Wilhelm Rpkes Political Economy

Wilhelm Rpkes Political Economy

Samuel Gregg
Acton Institute, Michigan, USA

Edward Elgar
Cheltenham, UK Northampton, MA, USA

 Samuel Gregg 2010 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009937917

ISBN 978 1 84844 222 1 Printed and bound by MPG Books Group, UK

02

Contents
Acknowledgments 1 2 3 4 5 6 7 8 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 vi 1 17 45 71 94 117 142 165 183 207

References Index

Acknowledgments
The name and thought of Wilhelm Rpke 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 Rpkes 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 Germanys 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 Rpke, was held by many of his contemporaries. Though readers will soon discover that I am critical sometimes quite critical of aspects of Rpkes thought, even Rpkes 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 Rpke 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 (Rpke, 1949f). If ever the much-overused expression Renaissance man was applicable to any individual, Rpke merited it. He was one of the last great polymaths. Nor is it possible to underplay Rpkes courage as a man and a scholar. Against National Socialist and Communist totalitarianism Rpke spoke out fearlessly and at considerable personal risk at a time when many intellectuals proved all too willing to acquiesce with authoritarian regimes. Though Rpke 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 Rpke 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
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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, Rpke 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, Rpke 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 Rpkes forte. He set a standard for integrity which, his biographers concur, cost him a great deal. Today Rpke 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 Rpkes 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 Rpke 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 proposals 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, Kstutis Kvalas, 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. Rpke,

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Wilhelm Rpkes 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 lifes 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 Rpkes 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 Rpkes works were published in several editions. In some instances, Rpke added and modified considerable sections of text in successive editions. In the cases where this occurs and provides fresh insights into Rpkes 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 Rpke, End of an Era ([1933d] 1969, p. 80)

When Wilhelm Rpke 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 Rpke had in mind by the masses reaching for power. Only nine days before, Weimar Germanys 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 Rpkes 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, Rpke could have easily conformed to the new regimes demands and perhaps risen to high office in the Third Reich. But Rpke had no illusions about where he believed Hitler would lead Germany. He also had the fortitude to speak his mind. During Germanys 1930 national elections, Rpke 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. (Rpke, 1977, p. 420)

It followed that on 7 April 1933, no-one was surprised that Rpke was among the first German professors to lose his position as the National Socialists purged Germanys universities of scholars who were outspoken
1

Wilhelm Rpkes 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, Rpke departed into exile in November 1933, initially taking refuge in Amsterdam. At the invitation of Turkeys modernizing president Kemal Atatrk, Rpke 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, Rpke accepted a post at Genevas Graduate Institute of International Studies, where he taught until his death on 12 February 1966. Rpke never returned to live in Germany. Exile did not diminish Rpkes 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, Rpke enjoyed an intellectual reputation that extended beyond the frontiers of the German-speaking world. Over the course of his life, Rpke 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, Rpke did not hesitate to engage other subjects. When Rpke first came to the attention of another modern economist and social philosopher, Friedrich von Hayek (18991992), it was on the basis that Rpke 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 Rpkes sixtieth birthday, Rpke 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). Rpke himself praised those economists with whom he often disagreed, such as Joseph Schumpeter, for being willing to engage in multidisciplinary analysis (Rpke, 1948m). Like most scholars, Rpkes thought developed and changed over time. The general orientation of Rpkes economic thought is itself a matter of much disagreement. The Chicago school economist Milton Friedman once described Rpke as something of an agrarian (Shlaes, 1996, p. 2). By contrast, the Oxford historian Anthony Nichols regards Rpkes later writings as becoming less and less easy to distinguish from . . . paeloliberals such as the economist Ludwig von Mises (18811973) (Nichols,

