and people, and the domestic
economic policies of nation-states, so that something akin to the pre-1914
global liberal economy could reemerge. But Röpke also embodied a type
of realism because he thought that nation-states do play a role in the international economy, and that it is unrealistic – even dangerous – to assume
that supranational institutions can assume an equivalent role in a world
economy (1949e). Such institutions, for Röpke, were too far removed
and detached from the humus of society and bound to pursue economic
policies underpinned by abstract scientism and rationalism in an effort to
control the complex world economy.
TOWARD AN ASSESSMENT
As this penultimate chapter demonstrates, Röpke’s approach to international economic relations closely conforms to the normative principles,
economic logic and sociological emphases that he applies to national
economies, but without necessarily embodying the framework of his neoliberal theory. The consistencies do not cease here. Certainly Röpke sees
a far less prominent role for the state in international economic relations
than in domestic economies. At the same time, Röpke believed that unless
sufficient numbers of governments consciously made a number of basic
ordering choices, either unilaterally or in concert, about their countries’
stance toward particular international questions, neither liberty nor order
would prevail in the international economy.
Röpke’s thinking on international political economy embraces a broad
canvas. It involved lengthy reflection on matters that initially seem remote
from economics but which, as Röpke illustrates, played a critical role in
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the rise, fall, and then partial reemergence of a global market economy.
This sociological aspect of Röpke’s analysis is complemented by his
underlining of strong normative arguments. His concerns about international dirigisme and bloc economies are driven as much by worries about
their impact upon liberty and peace as their consequences for economic
growth. Above all, Röpke’s international political economy is informed
by what might be described as a species of moral realism that avoids both
realpolitik cynicism and the naivety of Utopian idealism. In this sense,
synthesis is as much the leitmotif of Röpke’s analysis and prescriptions for
the international economy as it is for national economies. The attraction
of synthetical scholarship is that it avoids the narrow specialization that
can hinder breadth of understanding. The risk is that a certain precision in
analysis can be lost. In many respects, these are the crucial issues around
which assessment of Röpke’s political economy as a sufficiently coherent
set of propositions revolves.
NOTES
1. Oddly enough, Röpke notes, economic liberalism emerged as a force in Britain partly
because Queen Victoria’s consort, Prince Albert, had absorbed Smith’s insights while
growing up in Germany ([1946k] 1969, p. 102).
2. Röpke viewed the International Monetary Fund as having proved ineffective as an international credit institution and positively harmful as an international monetary authority
([1954d] 1959, p. 224).
3. In this sense, Röpke thought that the USSR created the same dilemmas for a liberalized
global economy as had Nazi Germany and its collectivist, autarkic and ultimately imperialist policies of the 1930s (ibid., p. 233).
4. Though it is a revised edition of Internationale Ordnung ([1945d] 1947), International
Order and Economic Integration ([1954d] 1959) is a sufficiently different text to merit
being treated here as a separate publication.
5. Röpke ruled out any economic integration with Central-East European countries while
they were subject to Communist regimes. The Communist equivalent of the common
market (COMECON), Röpke held, was incapable of integration into Western Europe,
partly because it was ‘an amorphous and incoherent congeries of more or less badly functioning clearing agreements combined with monetary disintegration brought about by
strict exchange control, arbitrary and therefore “wrong” exchange rates, and distorted
price–cost relationships’; and partly because it was ultimately controlled by ‘one powerful and ruthlessly dominating country, that is, the Soviet Union’ (1966c, p. 128).
6. Röpke acknowledged that one inspiration for the Steel and Coal community was the
desire to prevent monopolies and cartels from arising in this industry. Röpke thought,
however, that it was handicapped by the fact that ‘the production branches affected
remain integral parts of separated national economies’, cut off from each other by economically nationalist policies and monetary exchange controls ([1954d] 1959, p. 229).
7. Röpke considered it an open question whether all these views can be attributed to
Machiavelli himself (ibid., p. 33).
8. Röpke dismissed those who associated Christianity with idealistic visions of international
order by reminding his readers of the Christian tradition’s warnings against imagining
that the eternal peace of heaven can be replicated on earth (ibid., p. 40).
8.
Between humanism and social
science
Wilhelm Röpke exhausted himself offering – to those trapped in socialist–
collectivist thought, to those unable to escape such thought, to all those involved
in the constitution or glorification of the totalitarian state, to those who have comfortably excused themselves from responsibility or pangs of conscience – words of
transformation, offering them once more firm ground under their feet and an inner
faith in the value and blessings of freedom, justice and morality.
Ludwig Erhard (1967, p. 22)
One of the last articles penned by Wilhelm Röpke before his death in 1966
– ‘L’état dépensier’ (1967b) – was published posthumously in a collection
of essays honoring his friend and fellow economist Jacques Rueff. Rueff’s
life and work enjoyed curious parallels to Röpke’s own odyssey. Like
Röpke, Rueff devoted much time to rethinking economic liberalism, most
notably in L’ordre social (1945) but also stood firmly against the postwar Keynesian consensus. Both men served as advisors to governments,
with Rueff spending much of his career in a variety of official positions.
Each played a vital role in saving their countries from an economic abyss.
Ten years after Röpke helped to prepare the way for West Germany’s
economic liberalization, France adopted Rueff’s proposals (known as
the Rueff–Pinay Plan) for economic reform in 1958. These successfully
balanced France’s national budget and secured the franc’s convertibility.
Intellectually Röpke and Rueff shared an unwillingness to be constrained
by disciplinary boundaries. Neither accepted the fragmentation of economics as a moral and social science into a range of disciplines and subdisciplines that began not long after Adam Smith’s death in 1790, but
which accelerated after 1946.
Röpke’s 1967 article is, however, also a fitting epitaph to his work
because it underscores the synthesis at the heart of his political economy.
It begins by stressing the threat posed to monetary stability by the state’s
rapidly expanding share of national economies. But, Röpke then illustrates
how this economic development slowly alters the relationship between the
state, non-state associations, and the individual by undermining personal
liberty and subtly changing the culture of ostensibly free societies (1967b,
pp. 237–8). Consistent with Röpke’s previous writings, Keynes is squarely
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identified as ‘l’initiateur’ (ibid., p. 237) of these changes. Röpke’s blend
of economic and moral reflection continues with a fierce critique of John
Kenneth Galbraith’s The Affluent Society. Describing Galbraith as one of
the chief proponents of expanding government finances, Röpke argued
that such policies were a major cause of the chronic deficit in the United
States’ balance of payments (ibid., p. 242), a point on which he previously
elaborated (1963c), as well as a general American shift toward what he
called ‘fiscal socialism’ (1963j). But Röpke’s sharper critique of Galbraith
is that the latter’s attack on opulence in developed countries was driven not
so much by worries about a consumerist culture but rather by Galbraith’s
conviction that the consumer economy effectively robs governments of
the financial resources they require to fulfill a myriad of tasks that, in
Galbraith’s view, the state must undertake (Röpke, 1967b, pp. 244–6). In
this connection, Röpke was struck by the strength of Galbraith’s antipathy toward those aspects of life that belong to the non-state segment of
society, such as ‘the market, competition, prices, and individual responsibility’ (ibid., p. 248), and his subsequent advocacy of policies ranging
from state educational monopolies to vast public housing projects (ibid.).
According to Röpke, this normative presupposition on Galbraith’s part in
favor of the ‘public’ and against the ‘private’ was essential to understanding Galbraith’s prescriptions for growing state interventionism.
While Röpke’s 1967 article epitomizes the interplay between economic
analysis and normative concerns that defines his thought, questions
remain concerning the overall coherence of Röpke’s political economy. In
1986, one Röpke-sympathetic economist wondered if the modern elements
in Röpke’s thought were compatible with the more traditional aspects
(Ancill, 1986, p. 39). Assessing Röpke’s political economy, however, goes
far beyond the issue of the success or otherwise of Röpke’s attempt to fuse
‘classical liberal’ and ‘conservative’ concerns. It embraces other questions,
including his understanding of the normative and positive dimensions of
economic science, not to mention the internal consistency of his neoliberal
theory.
RECOVERING ‘OLD ECONOMICS’
Much commentary on Röpke’s post-war thought, especially that published in the English-speaking world, notes his critical view of Keynes’s
effect upon the economic way of thinking and ‘Keynesianism’ upon
economic policy. Yet such commentaries rarely enter into lengthy discussion of the reasons for Röpke’s position beyond noting his concern
that it would lead to excessive government intervention. But, Röpke’s
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dispute with Keynesian thought goes beyond the appropriate scope of
the government’s economic role. Röpke’s argument with Keynes and his
self-identified successors goes to the heart of the question of what economics ought to be. The expansive role for government typically associated
with most Keynesian economic policies is directly linked by Röpke to the
very nature of Keynesian economic science itself. Features of post-war
‘new economics’, such as its focus on macro-aggregates and its quasimathematization of economic inquiry, helped to bolster claims that governments could manage the economy and therefore raised expectations
that the state should indeed try to do so. Governmental and intergovernmental institutions committed to Keynesian policies wanted studies that
lent empirical credibility to these policies. A type of nexus thus developed
between the post-war economic profession and governments pursuing
Keynesian policies. To this extent, Röpke thought many economists had
effectively compromised their intellectual integrity.
But even more dangerous, in Röpke’s view, were the effects of the implicitly positivistic underpinnings of the new economics upon the coherence of
economic inquiry and policy. One of Röpke’s more significant post-war
intellectual contributions was to illustrate how attempts to eliminate normative points of reference from economic science actually undermined
the integrity of the positive dimension of economic investigation. A commitment to values ought, Röpke believed, to be the starting point of the
economist’s analysis, even if it was only the simple quartet of propositions
that truth exists; it is knowable; it is worth knowing; and error should be
identified and avoided. Unless these basic normative premises are working
assumptions of economic science, including its more abstract theorizing,
then the coherence of the more empirical–positive dimension of economic
reflection becomes questionable. By underlining this intrinsic dependence
of empirical economic inquiry upon normative principles, Röpke went
some way to rehabilitating economics as a moral science, but without
undermining that dimension of economics that properly belongs to the
sphere of positive science. More generally, it represented a harkening-back
to the Scottish approach in which there was no rigid distinction between
the domains of social science and moral normativity (Haakonssen, 1981).