Introduction

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, Rpkes economic thought is often located in what is usually denoted as the neoliberal tradition associated with twentieth-century figures such as Franz Bhm (18951977), Walter Eucken (18911950), Alfred Mller-Armack (190178) and Alexander Rstow (18851963). 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 Bhm increasingly focused upon the relationship between legal institutions and the economy, Mller-Armack and Rstows economic reflections were more akin to the type of historical sociology associated with Max Weber. Despite his prodigious literary output, Rpkes work is less known in the English-speaking world than other prominent twentieth-century free-market economists such as Friedman, Hayek and Mises. Though Rpke 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 Rpkes thought. Apart from John Zmiraks introductory book to Rpkes life and thought (2001), there is no booklength English-language study of Rpkes contributions to political economic discourse that matches German-language studies of Rpkes writings such as S.H. Skwierczs lengthy analysis (1988), Helge Peukerts two-volume study (1992) and Hans Jrg Henneckes biography (2005), or the Spanish-language analyses authored by Jernimo Molina Cano (2001) and Marcelo Resico (2008). As a consequence Rpke 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. 1668). Others present Rpke as one of the small group of market-inclined economists who paved the intellectual path for Ludwig Erhards liberalization of West Germanys economy in 1948 (Van Hook, 2004, p. 160). As Mises later wrote, For most of what is reasonable and beneficial in present-day Germanys monetary and commercial policy, credit is to be attributed to Rpkes influence. He and the late Walter Eucken are rightly thought of as the intellectual authors of Germanys economic resurrection (1966, p. 200). These pictures reflect something of Rpkes life and work. But they do not do justice to the breadth, depth, and above all complexity of Rpkes 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

Wilhelm Rpkes political economy

numerous political, economic and methodological debates that preceded and developed in these decades, Rpkes thought is not easily condensed into contemporary ideological categories. In many respects, Rpkes work has more in common with the intellectual agendas pursued by Adam Smith (172390) and Alexis de Tocqueville (180559).

A MAN OF HIS TIMES

Rpkes 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 Rpkes economic writing involved reflection upon events that directly affected him and his contemporaries. While historical context cannot explicate everything about any scholars work, Hennecke speculates that Rpkes 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. 478). Like many other young men of his generation, Rpkes experience of military service in World War I cannot be underestimated when attempting to comprehend the post-war direction of his thought. Reading Rpkes reflections on life in the Kaisers army in the trenches of northern France, it is striking to see how much feeling it still aroused in Rpke over forty years later. At the most basic level, it fostered in him a violent hatred of war (Rpke, 1959f, p. 228). War was, to Rpkes 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, Rpke 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 individuals dignity in the name of the mass mass existence, mass armies, even mass feeding (ibid.). Initially Rpkes 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, Rpkes 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 Rpke a great wariness about

Introduction

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, Rpke 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). Rpke 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 Rpke 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, Rpke 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. Rpke 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, Rpke 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, Rpke believed, the intellectuals 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 Rpke, 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 (Rpke, 1959f, pp. 2312). It took Rpke several years to integrate this focus into his economic thinking. But his peers recognition that this attention to human nature had become central to Rpkes economics was one reason, Rpke 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 Rpkes career was consumed by the effort to understand the Depressions causes and

Wilhelm Rpkes political economy

how to overcome it. While the Nazi seizure of power was deeply unsettling for someone of his liberal inclinations, Rpke 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 Rpkes thought was especially influenced by attempts to save capitalism from its apparent immolation. This ranged from John Maynard Keyness effort to radically revise the entire science of economics, to Hayeks 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. 1323) acknowledged Rpkes critical role in helping to realize Hayeks objective of establishing an international group of intellectuals later called the Mont Plerin Society concerned about the trend to planning following World War II.2 Rpke 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 Europes 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 Rpke 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, Rpke traced a straight line between Frances 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 Rpkes barely repressed frustration with members of his own profession who, he held, sought to reduce economics to a mathematical science of aggregates. Rpke 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 (Rpke, 1960i, pp. 2022, 1961f). This in turn contributed to Rpkes insistence upon the limits of economics as a science. Economics, from Rpkes 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. Rpke 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, Rpke wrote:

Introduction

[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 Rpkes intellectual focus throughout his academic career. Coming from a family that had produced lawyers, doctors, civil servants and Protestant clergy, Rpke studied law and then economics at the universities of Tbingen and Gttingen. He earned his doctorate under the supervision of Walter Troeltsch (18661933), a specialist in the economics of unemployment, at the University of Marburg in 1921. While Rpkes doctoral thesis concerned the very technical subject of German potash mines (Rpke, 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 Rpke was still writing 33 years later (Rpke, 1955e). By contrast, Rpkes habilitation dissertation addressed the economics of business cycles (Rpke, 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 Germanys war reparations an issue on which he continued to write throughout the 1920s and 1930s (1924d, 1928d, 1929e, 1930e, 1931e) Rpke was appointed professor at the University of Jena at the age of 24, thereby becoming Germanys youngest professor in 1924. Part of his tenure at Jena was spent in the United States,

Wilhelm Rpkes political economy

where, thanks to funding from the Rockefeller Foundation, he studied the economic problems of American agriculture (Rpke, 1927a, 1927b). After spending time at the University of Graz in 1928, Rpke 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, Rpke provided formal and informal advice on economic policy to various German governments. This included service on a government commission studying unemployment in 193031, as well as Ludwig Erhards currency-reform council which, between 1947 and 1948, forcefully advocated the German economys liberalization. In 1950, West German Chancellor Konrad Adenauer commissioned Rpke to write a defense of his governments economic policies a defense which, besides praising Erhards liberalizing measures, also criticized emerging trends of government intervention (Rpke [1950e] 1982). Often unwilling to wait for policy-makers to ask for his opinion, Rpke 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 Hayeks Road to Serfdom (1944) had upon Anglo-American audiences (Schwarz, 1980, pp. 393401). Likewise, many of Rpkes newspaper articles had a profound impact upon informed opinion. One of his more famous pieces was an article in the Catholic weekly Rheinische Merkur (Rpke, 1947b). Its critique of Gnther Keiser, the foremost economist opposing Erhards 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 Erhards reestablishment of the market economy in West Germany in 1948.3 Rpkes 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, Rpke 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

reason, Rpke commented, I determined to become an economist and sociologist (1959f, p. 228). Rpkes 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 Rpkes 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 (Rpke, 1964e, pp. 7887). Rpkes 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 Rpke 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 Hayeks opinion, Rpkes 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 Rpkes understanding of political economy. It is an exercise in historical recovery insofar as it seeks to recapture Rpkes 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 Rpkes 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 centurys first three decades. We then explore Rpkes 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 Rpkes 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 Rpkes 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

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Wilhelm Rpkes political economy

REDISCOVERING POLITICAL ECONOMY

Since apparently first coined in 1615 by Antoyne de Montchrtien (Schumpeter [1954] 1994, p. 167) to describe how monarchs could manage their kingdoms as landowners organized their estates, the term conomie 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. 36). 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, Smiths 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 Smiths 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 Smiths 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. 1340). 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, Smiths 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 societys 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 labors 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. 13140; Hayek, 1960, p. vii). With some notable exceptions, however, this Smithian conception of economics and political economy did not persist after Smiths death in 1790. The economic historian Terence Hutchison underlines the differences between Smiths sociological economics and post-Ricardian pure economics (Hutchison, 1979a, p. 433). In Hutchisons 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 Smiths 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

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Wilhelm Rpkes 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 Rpkes 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, Rpke developed a broad social science agenda. Though Rpke had a clear sense of the boundaries of economic science per se, Rpkes 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. Rpke 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 Rpke 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 Rpke and the Scots places questions of human happiness at the center of their respective inquiries. Rpkes 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, Rpke 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 Rpke garnered outside professional economic circles was his conviction that economics could not eschew questions of value. Rpke was an unabashed conomiste-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 Europes 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 Rpkes 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 Rpke draws upon history, literature and philosophy to explain Germanys mid-twentieth century catastrophe to German and non-German audiences. Like Smiths Wealth of Nations, Rpkes 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 Rpkes 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. Rpkes 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, Rpke insisted, was subordinate to these normative ends. Nonetheless, we shall see that Rpke did not regard normative commitments as necessarily compromising economics credentials as a positive science. Much Rpkean 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 Rpkes political economy

the realization and maintenance of particular moral, social and political goals. In his last book, Rpke identified the nineteenth-century French economist Jean Charles Lonard Simonde de Sismondi (17731842) 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. Rpke stressed, however, that Sismondi also reminded nineteenth-century audiences in his Nouveaux Principes dconomique 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 Rpkes project represented an attempt to return modern economics to the Aristotelian realm of ethics from which economics originally emerged. Rather Rpke 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 Rpke 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 ones 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 ones own with life and its uncertainties, a sense of the natural order of things, and a firm scale of values. ([1958f] 1998, p. 98)

Rpkes 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 Rpke 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, Rpkes 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 Rpke 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 Rpkes understanding of man his philosophical anthropology is also rooted in what might be called the tradition of Christian realism often associated with St. Augustine. Rpke 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 romanticisms contribution to National Socialisms rise, this was a serious charge. The point, however, is that Rpke 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, Rpke 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 Rpke 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 Rpkes 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 Rpkes liberal focus upon freedom and his conservative interest in order. This may simply be an irresolvable tension in the grand liberal

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Wilhelm Rpkes political economy

tradition to which Rpke 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 Rpke 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 Rpkes political economy challenges not only the direction of much post-1945 economic science, but also those who question the market economys moral and economic benefits.

NOTES
1. This figure includes the translation of some of Rpkes writings into multiple languages. Rpke also re-published many articles as chapters or sections in books. Many of the chapters in Rpkes Mass und Mitt, for instance, were previously published as standalone articles. 2. Hayek and Rpke corresponded on a regular basis before and during World War II. After the war, Rpke attempted to establish an international journal for liberal thought while Hayek wanted to create an international academy. Rpke, 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 Hayeks academy in 1947 (Hartwell, 1995, pp. 2231). 3. For other vital contributions by Rpke to the case for post-war Germany economic liberalization in this period, see Rpke (1946b, 1947a, 1947c, 1947e, 1947g, 1947h, 1947i, 1948f). 4. These are only a select number of the economic subjects addressed by Rpke throughout his career. But, as this book is not intended to provide a comprehensive study of every aspect of Rpkes economics, the subjects considered here have been chosen on the basis that they allow a thorough exploration of Rpkes political economy. 5. To this extent, this book substantially agrees with Hutchisons 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. 1678).

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 Rstow (1980, p. 644)

For understandable reasons, analysis of National Socialisms economic dimension often takes second place to study of the regimes 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 Hitlers creed. The regimes 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 Rpkes view, the Nazis increasingly interventionist economic policies, culminating in the extensive regulation and price controls associated with Germanys war economy, were not incidental effects of the Nazis desire to wage war. The regimes 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 Germanys slide from the 1834 customs union (Zollverein), which removed internal customs barriers between 38 states of the German Confederation, towards Nazi Germanys autarkic policies puzzled many German economists. Rpke focused on this in his two books addressing German issues: German Commercial Policy (1934a) and
17

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Wilhelm Rpkes political economy

The German Question ([1945b] 1946). Rpke 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. 64130). 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; Rstow, 1980). What follows is a sketch of the intellectual and historical developments which precipitated and contextualized Rpkes efforts to articulate a new liberal vision of political economy in the wake of capitalisms travails in the twentieth centurys 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 Bhm, Alexander Rstow and Alfred Mller-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 Mller-Armack and another school linked with the University of Freiburg (Vanberg, 1988), especially Eucken and Bhm. Rpke 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 Rpke and others sought with what he often called nineteenth-century historical liberalism (historischen Liberalismus des 19 Jahrhundert) (Rpke, 1947d). Rpke 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 (Rpke, 1950f, pp. 1414).