For Scots such as Adam Ferguson, it was not just that the identification of
particular normative concerns was considered integral to the explanation
of social phenomena; instead, the aim of Scottish social science was both
to comprehend and evaluate man so that we ‘endeavor to understand what
he ought to be’ (Ferguson [1792] 1973, 1.1–2).
An unanswered question is why Röpke singles out Keynes as particularly responsible for the direction of post-war economics and its interventionist inclinations. In his analysis of Keynes’s thought, Gilles Dostaler
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presents a strong case to suggest that ‘Keynes was not the only inspiration
behind the revolution that bears his name’ (Dostaler, 2007, p. 255). Other
economists, such as the Stockholm school, were proposing Keynesian-like
arguments about effective demand as early as the 1920s (ibid., p. 256).
Then there is the fact that the mathematization of ‘Keynesianism’ was
largely pioneered by Sir John Hicks in 1937 (ibid.). It is also true that much
of the responsibility for the claim – that Röpke regarded as economically
and morally dangerous – that there was a clear, predictable and consistent
relationship between high inflation and low unemployment owes as much
to A.W. Phillips (1958) and Paul Samuelson and Robert Solow (1960) as
it does to Keynes. Further complicating the picture is the emergence of
different ‘Keynesian’ schools after the publication of the General Theory,
often with rather different emphases despite their mutual anxiety to claim
Keynes’s mantle.
Röpke’s own writings identify the positivist and scientist mentality
as preceding Keynes by many decades. Röpke was also willing to make
distinctions between Keynes and his disciples, even if he rarely elaborated
on the differences. So why did he single out Keynes for such direct and
increasingly polemical criticism? The answer may be threefold. First,
Röpke was deeply concerned that Keynes’s thought lent legitimacy to
inflationary policies. In the late 1950s, Röpke lamented that:
The profound economic and social disorder which faces us in this inflation
was prepared by an intellectual one. Without Keynes, or rather, without The
General Theory of Employment, Interest and Money . . . nations would be richer
to the extent that the soundness of their economy and currency would be less
impaired by inflation. Insofar as the full danger of inflation is now generally
recognized, there may be wider understanding for the reasons why the writer
and his friends quickly took a decisive stand against the Keynesian doctrines
when the danger of inflation became apparent. ([1958f] 1998, p. 194)
Second, whatever the differences between Keynes and the various forms
of Keynesianism that emerged after the General Theory’s publication,
Röpke did not regard these as diminishing the fact that Keynes truly was
the father of the new economics. The radical character of Keynes’s General
Theory lay, Röpke believed, not only in its policy prescriptions but in its
attempt to recast the very foundations of economics. As the preface of the
first English language of the General Theory itself states: ‘For if economics is at fault, the error is to be found not in the superstructure, which has
been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises’ (Keynes, 1936, p. x).
Third, Röpke was acutely aware of the totem-like status that Keynes
was posthumously accorded in the economics profession and among
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policy-makers in the Western world. Twenty-five years after Keynes’s
death, the hitherto free-market-inclined President Richard Nixon did not
hesitate to state, ‘I am now a Keynesian in economics’. In short, Keynes
was a powerful symbol of the new economics ardently embraced throughout the non-Communist post-war world. To shift public opinion, Röpke
may have believed that it was necessary to articulate much of his negative
assessment of the new economics through direct and increasingly polemical critiques of Keynes so as to call into question the direction, methods
and priorities of post-war economic science and policy. Throughout his
life, Röpke was never content to confine his arguments to the academy. He
understood the value of engaging broader audiences in the wider public
square and did so regularly, primarily in German and Swiss newspapers.
This form of engagement, however, requires a different style of argumentation and rarely allows for the type of careful distinctions more common
in formal academic treatises.
SAVING LIBERALISM?
Röpke’s willingness to engage wider audiences first manifested itself in
his articles defending classical liberal philosophy and economic liberalism in German newspapers in the 1920s and 1930s. Over time, Röpke’s
efforts to rethink and reform liberalism occupied more of his attention
than developments in economic science per se. This work took place on
two levels. The first concerned Röpke’s effort to explore economic liberalism’s historical and philosophical underpinnings and his attempt to
bolster these without undermining the efficacy of market processes and
institutions. In this connection, perhaps Röpke’s most forceful point was
that the crisis faced by economic liberalism following World War I had
its roots in the association of much liberal thought with rationalism and
scientism. This was not an uncommon conclusion among many liberal
thinkers – including Hayek – in the 1930s and 1940s. The weakest part of
Röpke’s analysis was his oscillation about Smith’s place in economic liberalism’s association with rationalism. Röpke acknowledged that Smith’s
interests ranged far beyond the strictly economic realm and that he could
hardly be accused of economism. In other places, however, Röpke indicated his agreement with Rüstow that Smith had somehow contributed
to the market economy’s ties to rationalist thought. This position is more
difficult to defend. Certainly the question of whether Smith’s vision was
sufficient to sustain the emerging commercial order that spread across the
globe in the nineteenth century remains a subject for debate. But while
Smith’s ‘invisible hand’ may well have reflected Deistic tendencies on
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Smith’s part, there is little doubt that Smith’s political economy presupposes a more complex philosophical and sociological context and set of
foundations than suggested by Rüstow.
Röpke’s difficulties with Smith, however, should not obscure the fact
that Röpke went some way to show how the institutions of the market
economy could be rooted in deeper historical and philosophical foundations than nineteenth-century rationalism. This much is underlined by the
depth and breadth of Röpke’s effort to ground the market economy upon
a type of Christian humanism (what might be called the Christian liberal
tradition associated with Acton and Tocqueville) acceptable to many
Catholics, a broad spectrum of Protestant opinion, and a good number of
secular-minded people and which was itself rooted in the grand tradition
of Western liberalism. In part, this may have reflected the effort of Röpke
and others (especially German ordoliberals and sociological neoliberals)
to forge strategic alliances between economic liberals with mixed views
of Christianity, and Christians wary of nineteenth-century liberalism’s
rationalist undertones. For Röpke and some post-war liberals, such alliances were critical to resisting the spread of totalitarianism. Hayek, for
example, had been especially impressed by the dominant role played by
Catholics in the resistance in Germany to National Socialism after 1933
(1992, p. 210). But in Röpke’s case, it was also an indication of his conviction that it was historically incongruous to try to separate the market
economy from the Western classical–Christian–Enlightenment tradition
from which it emerged.
One difficulty with this approach is that this ‘Christian liberal’ tradition
has always occupied an uneasy place among both Christians and classical
liberals. The fact that most participants at the first Mont Pèlerin meeting
rejected Hayek and Röpke’s proposed designation of their group as the
‘Acton–Tocqueville Society’ reflected many liberals’ unease with this line
of thought. Frank Knight, for example, expressed strong objections to the
Mont Pèlerin Society being named after two Roman Catholics (Hartwell,
1995, p. 44). Over time, it also proved difficult for Röpke and other neoliberals to keep Germany’s Christian Democrats from drifting away from
core neoliberal economic commitments. But at an even broader level, the
viability of Röpke’s project surely depends upon sufficient numbers of
people believing that there is a distinct Western tradition and that it is
worth preserving. Röpke died two years before the cultural upheavals of
1968. Few would question that this contributed to widespread questioning of the Western tradition outside the more radical circles to which such
skepticism had previously been largely confined. The seeping of these
attitudes into elite and popular European and North American culture
must surely raise questions about the feasibility of Röpke’s particular
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171
proposals for facilitating more stable non-rationalist foundations for the
free economy in these parts of the world.
A further complication arising from Röpke’s schema is that it could
be read as suggesting that non-Western cultures and civilizations need to
embrace Western moral norms and expectations if they desire to develop
the habits and institutions required to create and sustain market economies. On one level, this claim possesses empirical merit. It is surely undeniable that the market economy first arose in the West and has tended to
flourish and persist in countries firmly rooted in the Western tradition,
especially those belonging to the more specific Anglo-American strand.
These facts, however, create dilemmas for countries with different civilizational heritages. From the standpoint of Röpke’s political economy,
if non-Western nations are to embrace the market economy successfully,
then they also need to embrace much of the morality, culture and institutions of Western civilization. This may well be the case. But that does not
make such transitions any easier. Nor does Röpke explain precisely how
they should occur.
One way that Röpke could have avoided these dilemmas may have been
to underline his emphasis upon grounding the market economy on natural
law foundations. This natural law dimension features prominently in
Röpke’s reflections on the international economy. These contain extensive
references to natural law thinkers such as Grotius, Vitoria, Pufendorf and
Suarez, not to mention concepts often associated with the broad natural
law tradition such as the ius gentium and the ordre public international.
Yet this emphasis on natural law is curiously absent from Röpke’s reflections on national economies and dwarfed by his attention to historical–
sociological context. In some respects, the ordoliberalism of Eucken
and Böhm might be viewed as more attuned to a natural law emphasis,
inasmuch as the concept of ordo is more thoroughly integrated into their
study of and recommendations for the economic order.1
The validity of natural law thinking has always been contested. Yet
few would question that it remains one of the more formidable alternatives to the positivism so detested by Röpke. The advantage of natural
law is that it purports to be based on propositions theoretically knowable
by all people through the fact of their possession of reason. If Röpke
had invested more of his intellectual energy in incorporating natural law
insights into his work, it may have allowed him to deepen and solidify
his critique of positivism’s influence upon economic science, liberal philosophy, and Keynesian and socialist economic policies. It may also have
permitted him to develop non-positivistic foundations for liberal economic institutions and practices that were less reliant on culturally specific
propositions and thus less open to potential charges of historicism.
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DILEMMAS OF COMPATIBLE INTERVENTIONISM
The second area in which Röpke attempted to reform liberalism involved
significantly rethinking the state’s role in ways that sought to escape the
limitations associated with more paleo-liberal positions, but without
opening the door to the type of interventions that undermine the market
economy. Röpke’s work on business cycles illustrates that this aspect
of his political economy preceded his efforts to revise economic liberalism’s philosophical foundations. He was not the only economic liberal
to rethink the state’s role in such a manner. The circumstances of the late
1920s and 1930s made such an exercise almost inevitable. Eucken later
recalled that in 1931 he had reversed his position in favor of a deflationary policy and specifically advised the German government to adopt
measures such as credit expansion and lowering interest rates because,
given the reality of five million unemployed, the alternative was ‘the end
of the Republic’ (1951, p. 65). Even as confirmed a paleo-liberal as Mises
recognized that the political dynamics of the time made this policy shift
unavoidable. As he later remarked:
We may admit that for the British and American governments in the thirties
no way was left other than that of currency devaluation, inflation and credit
expansion, unbalanced budgets and deficit spending. Governments cannot free
themselves from the pressure of public opinion. (1966a, p. 793)
Mises believed, however, that government officials should resign rather
than carry out such policies (ibid.). Other economic liberals took a different view. They too were disturbed that many politicians and economists
on the right and the left were increasingly willing to promote extensive
interventionism. In some instances, a number of these liberals thought that
there were sound moral and economic reasons for specific types of intervention, not least because they regarded competition as essential but not
sufficient for a free social order. But whatever their differences about these
specifics, they were perturbed by the fact that most schemas for intervention contained no framework or guiding set of principles that limited the
scale of intervention and allowed policy-makers to distinguish between
helpful and disruptive interventions into a market economy.
In Röpke’s case, this involved the gradual elaboration of a vision of economic liberalism that sought to incorporate precisely such a framework,
accompanied by efforts to bolster the sociological humus that played a
crucial role in dulling competition’s socially corrosive effects. On several
levels, however, Röpke’s neoliberalism is marred by unresolved tensions.
At different points, Röpke changed his mind about the compatibility of
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173
various forms of intervention with market economies. His position on antitrust laws is a good example. As time passed, Röpke’s skepticism about the
efficacy of various interventions seems to have increased. This suggests
that Röpke became more rigorous in applying the criteria of compatible
intervention, or found the results unimpressive, or quietly concluded that
the very concept of compatible interventions was insufficiently stable to
provide consistent guidance for state involvement in the economy.
A related problem is the question of whether the third (economic and
social policy) and fourth (social policy) elements of Röpke’s neoliberal
theory undermine its first (framework) and second (market) elements. As
noted, Röpke occasionally wondered whether his neoliberalism would
result in the state’s undue expansion. One is also struck by the number
of times Röpke suggested that a policy’s efficacy often depends upon the
wisdom of its implementers. In one sense, this is true. Prudence is surely a
highly valued quality in any politician or civic official. The first and second
elements of Röpke’s neoliberalism, however, were supposed to limit the
state’s room for discretionary action and thus reduce reliance on the personal qualities of whoever is in charge of economic policy at a given time.
By contrast, the third and fourth elements of Röpke’s neoliberalism allow
significant room for discretion on the part of elected and appointed public
officials, and there is no way to guarantee their prudence.
It may well be that there is no simple way to reconcile Röpke’s emphasis upon adherence to rules with his desire to address socio-economic
problems that, if left to fester, might undermine market economies. But
this need not be attributed simply to his concern for social policy. For all
their emphasis on rules and procedures, it is equally unclear that Eucken
and Böhm’s ordoliberalism adequately addresses the issue of expansive
state power. Like Röpke and Rüstow, they wanted a state strong enough
to resist the efforts of interest groups to undermine market competition
and free contracts. But, given the right set of circumstances, a state strong
enough to guarantee Eucken and Böhm’s fundamental and constitutive
principles might well be strong enough to usurp these rights and institutions. Indeed the ordoliberals’ regulative principles (anti-monopoly controls, redistributive incomes policies, minimum wages and so on) arguably
provided ample scope for interest groups, aided by compliant politicians,
to undermine free prices and competition.2
A SMITHIAN RÖPKE
The strength of Eucken and Böhm’s approach to political economy is the
manner in which it integrates jurisprudential analysis and philosophical
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Wilhelm Röpke’s political economy
insights into economic reflection. Ordoliberalism, at least in the form
pioneered by the Freiburg school, paid less attention to social and historical context, perhaps because of Eucken and Böhm’s critical view of
the German historical school’s tendency to historicism. Röpke, however,
was more sympathetic to the efforts of Rüstow and Müller-Armack to
draw upon historical sociology to develop economic theory. This need not
imply, however, that Röpke’s political economy involved an effort to reconcile the historical and Austrian schools. Instead, his approach to political economy may be viewed as drawing upon a somewhat older tradition
– that of Adam Smith and the Scottish Enlightenment.
Smith’s vision of political economy involved a strong positive dimension insofar as he was interested in articulating theories to explain a
variety of economic occurrences and developments. His Wealth of Nations
is, however, replete with historical commentary. Occasionally the detail
verges on the arcane. But Smith did not examine these matters because he
was trying to identify which economic arrangements might suit a particular country at a certain point of history. Instead his attention to history
has a strongly normative–sociological purpose: to identify the moral, historical and social preconditions for the realization and maintenance of the
civilization of natural liberty that, to Smith’s mind, was desirable for all
people, regardless of time, place and culture. It was not that Smith necessarily thought that there were no natural rights owed to human beings by
virtue of being human. For Smith, it was more important to consider that
most people have not enjoyed these liberties for most of human history.
This meant that attention should be directed to how and why certain
habits and institutions had emerged to secure, protect and promote these
freedoms. In this sense, the descriptive and normative dimensions of
Smith’s political economy are deeply intertwined. For Smith and other
Scots, utility was important but so too were liberty and virtue if humans
were to engage in human flourishing (Hanley, 2009, p. 30). From this
standpoint, Röpke’s historical–sociological liberalism begins to look
rather ‘Smithian’ and ‘Scottish’ in character.
Certainly Smith and Röpke approached political economy from different directions. Röpke began by focusing on more strictly economic subjects before embracing historical, philosophical and religious dimensions.
Smith, by contrast, began with natural theology, philosophy, rhetoric and
jurisprudence before entering the realm of political economy. The contexts
in which Smith and Röpke worked and the phenomena to which they were
responding also varied. Smith’s work reflects and anticipates the rise of
modern commercial society. Röpke was seeking to save and reinvigorate
this order amidst the ashes of nineteenth-century liberal capitalism, two
world wars, and the modern state’s unprecedented expansion. Yet while
Between humanism and social science
175
each man worked in very different historical periods, their respective
political economies are deeply attentive to the manner in which moral
habits, traditions, customs and law help maintain and order the processes
and institutions associated with the market economy. In this light, features of Röpke’s thought, such as his not-always successful efforts to find
market-compatible ways of maintaining particular segments of society in
the face of market competition, seem less idiosyncratic. Likewise, Röpke’s
willingness to think about the state’s economic role in a non-laissez-faire
manner seems more attuned to Smith’s political economy than what might
otherwise be supposed. As Jerry Z. Muller notes, Smith’s writings unambiguously attest to his conviction ‘that individual liberty requires a government strong enough to protect citizens from one another, and a system
of regular and impartial justice which limits the use of government power
and protects the rights of the citizen against the sovereign’ (1993, p. 125;
cf. Haakonssen, 1981, pp. 131–3).
A significant difference between Smith and Röpke may lie in their
understanding of ‘order’. Röpke’s political economy embodies the idea
of ‘ordered anarchy’. This insight parallels Smith’s invisible hand and
Ferguson’s axiom concerning social order emerging as a result of human
action rather than human design. For the Scots, people choose and act
in particular ways without necessarily being conscious that their microactions contribute to the development of a stable and simultaneously
dynamic macro-order. Yet unlike the Scots, Röpke also insisted that a
society or political order also had to make a basic ordering decision for
the market. Perhaps the difference may be explained by the particular
historical situation faced by Röpke. Given the rising collectivist trends
of the twentieth century, one could not assume that market economies
would emerge spontaneously and be maintained in place. This meant
that a definite political decision for the market and against socialism was
indispensible, such as occurred in West Germany in 1948.
As this book attests, there is much about Röpke’s political economy
that can be criticized. It may well be that, like Smith, Röpke attempted
to do too much. It is often forgotten that Smith aimed at producing a
comprehensive science of man of which economic science formed a major
part – but only part. Smith never completed his grand design to his own
satisfaction, and requested that his unfinished manuscripts be burnt
when he died. Röpke’s interests and concerns ranged as widely as those
of Smith. He did not hesitate to opine on a breadth of subjects. The price
was that, despite his prodigious scholarly output, particular aspects of his
political economy remain undeveloped. To be fair, Röpke was also intent
upon responding to the manifold challenges of his time. This may have
caused him to move on from particular subjects more quickly than he
176
Wilhelm Röpke’s political economy
should have, thus leaving important questions unanswered. That Röpke
did not resolve these problems does not mean that they are not amenable
to resolution. Nevertheless they remain questions that cannot be avoided
by anyone proposing policies that draw heavily upon Röpke’s political
economy.
RÖPKE’S CHALLENGE
When Röpke completed his last major book, A Humane Economy, he concluded on a somewhat pessimistic note. He spoke of the ‘dehumanization
of theoretical economics’, by which he meant the reduction of economic
science to ‘physics’ which flowed from stripping economics of all ‘its
psychology, ethics, intelligence – in short, its human elements’ ([1958f]
1998, p. 258). This was especially evident in the way the new economics
largely ignored the figure of the entrepreneur who was ascribed ‘the role
of mere automata’ (ibid.) because entrepreneurship could not be captured
in mathematical language (Röpke, 1945f, pp. 107–8). A similar dehumanization, Röpke suggested, was occurring on the level of economic policy.
Everywhere he looked, government intervention was steadily eroding economic liberty and market economies, even in ‘its model countries’ ([1958f]
1998, p. 259), and expanding the realm of centralized compulsion.