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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 Smiths Wealth of Nations, established what amounted to free trade between Prussias provinces. This marked a prominent break from the mercantilist, cameralist and interventionist policies hitherto pursued by Prussias 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 revolutions failure to reshape the German political landscape in favor of parliamentary democracy, and the rise of the worlds 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 Bismarcks successful effort to establish German unity under the Prussian monarchy a unity forged through Bismarcks 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 capitalisms

20

Wilhelm Rpkes political economy

increasingly state-orientated nature. This economic trend was exacerbated by the new German Empires financial and commercial crash in 1873. This was followed by a severe industrial recession and a downturn in German agricultures 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). Bismarcks intention was to facilitate a greater centralization of power and to marginalize the Reichstag as a rival source of authority. Though Bismarcks 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 Germanys 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

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These moves towards dirigiste policies were largely accepted across Germanys 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 conservativenationalist parties have any desire to challenge the status quo. They relied heavily upon the votes of the heavily protected, subsidized and often Junkerassociated East Elbian farmers. Moreover, like the National Liberals, German conservativenationalists generally approved of the social welfare programs instituted by Bismarcks 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, Germanys economy had become characterized by a high degree of regulation and cartelization and also deeply integrated into Germanys prevailing political order. Writing almost thirty years later, Rpke 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 Rpkes political economy union organizations . . . here, too, the whole German credit system was soon centralized . . . ([1945b] 1946, p. 169)

Not surprisingly, Rpke commented (1938c, 1938e), these trends accelerated upon Germanys entry into World War I. Just as the Imperial Governments foreign policy slowly became subordinated to the German General Staffs military objectives, so too much of the economy was militarized. Germanys war economy was directed by Walter Rathenau, a German-Jewish industrialist who founded one of Germanys biggest electricity companies, the Allgemeine Elektrizitts-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). Germanys 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 Germanys central bank, the Reichsbank, was able to contain the inflation that resulted from the decision to expand Germanys money supply to reduce unemployment. Monetary stabilization only occurred in 1924. The anti-liberal trend in economic policy was exacerbated by articles 26475 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 Germanys 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,

Ruin and reform

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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 Peoples 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. 44457). Cartels and protectionism became accepted as simply immovable parts of Germanys post-war economic landscape (Sheehan, 1978, pp. 2567). 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 Germanys 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. Prussias trade liberalization of 1818 occurred almost three decades before Britains formal embrace of free trade in 1846. Writing over one hundred years later, Rpke observed that the Prussian officials implementing the program of 1818 were eager followers of Adam Smith and noted that Prussias experiment in economic liberalism was studied by

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Wilhelm Rpkes political economy

many wishing to see their own nations follow a similar path ([1945b] 1946, p. 159). Economic liberalisms true intellectual epicenter in nineteenthcentury Central Europe was not, however, to be found in Prussia. In 1871, the Vienna-based scholar Carl Menger (18401921) 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 Mengers 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)

Mengers subjectivist theory of value thus grounds the price of anything services, loans, labor, objects in peoples subjective estimation of its ability to meet a particular need relative to all the other goods available to them to meet other needs. Mengers search for empirical laws that governed the economys workings spawned the Austrian school of economics. Its leading lights included Eugen von Bhm-Bawerk (18511914), Friedrich von Wieser (18511926), 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 (17891846) and Wilhelm Roscher (181794) held that Smithian free-trade arguments largely reflected particular British circumstances which could not be uniformly applied to other nations. Economists, in Roschers 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 countrys economic development stage. It was, however, Gustav von Schmoller (18381917) who sharpened the emerging tensions between the Austrian and historical schools, not least by penning a critical review of Mengers 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 historicalcultural 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