From Röpke’s perspective, these were not isolated phenomena.
Excessive abstraction at the level of economic theory facilitated particular
economic policies which in turn affected a society’s ability to uphold and
reconcile values such as liberty and order. Röpke was not opposed to
abstraction. Inasmuch as social science focuses on discerning regularities
in human action and behavior on the basis of detached observation and
comparison, Röpke himself sought to develop theories about the causes
and effects of a range of social, political and economic phenomena. Röpke
did not, however, consider this incompatible with the promotion of certain
values that he did not regard as merely subjective preferences and which,
he believed, should be integral to the work of economists. It is difficult
to understate the radical nature of such a stance for a twentieth-century
economist. This much becomes evident from comparing Röpke with
Hayek.
In The Road to Serfdom, Hayek begins by almost apologetically stating
that his argument about how the trend to economic planning will have
negative consequences is based, in the final analysis, upon ‘certain ultimate values’. On one level, Hayek is indicating that the foundations of
his argument are not to be found in the realm of positive science. As Paul
Heyne comments, the word ‘ultimate’ means for Hayek that ‘his values,
Between humanism and social science
177
indispensible though they are for such a book, cannot and therefore
will not be defended or argued for. Because they are ultimate, there is
nothing beyond or beneath to which one might point to make a rational
or empirical case for them’ (2008, p. 340). This illustrates just how committed Hayek remained at this point of his life to positivist premises. As
observed in Chapter 3, close reading of Röpke’s writings penned during
the same historical period underline how far removed Röpke already was
from these positions. This was especially evident in his willingness to argue
on the basis of reason for the objectivity of certain values, and to incorporate a concern for these self-evident truths into the positive and normative
dimensions of economic science.
Close scrutiny of The Road to Serfdom indicates that Hayek never precisely indicated the ‘ultimate values’ upon which he based his arguments.
There are, as Heyne observes, references to ‘tolerance’, ‘individualism’
and ‘rule of law’, but none are identified by Hayek as among his ‘ultimate
values’. He does – citing Acton – define liberty as ‘the highest political
end’, but, as Heyne notes, Acton proceeded to specify that liberty is necessary ‘for security in pursuit of the highest objects of civil society and of
private life’ (ibid., p. 341). Liberty, from Hayek’s perspective, thus remains
an instrumental good rather than an ultimate value.
In later life, Hayek tried to clarify his position on this subject, especially
in the Constitution of Liberty. Freedom in the sense of non-coercion is
important, Hayek states, because coercion makes one person the instrument of a second person’s will, not for the first person’s sake, but for the
coercer’s purposes (1960, p. 133). Hayek thus appears to regard coercion
as representing an affront to each person as thinking individuals who
should be valued for their own sake. Hayek’s primary concern about
coercion, however, is that civilizational progress is radically dependent on
individual freedom. Progress, Hayek maintains, does not normally occur
as a result of people seeking to resolve problems in a coerced or collective
manner. Progress comes when individuals freely act upon their particular
knowledge of their unique circumstances and abilities while pursuing their
own chosen purposes. It is precisely because one person cannot know
everything, Hayek maintains, that we should place our trust in the independent and sometimes competitive acts of many people, and allow this
process to determine what is worth keeping or discarding (ibid., p. 29).
Hayek’s faith in freedom therefore ‘does not rest on the foreseeable results
in particular circumstances but on the belief that it will, on balance, release
more forces for the good than for the bad’ (ibid., p. 31). His justification
for minimizing coercion is therefore somewhat utilitarian.
That Hayek makes an important point about the character of material and cultural development is not in question. But the very nature of
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Wilhelm Röpke’s political economy
utilitarianism, be it of the act or rule variety, is such that it holds that
there are no ultimate values and no moral absolutes. For any utilitarian,
there is only ‘better’ or ‘worse’. Moreover, while Hayek identifies liberty
as essential for progress, he has surprisingly little to say about the content
of progress. He even concedes that progress ‘in the sense of the cumulative
growth of knowledge and power over nature is a term that says little about
whether the new state will give us more satisfaction than the old’. Such a
question, Hayek comments, is ‘probably unanswerable’ (ibid., p. 41). For
Hayek, this does not matter. More important is ‘successful striving for
what at each moment seems attainable’, or ‘movement for movement’s
sake’ (ibid.). This response leaves unanswered some very important questions. Towards what people are moving? What are they becoming in the
process of doing so?
In short, Hayek’s philosophy and political economy seem not to be
based on any ultimate values. For Hayek, moral values and rules were not
divinely ordained, an integral part of human nature, or revealed by right
reason. Instead they result from human experience and the utility contributed by each habit and rule to human welfare. People are thus simply born
into a system of values which supplies the ends that human reason serves
(ibid., p. 63). These statements remind us just how deeply Hayek shares in
the tradition of skepticism perhaps most associated with Hume that holds
we cannot really know any ultimate truths. Hayek himself conceded ‘that
in some respects the liberal is fundamentally a skeptic’ (ibid., p. 406). But,
as Röpke observed, skepticism is essentially a self-refuting position insofar
as one purports to know that we can know nothing with certainty ([1944b]
1948, pp. 73–5). In his last book, The Fatal Conceit, Hayek argued that the
main monotheistic faiths had provided effective powerful, mystical, and
what he regarded as non-rational foundations for the West’s core values.
Over the centuries, he stated, they had given millions of people a range
of motivations to act rightly, even if these motivations, from Hayek’s
standpoint, could not be explained in terms of reason. The broader point,
however, is that Hayek, like many other classical liberals, appears to have
experienced difficulty moving beyond an empirical–positivist conception
of reason, despite his repeated denunciations of constructivist rationalism
and his insistence that mathematics had a limited albeit significant role to
play in economic inquiry (1994, p. 148).
Röpke underscored the utility and importance of empirical analysis but
did not believe that this meant all other methods of inquiry and sources of
knowledge were excessively subjective or marginal to the study of economics. In this sense, Röpke’s political economy transcended the distinction
between ratio (the empirical realm of what can be done) and intellectus
(reason that contemplates the deeper strata of being). Röpke regarded
Between humanism and social science
179
empirical methodology as a powerful tool, especially when applied to the
realm of positive economics. Röpke was very willing to employ the empirical method of using working hypotheses that are testable via observation
or experiment. This is reflected in his inquiries into subjects ranging from
business-cycle theory to the effects of opening and closing markets to
international trade. Strictly scientific or positive statements, from Röpke’s
standpoint, were subject to and derivative from human experience and
observation. Nevertheless Röpke held that the truth of the empirical
method could not be proved on purely empirical grounds. It depended
upon logic derived from extra-empirical foundations. For Röpke, all the
natural and social sciences rely on undemonstrated or indemonstrable
premises of theoretical rationality. An example of such a premise would
be the elementary principle of formal logic that a method of interpretation
which is successful is to be used and relied upon until a contrary reason
emerges. This principle is ‘indemonstrable’ inasmuch as it is presupposed
in the methods of natural and social sciences and does not describe the
world; yet no economist or other social scientist would think of dispensing
with this principle. Its truth is self-evident to human reason.
For Röpke, rationality involved more than efficiency, utility and functionality. In his view, there were pre-analytic commitments embodied in
any form of scientific inquiry. Nor did the fact that a proposition could
not be proved using empirical methods necessarily mean that it was
untrue. Though Röpke refused to romanticize the pre-modern world, he
also accepted Burke’s axiom concerning the wisdom contained within
inherited institutions (something accepted by Hayek), not to mention
Smith’s view of history as a repository of information about how the
relationships between property, trade, the government and civic institutions had developed in different societies. Röpke was equally unafraid to
draw upon particular insights into human reality derived from natural
reason or even Christian theological reflection upon human nature. The
fact that persistent disagreement about philosophical, religious and moral
questions exists within any given society did not suggest, in Röpke’s
opinion, that humans cannot arrive at a universal consensus about what is
right. He was aware there were many claims – even value judgments – that
had acquired near universal acceptance and not only because of cultural
change. People had also used reason to lead others, even entire societies, to
change their views on many subjects. As Röpke himself stressed, the case
for free trade had been philosophically well-established by medieval and
early-modern scholastic thinkers, such as Vitoria and Grotius, long before
its empirical merits were outlined in the eighteenth century by Smith
and others, which themselves only began to be manifested as a global
economic reality in the nineteenth century.
180
Wilhelm Röpke’s political economy
Röpke’s willingness to go beyond strict empirical science in developing
his own vision of political economy reflects his faith in the power of ideas
to change the course of history. He was conscious that his positions were
those of a minority, not least because they could not be contained within
conventional political and philosophical categories. Röpke’s free-market
convictions did not fit well with some conservatives. But his willingness
to rethink economic liberalism’s premises and the state’s role in market
economies made him somewhat suspect to more traditional classical liberals. Even his very way of economic thinking increasingly placed him in
a somewhat invidious position vis-à-vis most of the post-war economic
profession.
But for Röpke, none of this mattered. Fully aware of the explanatory
power of economics, he never ceased to place the knowledge yielded
by economic science onto a wider canvas that incorporated ideas and
insights from extra-economic sources. To this extent, Röpke was as much
a humanist (in the sense that Erasmus of Rotterdam and Thomas More
were humanists) as he was a social scientist. Narrowness of vision is not a
description that anyone would apply to Röpke and his approach to political economy. He did consider economics a science insofar as it was based
on warranted conjectures that had withstood criticism by a profession of
scholars who continually developed and criticized their own and others’
work in the same field. Yet Röpke plainly thought that efforts by economists to construct a value-free, purely descriptive, abstractly scientific,
empirical system of thought that condemned as unscientific anything that
invoked particular value-judgments or knowledge derived from outside
the natural and social sciences, were themselves fallacious exercises that
undermined rigorous investigation of economic phenomena.
Certainly the breadth of Röpke’s inquiries may have contributed to a
number of substantial tensions and even apparent contradictions in his
work. Nevertheless Röpke recognized that the challenges to economic
liberalism in the twentieth century arose from many sources, some of
which were non-economic in origin and character. It followed that purely
economic critiques of the proposed alternatives, ranging from outright
Soviet-style collectivization to Keynesian mixed arrangements, were not
enough. Röpke’s genius lay in his ability to demonstrate the often-hidden
connections between the development and character of economic life on
the one hand and the power of particular ideas about human beings and
the social order on the other. It contributed to his proposition of a society
of fallible human beings held together by market relations of mutual selfinterest; by moral commitments that could be shared by non-believers and
religious believers alike; by a rich and complex civil society that fostered
liberal education and virtuous action; and by a legal and governmental
Between humanism and social science
181
framework strong enough to resist pressures to distort the market but
which nevertheless was itself confined by law and custom to certain
tasks and prevented from acting arbitrarily toward those subject to its
sovereignty.
Perhaps above all, it led Röpke to underscore the indispensability of
self-command, self-control and self-government on the part of individuals
if the normative dimension of his political economy was to be realized. If
a free economy was to skirt the temptation of excessive regulation, Röpke
believed that it required more than carefully stated scientific explanations
of the economic folly of various forms of government intervention. It also
demanded a people who were willing to make their conduct conform to
standards knowable through reason and custom that went beyond the
self’s immediate passions, and a society in which people learnt this selfcontrol from institutional sources that extended beyond and often preceded
the law. For Röpke, the only conceivable modern alternative to a society
of self-possessed, well-formed, even virtuous individuals was Ortega y
Gasset’s mass man, which in turn lent itself to the development of the type
of populist economies that Röpke associated with Communism, National
Socialism and, in the post-war era, neo-Keynesian inflationist-inclined
welfare states. Röpke regarded the last of these as representing the political
economy of soft despotism, in which the brutal methods of Communist and
Nazi apparatchiks were replaced, to cite Tocqueville, by ‘an immense protective power’ which took all responsibility for everyone’s happiness, just
so long as this power remained ‘sole agent and judge of it’, and which kept
people ‘in perpetual childhood’ by relieving people ‘from all the trouble of
thinking and all the cares of living’ (Tocqueville, 2000, p. 692).
In the face of these developments, more than one economist during the
twentieth century adopted the course of least resistance. Wilhelm Röpke
chose a different course. Like the Scots, his political economy demanded
high standards from individuals, institutions and governments – perhaps
even too high standards. But for Röpke, it was a mistake to limit oneself
to illustrating the utility and pragmatic efficiency of market economies.
Unless it was imbued with both moral depth and realism, Röpke was convinced that the economy of the free society could not endure.
The twenty-first century may well be the century that tells us whether
Röpke was right.
NOTES
1. The word ordo, it has been suggested, was chosen by the ordoliberals because it meant
‘inner order’ rather than ordinate, which means ‘externally imposed’ (Grosskettler, 1989,
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Wilhelm Röpke’s political economy
p. 43). On one level, this underlines the ordoliberals’ determination not to be viewed as
advocates of a benevolent dictatorship or soft authoritarianism when explaining their
view of the state’s role. A more vexed question is whether the same word indicated the
influence of natural law theory, insofar as natural law purports to arise from the right
reason inscribed upon human beings. Eucken stated that ‘the regulative framework with
which we are concerned here did not emanate from natural law . . . The emphasis among
all these principles lies upon their positive approach’ (1952, p. 290). Yet in the same
book, Eucken contends that the competitive order which he desires is ‘in another sense
. . . a natural order . . . one which corresponds to the nature of things and of Man’ (ibid.,
p. 373). A decade earlier, Eucken had stressed that, like Augustine and medieval scholars, he was in search of an order that ‘conformed to the reason or nature of Man and
things’ ([1940] 1992, p. 239). This might be construed as the language of natural law.
2. To this critique, the ordoliberals’ response – which might well be affirmed by Röpke and
other sociological neoliberals – is that their principles offer a reference system for policymakers to think through various economic policies in a consistent manner. They are not
trying to create a rigid ideological grid that encourages governments to ignore the type of
social problems that discredited nineteenth-century liberalism. Reflecting upon proposals for worker participation in the management of business, for example, Eucken argued
that the issue is not the justice or otherwise of worker-participation claims per se. The
question is whether it can be accommodated within the overall ordoliberal framework.
‘If the individual firm’s business planning is impaired by worker participation’, Eucken
wrote, ‘then the functioning of the order as a whole is jeopardized’ (1952, p. 320; emphasis added). Thus worker participation is not ruled out in principle. Much depends upon
the precise content and effects of a given worker-participation scheme.
References
WORKS BY WILHELM RÖPKE
(1922a), Dei Arbeitsleistung im deutschen Kalibergbau, unter besonderer
Berücksichtigung des hannoverschen Kalibergbaus, Berlin: de Gruyter.
(1922b), Die Konjunkter: Ein systematischer Versuch als Beitrag zur
Morphologie der Verkehrswirtschaft, Jena: Gustav Fischer.
(1922c), ‘Die wirtschaftsideen Walter Rathenaus’, Der Herold, 13
September.
(1923a), Die internationale Handelspolitik nach dem Kriege, Jena: Gustav
Fischer.
(1923b), ‘Freihandel und finanzpolitik’, Plutus, 1 December.
(1924a), ‘Der kapitalische geist’, Jahrbücher für Nationalökonomie und
Statistik, 122, 67–80.
(1924b), ‘Freihandel und sozialpolitik’, Soziale Praxis, 20 November.
(1924c), ‘Probleme der Deutschen handelspolitik’, Der Österreichische
Volkswirt, 8 March.
(1924d), ‘Zum reparationsproblem’, Jahrbücher für Nationalökonomie und
Statistik, 122, 527–36.
(1925a), ‘Die neue wirtschaftsstrukur Deutschlands als grundlage seiner
künftigen handelspolitik’, Schriften des Vereins für Sozialpolitik, 171
(1), 1–46.
(1925b), Geld und Aussenhandel, Jena: Gustav Fischer.
(1925c), ‘Konjunkturtheorie und konjunkturpolitik’, Bankwissenschaft, 1
and 15 August.
(1926a), ‘Kredit und konjunktur’, Jahrbücher für Nationalökonomie und
Statistik, 124, 243–85.
(1926b), ‘Sozialisierung – 2’, Handwörterbuch der Staatswissenschaften,
4th edn, Jena: Erganzungsband, pp. 473–90.
(1926c), ‘Spekulation’, Handwörternuch der Staatswissenschaften, 4th edn,
Jena: Erganzungsband, pp. 509–23.
(1927a), ‘Amerika in neuen büchern’, Frankfurter Zeitung, 9 October.
(1927b), ‘Die südstaaten der Union’, Frankfurter Zeitung, 20, 21 and 24
May.
(1928a), ‘Auslandkredite und konjunktur’, Schriften des Vereins für
Socialpolitik, 173 (2), 215–46.
183
184
Wilhelm Röpke’s political economy
(1928b), ‘Das agrarproblem der vereinigten staaten II. Die gegenwärtige
lade der landwirtschaft’, Archiv für Sozialwissenschaft und Sozialpolitik,
59, 96–120.
(1928c), ‘Investitionskonjunktur und konsumkonjunktur’, Maschinenbau,
15 March.
(1928d), ‘Zur mythologie der reparationen’, Magazin der Wirtschaft, 20
December.
(1929a), ‘Amerikanische prosperität und Europäische armut’, Mitteilungen
des Universitätsbundes Marburg, 12 November.
(1929b), ‘Die kapitalbildung’, Sparkasse, 1 March.
(1929c), Die Theorie der Kapitalbildung, Tübingen: Mohr.
(1929d), Finanzwissenschaft, Berlin: Spaeth & Linde.
(1929e), ‘Hemmungen von umstellung und transfer in den internationalen
handelsbeziehungen’, in Egar Salin (ed.), Das Reparationsproblem,
Berlin: Reimar Hobbing (Veröffentlichungen der Friedrich-ListGesellschaft), pp. 15–122, 329–64.
(1929f), ‘Staatsinterventionismus’, in Handwörterbuch der Staatswissenschaften, 4th edn, Supplementary volume, Jena: Erganzungsband,
pp. 861–82.
(1929g), ‘Wirtschaftstheorie und wirtschaftpraxis’, Maschinenbau, 19
September.
(1930a), ‘Die kreditschöpfung durch banken und ihre volkswirtschaftlichen auswirkungen’, Bankwissenschaft, 5 January.
(1930b), ‘Die sozialökonomische betrachtungen des abnehmenden bevölkerungsüberschusses’, Magazin der Wirtschaft, 5 December.
(1930c), ‘Ein handbuch der finanzwissenschaft’, Frankfurter Zeitung, 24
August.
(1930d), ‘Kapitalbildung oder produktionsentlastung’, Berliner Tageblatt,
1 January.
(1930e), ‘Neuere literatur zum reparationsproblem’, Zeitschrift für
Nationalökonomie, 2, 103–12.
(1930f), ‘Ökonomische diagnose unserer zeit’, Frankfurter Zeitung, 12
January.
(1930g), ‘Zum transferproblem bei internationalen kapitalbewegungen’,
Jahrbücher für Nationalökonomie und Statistik, 133, 225–40.
(1930–1931), ‘Liberale handelspolitik’, Archiv für Rechts- und
Wirtschaftsphilosophie, 35, 354–70.
(1931a), ‘Das Brauns-Gutachten und seine kritiker’, Soziale Praxis, 21
May.
(1931b), ‘Der staatseingriff im internationalen kapitalverkehr, ein
Beitrag zur theorie des interventionismus’, in C.A. Verrijn Stuart (ed.),
Economische Opstellen, Haarlem: Bohn, pp. 249–70.
References
185
(1931c), ‘Deutschland in der weltwirtschaftskrise’, Sparkasse, 1 and 15
May.
(1931d), ‘Die angst von der production’, Frankfurter Zeitung, 9 April.