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that a cohesive economy could survive (ibid., vol. 1, p. 5). A student of Prussias rise from Northern European obscurity to world power status, Schmoller was convinced that the Prussian states intervention in economic life, most notably under Frederick William I (168840) and Frederick the Great (171286), 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 Schmollers 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 schools 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 schools strength, however, was its consciousness of the importance of historical differences. In this regard, Schmollers approach marks less of a departure from previous approaches to economics than is often supposed inasmuch as Smiths 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. Schmollers insistence on placing economics into a broader social science agenda thus had more in common with Smiths approach than that of Smiths nineteenth-century English successors. Schmollers 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 Rpke 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 (18351917) 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 fr 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 governments 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. 81113). Historians continue to debate whether the historical schools emergence encouraged Bismarcks 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 schools rise was providential for Bismarcks 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 Hohenzollerns 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 Germanys 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. 24953). 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 others methodology, they became locked into antagonistic positions. Yet the differences between the schools should not be exaggerated. Schmoller acknowledged and approved of the markets 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. 778), some similarities between the

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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 historicaltheoretical 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, BHM AND FREIBURG ORDOLIBERALISM

Eventually the historical school declined in relevance and importance throughout Germany. This resulted partly from inner dissension, especially after Max Webers critique of historicist methodology. Even more damaging was Imperial Germanys defeat in 1918, which discredited those intellectual schools associated with the HohenzollernBismarckian state. It remains, however, that the combination of the historical schools 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 mechanisms 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 Austrias 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, Rpke later stated, rendered him forever immune from the virus of socialism (1961c, p. 6). Still, economic liberalisms path in Germany was different from that advocated by Mises, and ultimately to be more influential on Rpkes economic thought. Crucial figures in this regard were Eucken, Rstow, Bhm and Mller-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 (18461926), winner of the 1908 Nobel Prize for Literature for his work on Kantian ethical theory, Walter Euckens thought and writings appear to have reflected something of his fathers anti-positivism, anti-utilitarianism, anti-socialism (Eucken, 1921a, p. 126, 1921b, p.186), as well as the influence of the phenomenological philosopher Edmund Husserl (18591938) 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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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. 4044). 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 economys 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 Smiths 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. 6386). He thus sought to break free of the historical schools anti-theoretical empiricism and to return German economics to the realm of theory from which it had been cut off during the historical schools long period of dominance. Euckens 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 Nationalkonomie, 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 capitalisms crisis lay in the moral and spiritual realm. This required a return to a comprehensive spiritual order of life (Eucken, 1926, pp. 1516), 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 Rstow, 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 Euckens standpoint, the essential problem of economics was therefore how to overcome scarcity without destroying liberty (1952, p. 300). Euckens 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 individuals liberty from all other individuals and the state was preserved (ibid., pp. 18199). Pursuing an intellectual project of such magnitude required, in Euckens 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 schools 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, Euckens approach to economics grew increasingly synthetic over time. Euckens first forays into public policy debates underlined his skepticism about the efficacy of state economic intervention. Euckens 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