(1931e), ‘Die moral der reparationen’, Frankfurter Zeitung, 15 November.
(1931f), ‘Die quellen der deutschen kapitalbildung 1908–1913 und 1924–
1929’, in B. Harms (ed.), Kapital und Kapitalismus, Berlin: Hobbing, pp.
289–307.
(1931g), ‘Die verantwortung der Reichsbank’, Frankfurter Zeitung, 26
July.
(1931h), ‘Ein weg aus der krise’, Frankfurter Zeitung, 7 May.
(1931i), ‘Ewige prosperität’, Der Deutsche Dolfswirt, 6 February.
(1931j), ‘Geldtheorie und weltfrise’, Deutsche Dolfswirt, 25 September.
(1931k), ‘Praktische konjunkturpolitik, die arbeit der BraunsKommission’, Weltwirtschaftliches Archiv, 34 (2), 423–64.
(1931l), ‘The intellectuals and “capitalism” ’, reprinted in Wilhelm Röpke
(1969), Against the Tide, translated by Elizabeth Henderson, Chicago,
IL: Regnery, pp. 25–44.
(1931m), Weltwirtschaft und Aussenhandelpolitik, Berlin and Vienna:
Spaeth & Linde.
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04–11.
Viner, Jacob (1936), ‘Mr. Keynes and the causes of unemployment’,
Quarterly Review of Economics, 51 (1), 147–67.
Viner, Jacob (1991), Essays on the Intellectual History of Economics,
Princeton, NJ: Princeton University Press.
Waterman, A.M.C. (2002), ‘ “New political economies” then and now:
economic theory and the mutation of political doctrine’, in Laurence S.
Moss (ed.), The New Political Economies: A Collection of Essays from
around the World, Oxford: Blackwell, pp. 13–40.
Watrin, Christian (2000), ‘Alfred Müller-Armack – economic policy
206
Wilhelm Röpke’s political economy
maker and sociologist of religion’, in P. Koslowski (ed.), The Theory
of Capitalism in the German Economic Tradition: Historism, OrdoLiberalism, Critical Theory, Solidarism, New York: Springer, pp.
192–220.
Wendt, S. (1956), ‘Schumacher, Hermann’, in E. Beckerath et al. (eds),
Handwörterbuch der Sozialwissenschaften, vol. 9, Stuttgart: Fischer, pp.
150–51.
Willgerodt, H. (1975), ‘Fehlurteile über vielzahligen Wettbewerb’, Ordo,
26, 97–130.
Zmirak, John (2001), Wilhelm Röpke: Swiss Localist, Global Economist,
Wilmington, DE: ISI Books.
Index
[Please note that W.R. stands for Wilhelm Röpke]
absolutism 80
Acton, Lord 75, 85, 157, 170
‘Acton-Tocqueville Society’ 170
Adenauer, Konrad 8, 129, 130, 156
Affluent Society, The (Galbraith) 166
aggregate demand 103, 118, 119, 121,
132
agrarians 2, 3
agriculture/agricultural nationalism 97,
138, 139, 141
Allgemeine Elektrizitäts-Gesellshaf
(German electricity company) 22
Althoff, Friedrich 28
altruism, ‘ethically positive’ method of
52, 53
anarchy, ordered 175
anticipatory cycles 95
anti-inflationary policies 125
anti-liberalism 22
antitrust laws 89–90
Antoni, Carlo 72
Aquinas, Thomas 61, 157
Aristotle 14, 157
Aron, Raymond 82
Atatürk, Kemal 2
Austrian school of economics 18, 114
versus historical school 18, 24–8, 174
autarkic policies 17, 74
Bank of Egypt, Cairo (lectures at) 56,
87
banks, credit policy 98, 104, 110, 114
Beaverbrook, Lord 158
Benthamite tradition 66
Berlin 21–2
Beveridge Plan (1942) 117
Bismarck, Otto von 19, 20, 27, 28
wars of aggression 145
bloc economies 164
Böhm, Franz 33–5, 36, 40, 42
economic liberalism of 3, 18, 29, 39
Wettbewerb und Monopolkampf 34,
35
Böhm-Bawerk, Eugen von 24
boom-bust cycles 97–8
credit expansion 103, 104, 105–6,
109
disadvantages of booms 108–9
Hayek on 103–4
Keynes on 102–3, 122
upswings and downswings 96, 101,
102, 108, 111
see also business cycles
bottlenecks 118, 122
Brauns, Heinrich 94
Brauns Commission (1931) 88, 95, 105,
108, 118
Bretton Woods agreements 147–8
Britain
adoption of free trade (1846) 23, 25
anti-collectivist sentiment in 141
Brüning, Heinrich 136
budgetary measures 111, 112
Bundestag elections (1957) 130
bureaucracy 81
Burke, Edmund 15, 157, 179
Burlamaqui, Jean-Jacques 145
business cycle engineers 122
business cycles 7, 14, 46, 88, 94
active measures 115
anticipatory 95
crises, understanding 99–102
defined 95–9
as distinct economic fluctuation 96
duration 97
and economic liberalism 39, 41
effect on industrial-commercial
sector 97
207
208
Wilhelm Röpke’s political economy
elements 96
equilibrium 102, 105, 107, 109
fluctuations 95, 107
and Great Depression 96
habilitation disseration of W.R. 7
inevitability of 108
and price mechanism 116
restrictionists and expansionists
111–12
and short- and long-term economic
changes 96
typical course of 96, 97
see also boom-bust cycles
business principle 52–3
Caldwell, B. 27–8
Calvinism 41
capital crisis 98
capitalism 3, 6, 13, 77–8
anti-capitalist sentiment 73
crisis of 31, 86
German 18, 19–20
and laissez-faire economics 82
liberal 32
and Marxism 19, 28, 38–9, 39, 52, 94
natural disturbances in 99
nineteenth- and early-twentiethcentury 39
nineteenth-century 87, 93
pre-1914 78
post-war 118
Rüstow on 38–9
and socialism 58, 87
cartels/cartelization 7, 33, 35, 36
in Germany 20, 21, 22, 23, 30
Cartesian rationalism 63
Catholic Center party, Germany 21
Catholic social teaching 39, 135
Catholicism 41, 93
central banks, credit policy 104, 110,
114, 128
centralization 135, 136
chemistry 64
Chesterton, G.K. 93
Chicago School 16
Christian Democrats 129
Christianity 15, 41, 93, 164
humanism 84, 85
civilization 84
Civitas Humanas (W.R.) 13, 59, 79
classical economic theory 24, 25, 51–2,
102
see also Mill, John Stuart; Ricardo,
David; Smith, Adam
classical liberalism 3, 137
class-war language 150
closed integration model 159
codetermination 41, 42
collectivism 6, 27, 49, 57, 58, 64, 71, 87
and full employment 125–6
Colloque Walter Lippmann 82, 86
COMECON 164
commodity-market crisis 98
Communism 83, 107
competition 57
framework policy 88–9
and German economic liberalism 20,
32, 34, 36, 37–42, 40
perfect 38, 116
confidence, collapse in 99, 101
Congress of Vienna (1815) 145
conservative liberalism 15
conservatives 137–8, 139
Constant, Benjamin 75
Constitution of Liberty (Hayek) 177
constructivist rationalism 178
contra-cyclical policies 94, 95
cooperativism 87
coordination and liberty 57
corporativism 81
credit creation 102
credit crisis 98–9
credit expansion 103, 104, 105–6, 109,
127
credit restriction 110
Crises and Cycles (W.R.) 46, 95, 96,
104, 106, 108, 111
critical reason 49
culture 54
Curzon-Price, Victoria 135–6
customs duties 19, 20
Das Adam Smith Problem 79
de Gaulle, Charles 161
de Molina, Luis 145
de Soto, Huerta 114
de Vitoria, Francisco 145
death taxes 93
decentralization 90, 136, 139
deflation 20, 125
Index
dehumanization of theoretical
economics 176
Deistic confidence in natural
harmonies 38
democracy 129, 132, 134
Democracy in America (Tocqueville) 15
deproletarianization 90, 137
Descartes, R. 77
Die Theorie der Kapitalbildung (W.R.)
104
Dietze, Constantine von 44
Dietzel, Heinrich 30
dilemma of thrift 100
Director, Aaron 71, 72
dirigisme/dirigiste policies 21–3, 33, 134
discount rates 110
division of labor 11
dogma, Keynesian 120
Dollfuss, Engelbert 81
dominium 145, 146, 147, 153
Dostaler, Gilles 167–8
Eastern Orthodoxy 41
economic and social policy 89
economic constitutionalism 34
economic humanism 5
economic liberalism 9, 13, 15
discrediting of 28, 72
German, crisis of 17–43
inadequacies 6
new 42–3, 71–92
Prussia 23–4
and rationalism 169
in Weimar Germany 29
economic liberty 11, 75–6
economic nationalism 23, 32
economic policy 7–9
and economic science 69–70
positive 88
economic science
and economic policy 69–70
and history 46–7
nature and purpose 9, 18, 27, 28, 45
economics
as ‘border science’ 68
and economic policy 7–9
and historical sociology 37–42
home-grown 54
laissez-faire see laissez-faire
economics
209
modern 48, 49
and morality 6–7, 14, 26, 59
as normative social science 53–6
origin 47–50
as positive social science 50–3, 54
principles and truths of 55
purpose of 56
Economics of the Free Society (W.R.)