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by government deficit-spending and the Reichsbanks 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 Germanys return to the gold standard (1925, pp. 7981), maintaining that this would limit the states 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. 12023), 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, Euckens 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 historicalinstitutional 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 states power. The age of liberal capitalism reflected the dismantling of such structures and the states withdrawal from much of the economy. But, Eucken held, the period following Bismarck marked a reversion to the states 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. 300301). 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 Euckens view, was to work toward a separation of the political and economic realms that was as unambiguous as possible (1932b, p. 302). Euckens work in the 1920s and early 1930s thus focused upon theoretical argumentation supplemented with some historical analysis in order to shed light on Germanys particular economic and political problems. Gradually, however, Eucken became persuaded that neither Mengers theoretical approach nor Schmollers historicalempiricism were adequate for his purposes. Neither Mengers insistence on separating theory and history nor Schmollers 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 Euckens thought was the influence of the legal theorist, Franz Bhm, whom Eucken encountered after taking up his chair at Freiburg. Bhm was especially interested in the role of law in shaping economic conditions. Having served in Germanys economics ministry in the 1920s, Bhm 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, Bhm 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, Bhm was especially attentive to cartelization. This was a prime example of law, he noted, being shaped to justify preexisting anti-competitive economic practices. From Bhms 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 Nrr 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 Bhm 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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In 1933, Bhm 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 Bhm, 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 politicallegal and politicaleconomic 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, Bhm and Grossman-Doerth [1936] 1989, pp. 234). 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 (Mschel, 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 Bhms 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, Bhm 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 laws purposes, Bhm 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 (Bhm, 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 Bhm did explore how different historical ideas, such as Rousseaus theory of the General Will, had contributed to the state succumbing to powerful interests (Bhm [1966] 1989), his approach to economics was primarily theoretical. In Wettbewerb und Monopolkampf, Bhm 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. Bhms 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 Bhms 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 ordoliberalisms 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 Bhms influence, Euckens attention began shifting toward developing a policy of order to realize and maintain a free-market economy. In 1961, Rpke recalled that at the second Mont Plerin 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 (Rpke, 1961a, p. 10; Vanberg, 2004, p. 16). One of Euckens 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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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 Euckens 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 peoples 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. 2914). An economy controlled by monopolies and cartels effectively destroyed the liberty of other market participants, thus rendering meaningless the rule of law (ibid., pp. 4155). 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. Euckens 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 Bhm, 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: RSTOW AND MLLER-ARMACK

While Eucken and Bhm focused on developing a type of economiclegal constitutionalism, their fellow economic liberals, Alexander Rstow and Alfred Mller-Armack, sought to integrate the study of economics with insights derived from historical sociology. Unlike Eucken and Bhm, Rstow returned from World War I a convinced socialist. Like Bhm, Rstow worked in the economics ministry in the immediate post-war period, and was responsible for plans to nationalize Germanys Ruhr coal industry. The ongoing instability of Weimar governments in the 1920s made implementation of such plans increasingly improbable, so much so that Rstow 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 Rstows disillusionment with socialism (Rstow, 1980, pp. xiiixxix) and turned him into a prominent and vocal anti-dirigisite. Rstows 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. 1856). Rstow also argued that the states economic role should primarily be one of protecting competition from any interest group seeking legal privileges (ibid., p. 186). This meant that while the states power should be limited, it should also be strong enough to defend the market economy from private actors. Rstows 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. Rstows concerns about the social question led him to advocate particular redistributionist policies, such as inheritance taxes (Rstow, 1950, p. 98), to reduce economic inequities in society. More significantly, Rstow held like Schmoller that markets tended to undermine social cohesion: competition as such, he wrote, appealing as it does solely to selfishness

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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 (Rstow in Rpke, 1942, p. 272). Rstow 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, Rstow 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, Rstow 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 (Rstow, 1945) but later expanded upon in his own opus, Freedom and Domination. Rstows 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 Rstow, 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, Rstow 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, Rstow suggested, one could hardly blame Western Europes 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, Rstow 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, Rstow added, was properly designated as capitalism (ibid.). Rstow conceded that this distinction meant that he agreed with Marxs proposition that this capitalist economy, carried further, must perforce lead to communism and

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collectivism (ibid., p. 458). But Rstow 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 economys corruption from its gradual association with non-economic elements inimical to the market economy. A crucial part of Rstows Schmoller-like attention to history was his growing conviction that the market economys 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. Rstow 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 Mller-Armack. Mller-Armacks path toward economic liberalism was more complicated than that of Eucken, Bhm and Rstow. A committed Christian and intensely interested in Catholic social teaching, Mller-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). Mller-Armack spent much of the 1920s working on business-cycle theory. While he opposed price controls as a way to dampen business-cycle fluctuations, Mller-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 booms later stages as its momentum began declining (Mller-Armack, 1929). Business-cycle theory was an important component of Mller-Armacks 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 (Mller-Armack, 1932). This contradicted the Marxist position that capitalisms very nature would lead it in the very predictable direction of socialism and eventually communism (Watrin, 2000, pp. 1967). Mller-Armack, however, perceived a greater threat to the markets 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, Mller-Armack held, had