65, 70
economism, error of 62
economists
habits of 54–5
restricted vision of 62
efficiency 57, 58
empirical methodology 179
empiricism 12, 33
Enabling Act 1933 (Nazi Germany)
17
Enlightenment reasoning 24, 38, 41,
49, 80, 157
Röpke on 76, 77
see also Scottish Enlightenment
thinkers
entrepreneurship 57, 64
and boom-bust cycles 103, 106
and economic liberalism 32, 34, 40
incentives for 97
equilibrium 102, 105, 107, 109, 116
Erasmus of Rotterdam 180
Erhard, Ludwig 3, 42, 117, 156, 161,
165
currency-reform council 8
reforms of 118, 125, 126
‘ersatz-socialism’ 87
ethics, and economics 6–7, 14, 26, 52
Eucken, Rudolf 29
Eucken, Walter 12, 20, 31, 32, 35, 40,
42, 94, 120
economic liberalism of 3, 18, 29–33,
39
and Mises 32, 35
on principles of economic policy 54
European Coal and Steel Community
(ECSC) 160, 161, 164
European Economic Community
(EEC) 138, 155, 158, 159–61
European Free Trade Association
(EFTA) 161
European integration 156, 160–3
European Payments Union (EPU) 161
210
Wilhelm Röpke’s political economy
exile of W.R. 2, 38, 43, 77, 143
expansionists 111
facts 59
Fascism 83, 87
Fatal Conceit, The (Hayek) 178
federalism 135
Ferguson, Adam 12, 144, 167
fiscal socialism 166
Fischer, C.E. 20
fluctuations, business-cycle 95, 107
formalism, mathematical 67
fractional-reserve banking 114
framework policy 88–9, 91
Frederick the Great 26
Frederick William I, King 26
free markets, crisis of 19–21
free price system 36, 48, 57, 69–70, 81,
89
movement of individual prices,
doctrine 67
see also price mechanism
free societies 49
free trade 22, 23, 144, 145
and historical school 25
freedom 49, 75, 130
Freedom and Domination (Rüstow) 38
freedom of contract 20
freedom of movement of goods 144
Freiburg, University of 18, 29
Freiburg school 33, 34, 35, 42
French Enlightenment 80
frictional unemployment 100, 123
Friedman, Milton 2, 3
Friedrich-List-Gesellschaft 42
full employment 117, 121, 132
and business cycles 100, 103, 106,
115
consequences 121–4
functional finance 114
fusionism 3
Galbraith, John Kenneth 166
Gasset, Ortega y 74, 76
General Agreement on Tariffs and
Trade (GATT) 153
General Theory (Keynes) 45, 106, 118,
124, 168
General Will (Rousseau) 35, 84, 134
German capitalism 18, 19–20
German Commercial Policy (W.R.) 17,
47, 73, 86
German Democratic Party (DDP) 23
German economic liberalism
cartels/cartelization 20, 21, 22, 23, 30
crisis of 17–43
German League for Free Economic
Policy 43
German People’s Party (DVP) 23
German Question, The (W.R.) 8, 13,
17–18, 47
German-Jewish exiles 77
Germany
Berlin 21–2
defeat in war 28
economic crises 20, 73
inflation in 22, 31–2
neoliberalism 37, 44
war economy 65
see also Nazi Germany; Weimar
Germany
gold standard 32, 124–5, 145, 146, 151,
152
Good Society, The (Lippmann) 82, 86
government expenditure 111
Graduate Institute of International
Studies, Geneva 2, 8
Graz, University of 8
Great Depression 1929 5–6, 25, 65, 94,
96, 99, 146
Great War 4, 8, 22, 37, 146
Grossman-Doerth, Hans 34
Grossraume (closed bloc) 147, 157,
158
Grotius, Hugo 145
Hanley, Ryan Patrick 12
happiness 12, 14
Hayek, Friedrich von 2, 3, 6, 9, 11, 13,
16, 64, 100, 117, 120
on boom-bust cycles 103–4
and economic liberalism 24, 27, 34,
82, 83
Road to Serfdom 8, 58, 71, 176, 177
Hegel, Georg 25
Hennecke, Hans Jörg 3, 4
Heraclitus (Greek philosopher) 78
Hicks, Sir John 115, 168
High Middle Ages 39
historical interference 87
Index
historical relativism 30
historical school of economics 18, 26,
27, 28, 30, 79, 99
versus Austrian school 18, 24–8, 174
historical sociology 3, 37–42
history, and economic science 46–7
Hitler, Adolf 6, 17, 147
appointment as Reich Chancellor of
Germany 1, 137
Höffner, Joseph 93
Hohenzollern monarchs 27, 28
home-grown economics 54
homo economicus 11, 78, 79, 82
Hülsmann, Jörg Guido 83, 107
human nature 15, 61, 63, 68
Humane Economy (W.R.) 14, 176
humanism 5, 76, 157, 180
Christian 84, 85
Hume, David 12, 15, 145
Hunold, Albert 16
Husserl, Edmund 29
Hutcheson, Francis 12
Hutchison, Terence 11, 16
idealism 162
imperium 145, 146, 147
imported inflation 140
incentives 56, 57, 97
incomes policy 36
Industrial Revolution 26
inflation
accumulated 125
anti-inflationary policies 125
balance-of-payments explanations 32
credit 97
Germany 22, 31–2
imported 140
and Keynes 125
mild 126
repressed 126, 127
inherited wealth 93
initial ignition policy 108
intellectual refugees 2
intellectualism of W.R. 2, 4, 8
intellectuals, errors of 73–5
intellectus (reason contemplating
deeper strata of being) 178
interdependencies 12, 50
interest-rate policy 32, 97–8, 103
inflation 127–8
211
International Economic Disintegration
(W.R.) 13, 77
International Monetary Fund (IMF)
148
interventionism 17, 18, 36, 40, 73, 77
compatible and incompatible
interventions 86, 89, 172–3
liberal 88, 89
intuition 50
Istanbul, University of 2, 8
ius gentium 145, 171
Jacobinism 6, 41, 134
Jena, University of 7–8
Jevons, W.S. 46, 51
Jodl, Alfred 71
Kaldor, Lord Nicholas 115
Kames, Lord 12
Kant, Immanuel 77
Kathedersozialisten (socialism of the
chair) 28
Keiser, Günther 8
Keynes, John Maynard 6, 8, 45
as antithesis of Smith 65
on boom-bust cycles 102–3, 122
General Theory 45, 106, 118, 124,
168
on inflation 125
and new economic liberalism 42
Tract on Monetary Reform 119
Treatise on Money 96, 103, 106
Treatise on Probability 66
Keynesianism 4, 44, 94, 118
aggregate demand 103, 118, 119,
121, 132
dogma 120
fallacies 65–9
limitations of 67, 70
Röpke on 118, 119, 120
skeptics 106
Knight, Frank 11, 170
Krise und Konjunktur (W.R.) 95
Kyklos (journal) 2
labor nationalism 113
labor theory of value 24, 25, 52
laissez-faire economics 20, 26, 29, 31
and capitalism 82
Müller-Armack on 39, 40
212
Wilhelm Röpke’s political economy
and rationalism 77–81
Rüstow on 38
law, role in economic life 18, 34
L’Economie mondiale aux XIX et XX
siècles (W.R.) 47
Leibnitz, G.W. 55
lex mercatoria 144
liberal capitalism 32
liberal international economy 142–64
liberal interventionism 88, 89
liberal rationalism 49, 77
liberalism
and civilization 84
classical 3, 137
conservative 15
economic see economic liberalism
eighteenth-century 78
foes of 75–7
modern 12
nineteenth-century 35, 72
and religious belief 31
traditional 78, 83
see also neoliberalism;
ordoliberalism
liberalization, economic 19, 20, 23, 26,
129
Lichtenburg, Georg Christoph 62
Lippmann, Walter 82, 83
liquidity 98, 102
List, Friedrich 25
loans 98, 114
logic of relationships 50
‘long-wave phenomena’ 96
L’ordre social 165
Lutheranism 41
Machiavellism 162
macroeconomics 67, 123
mankind, W.R.’s understanding of 15
Marburg, University of 7, 8
marginal theory 51–2
marginalist revolution 24
market economics 15, 41, 50, 80
business cycles 101
and competition 34
and mercantilism 11
and office economies 58
re-establishment in Germany (1948)
8
and spontaneous order 48–9
market policy 88, 89, 91–2, 112
market socialism 87
Marshall, Alfred 45, 46
Marshall Plan 148, 149
Marxism 19, 28, 38–9, 52, 59, 94
Marxism-Leninism 71, 152
mass democracy 132
mass movements, power of 32
Mater et Magistra (John XXIII) 93
mathematics 64, 66, 67, 68
medieval world economy 144
Menger, Carl 24, 25, 33, 46, 51
mercantilism/mercantilist systems 11,
30, 32, 49, 76
meta economic order 145
Methodenstreit (dispute on nature of
economic science) 18, 27, 28,
45
microeconomic activity 103
Middle Ages 39, 41, 49
Miksch, Leonhard 44
military life 4
Mill, John Stuart 11–12, 26
Ministry of Economics 22
Mises, Ludwig von 2, 3, 48, 82, 94,
125, 172
and economic liberalism 24, 27,
28
and Eucken 32, 35
Hülsmann’s biography of 83
publications by 124
on socialism 29
wage policy 107
modern intellectuals 56
modern liberalism 12
Molina, Luis de 85
Molina Cano, Jerónimo 3
monetary policy 128
monetary theory 31
monopolies 7, 77, 89, 109, 112, 127
and economic liberalism 36, 38
Mont Pèlerin Society 6, 35, 71, 170
Montchrétien, Antoyne de 10
Montesquieu, Charles de Secondat,
Baron de 61, 135
Moore, G.E. 66
morality 6–7, 14, 26, 59, 66
More, Sir Thomas 157, 180
movement of individual prices,
doctrine 67
Index
Muller, Jerry Z. 175
Müller-Armack, Alfred 42
on contra-cyclical monetary
measures 94
economic liberalism of 3, 18, 29
on historical development 41
historical sociology and economics
39–42
on welfare measures 129
multilateralism 144, 147
Myrdal, Gunnar 149
National Liberal Party (Germany) 19,
21, 23
National Socialist German Workers
Party (Nazi Party) 1–2, 6, 15, 17,
107, 126, 135
and economic liberalism 71, 83
racially-orientated employment
policies 113
see also Nazi Germany; Third
Reich
nationalism
agricultural 138
economic 23, 32
German 19
labor 113
W.R.’s dislike of 4–5, 74, 156
nationalization schemes 118
natural law 25, 171, 182
natural sciences
and economics 6, 51
and mathematics 64, 67
and objectivity 59
Nazi Germany
Enabling Act 1933 17
full employment policies 121
totalitarian instinct 153
see also National Socialist German
Workers Party (Nazi Party)
negative savings 128
neoliberalism 3, 9, 13, 84
in Germany 37, 44
reform program 86–92
of Röpke 109, 111, 134, 151, 172
sociological 40, 42
term 18, 44
Neue Zürcher Zeitung (Swiss
newspaper) 72
New Deal policy 114, 149
213
‘new economics’ 66, 67–8, 119, 123,
124
and business cycles 115–16
Nichols, Anthony 2
Nixon, Richard 169
non-employment 123
normative perspective 10–11, 12, 13,
52–3, 57
economics as normative social
science 53–6
Nörr, Knut Wollgang 33
North German Confederation (1869)
19
Nouveaux Principes d’Èconomique
politique (Sismondi) 14
objectivity 59
office economy 57, 58
‘old economics’ 67, 166–9
open market operations 110
order 48–9, 56, 57, 175
ordered anarchy 116
Ordo (journal) 2, 156
ordo, concept of 30, 181
Ordo Manifesto 34
ordoliberalism 36, 44, 86, 174, 182
and economic liberalism 33–4, 35,
40, 42
ordre naturel 78, 79
ordre public international 145, 146, 147,
152, 153, 157, 163, 171
Organization for European Economic
Cooperation (OEEC) 161
origin of economics 47–50
Orthodox Christianity 41
over-capitalization, monetary 102
overinvestment 103, 104, 114
over-production thesis 100
Pacta sunt servanda 152
paelo-liberals 2, 3, 29
palliative measures 113
Pascal, B. 56, 61, 77
pensions 130, 131–2, 133–4, 135
perfect competition 38, 116
Peukert, Helge 3
Phillips, A.W. 168
philosophical anthropology 43
Physiocrats 78
Picasso, Pablo 69
214
Wilhelm Röpke’s political economy
planned and command economies 57
political capital 149
political economy
Austrian school versus historical
school 18, 24–8
society and values 12–16
study of 10–12
population growth 137
positive social science, economics as
50–53, 54
positivism 9, 28, 59, 162
pre-1914 global economy,
romanticizing 145–6
Preiser, Erich 118
price mechanism 36, 48, 57, 67, 69–70,
81, 91, 116
intervention compatible with 86, 89
Principia Ethica (Moore) 66
Principles of Economics (Marshall) 46
Principles of Economics (Menger) 24, 25
probability theory (Keynes) 66
productivity 99–100
profit 81
progress 178
proletarianization 26, 80, 93, 139
promotion crisis 98
protectionism 22, 76, 147
Protestant Christianity 41, 93
Protestant Ethic and the Spirit of
Capitalism (Weber) 41
Prussia
economic liberalism in 23–4, 26
Hohenzollern monarchs 19
psychological factors, and crises 101,
109
public initiatives 112
public works programs 112–13
pump-priming 114, 115, 129
pure economics, post-Ricardian 11
Quadragesimo Anno 93
Rabelais, François 64
Rappard, William 71–2
Rathenau, Walter 22, 23, 65
ratio (what can be done) 178
rationalism 64, 120
and laissez-faire 77–81
Cartesian 63
constructivist 178
and economic liberalism 169
‘false’ 72
‘intellectual hubris’ 72, 79
liberal 49, 77
social 62
Ratzinger, Joseph 7
Rawls, John 12
realpolitik 19
reason 76, 178
recessions, economic 94, 102,
see also Great Depression 1929
redistributionist policies 37
Reichsbank 22, 99, 109
Reichstag 20, 21
Renaissance 76
rent controls 92
repressed inflation 126, 127
Res publica Christiana 144, 157
Resico, Marcelo 3
restrictionists 111–12
Rheinische Merkur (Catholic weekly) 8
Ricardo, David 24, 26, 51, 83
Road to Serfdom (Hayek) 8, 58, 71,
176, 177
Robertson, D.H. 106
Robinson, Joan 115
romanticism 15
Roosevelt, F.D. 114, 130
Röpke, Eva (wife of Wilhelm) 1
Röpke, Wilhelm
career 7–8
early life 4, 139
Rüstow contrasted 93
death 7
see also specific publications by W.R
Roscher, Wilhelm 25
Rothschild, Emma 11
Rougier, Louis 82, 83, 86
Rousseau, J.J. 35, 80, 84, 134
Rueff, Jacques 13, 82, 158, 165
Rueff-Pinay Plan 165
rule of law 35
Rüstow, Alexander 3, 17, 42, 78, 82
on capitalism 38–9, 86
economic liberalism of 18, 29
Freedom and Domination 38
on historical development 41
historical sociology and economics
37–42
Röpke contrasted 93
Index
Saint-Simon, Henri de 65
Sally, Razeen 42, 137, 142
Samuelson, Paul 67, 168
savings 104, 114, 128, 134
scarcity 15, 31, 52, 57, 58, 100
Schmoller, Gustav von 25–8, 33, 37,
40, 41
scholastic tradition 64
Schumacher, Hermann 30
Schuman Plan 148, 155, 160
Schumpeter, Joseph 2, 25, 27
Schwarmstedt, village of 4, 139
science see natural sciences; social
science; social science, economics
as
scientific positivism 162
scientism 63–5
Scottish Enlightenment thinkers 12,
15, 16, 174
Second World War 16, 147
secondary depressions 104–6, 111, 112,
113, 116
secular humanism 76
self-interest 26, 31, 38
servility 76
Shlaes, A. 2
Sismondi, Jean Charles Léonard
Simonde de 14
Skidelsky, Robert 66, 120
Skwiercz, S.H. 3
SMEs (small and medium-sized
enterprises) 90
Smith, Adam 4, 12, 15, 51, 144, 157,
169–70, 174, 179
and economic liberalism 23, 24, 30,
77, 83
Keynes as antithesis of 65
Theory of Moral Sentiments 26, 65,
79
Wealth of Nations 10, 13, 19, 26, 65,
66, 78, 79, 142, 174
Smoot-Hawley Tariff Act (1930), US
23
social cohesion 78
Social Crisis of Our Time (W.R.) 13, 79
Social Democrats (Germany) 19, 21,
129
social policy 90
social question 26, 37, 118
social rationalism 62
215
social science
and natural sciences 65
and Scottish Enlightenment 12
and value-judgments 60
social science, economics as 6, 48
normative social science 53–6
positive social science 50–53
socialism 4, 29, 37, 52
and bureaucracy 81
and capitalism 58, 87
economic theories 48
Röpke’s opposition to 85–6
and unemployment 107
socialized capital formation 148
sociological economics 11
sociological neoliberalism 40, 42
Solow, Robert 168
sovereignty 162–3
Soviet bloc 152, 153
speculation crisis 98
Spiethoff, Arthur 98
spontaneous order 48–9
St. Augustine 15, 162
state power 5, 20, 32, 36, 37, 58, 77
statistical method 26, 65, 67, 99
Stockholm school 168
stock-market crisis 98
Streit, Manfred E. 35, 44
Stresemann, Gustav 23
Studium Generale (journal) 2
Suarez, Francisco 145
subjectivist theory of value 24, 52
subordination and command 57
subsidiarity 135
subsidies 22, 40, 88
Switzerland, as model 133–4, 135,
156
symbols, of mathematics 67
syndicalism 87
tariffs 20, 88
taxation 93, 111, 112, 132
technical economic analysis, versus
political economy 11
Theory of Moral Sentiments (Smith)
26, 65, 79
Third Reich 2, 22
third way 42, 87, 92, 138
Tocqueville, Alexis de 4, 15, 58, 61, 75,
85, 129, 133, 134, 157, 170, 181
216
Wilhelm Röpke’s political economy
‘total crisis’ of economy 98
totalitarianism 41, 81, 153, 170
Tract on Monetary Reform (Keynes)
119
trade union power 107, 128
traditional conservatism 3
traditional liberalism 78, 83
Treatise on Money (Keynes) 96, 103,
106
Treatise on Probability (Keynes) 66
Treaty of Rome 159, 160
Treaty of Versailles 22, 44
Troeltsch, Walter 7
truth 48, 55, 76
Turkey, W.R. in 2, 38, 43, 77, 143
underconsumption theories 100
unemployment 94–5, 102, 103
frictional 100, 123
mass unemployment 121, 123
and non-employment 123
and socialism 107
unilateral liberalization 150–55
United States
anti-collectivist sentiment in 141
New Deal policy 114, 149
Röpke on 139
and secondary depression 105, 106
Smoot-Hawley Tariff Act (1930)
23
universities, independence of 135
utilitarianism 30, 66, 177–8
utilities, marginal 51, 52
value, labor theory of 24, 25, 52
value-judgments 59, 60–61, 62
values 59–60, 178
Vanberg, Viktor 35
Verein für Socialpolitik (Association of
Economists) 27, 37, 42
Viner, Jacob 106, 120
Voltaire 77
voluntary and non-voluntary savings
104, 114, 128
von Hindenburg, Paul 1, 137
von Schleicher, Kurt 136–7
wage inflation 127
wage policy 90
wage stickiness 102–3
Wagner, Gustav 26
war, W.R. on 4–5, 8
see also world wars
war reparations policy 142
Waterman, A.M.C. 10
Watrin, Christian 41
Wealth of Nations (Smith) 10, 13, 19,
26, 65, 66, 78, 142, 174
and Theory of Moral Sentiments 79
Weber, Max 3, 28
Protestant Ethic and the Spirit of
Capitalism 41
Wedgwood, Vivian 72
Weimar Germany 5, 29, 37
welfare state/welfare programs 120,
129–33, 131, 134
Wieser, Friedrich von 24
Willgerodt, Hans 36
Wohlgemuth, Michael 35, 44
worker participation 182
World Bank 148
world wars 4, 8, 22, 37, 72, 146
Zmirak, John 3
Zollverein (German customs union) 17,
19, 73, 159