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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, Rstow and Bhm, much of Mller-Armacks 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, Mller-Armack suggested that the most optimal approach was to design socially and economically interventionist policies that did not damage the competitive orders fundamental institutions, but which also met modern industrial mass societys 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, Mller-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, Mller-Armack argued, was the mistake of measures such as price controls (1947, p. 107). Yet Mller-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). Mller-Armacks willingness to permit government interventions in the economy went far beyond what Eucken and Bhm thought permissible, and even exceeded Rstows parameters. Mller-Armack was thus closer to Schmoller than others commonly identified with ordoliberalism and sociological neoliberalism something that Mller-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. 1489). By style, Mller-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 economys formal direction towards realization of specific political and social ends was achievable and desirable (Mller-Armack [1973] 1974, p. 248).

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41

Mller-Armack also shared Schmoller and Rstows interest in theories of historical development (Mller-Armack [1948b] 1974, p. 108). This may explain why, as Christian Watrin notes, Mller-Armacks publications on political economy were permeated with social-philosophical reflections (2000, p. 214). These thoughts also reflected a central conclusion of Mller-Armacks research: that economic, social, and political institutions are powerfully shaped by different religious convictions (Mller-Armack, 1944, p. 110). Mller-Armack was not inclined to determinist positions, but, following the line of inquiry outlined in Webers 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, Mller-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 Europes 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, Mller-Armack noted that Calvinist regions had quickly developed the basics of a liberal economic system, while Lutheranisms bolstering of royal power in the post-Reformation period helped foster absolutism, strong state bureaucracies, and less-liberal economic arrangements. In later works, Mller-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 MarxismLeninism (1948a). The point of these historical excursions was Mller-Armacks 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 Mller-Armack differed from Eucken, Bhm and even Rstow who generally regarded the market economys 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. Mller-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 (Mller-Armack [1960] 1982, pp. 5361). Without the active promotion

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of social cohesion, Mller-Armack believed, it was questionable how long the market economy could sustain itself.

RPKE AND THE NEW ECONOMIC LIBERALISM

After World War II, Eucken, Bhm, Rstow and Mller-Armack exerted considerable influence upon West German economic policy. Bhm was a prominent member of the Bundestag, while MllerArmack 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 Bhm focused upon the intersection between the legal and economic realms whereas Rstow and Mller-Armack incorporated stronger sociological, historical and religious emphases into their writings. Rstow and Mller-Armack were also more willing to permit state intervention in the economy than Eucken and Bhm, and more explicit about their ambition to develop a third way which retained laissez-faires 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 theoryhistory division. Whereas the historical school took the view that history was theory, Eucken, Bhm, Rstow and Mller-Armacks 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 Germanys economic and political problems had much in common. All placed a premium on preventing the states 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 Germanys 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, Rpke 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 Rpke soon concluded that a great deal of the Prussian mentality lay hidden in this same socialism (ibid.). Rpkes 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, Rpke advocated some degree of worker participation in the management of companies, arguing that it would ease industrial tensions (1922a, pp. 6970). Rpke 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. 299300). By the mid-1920s, Rpke had become familiar with Eucken and Rstow, 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. 4957). They regularly corresponded with each other as individuals with whom they need not dissemble. This was especially true in the case of Rstow and Rpke, particularly after they went into exile in 1933. Many elements of Rpkes 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 Euckens Die Grundlagen der Nationalkonomie, Rpke argued that Euckens focus on a narrow data-set contributed to the books excessively narrow examination of its subject matter ([1940] 1959, p. 339). The same criticism could not have been made of Rpke, even in his earlier days when his own economic focus was relatively narrow in comparison to his later works. Like Mller-Armack, Rpke was deeply interested in philosophical anthropology and the influence of religion. He shared Rstows passion for history. At the same time, Rpke believed, like the Austrians, that certain economic truths transcend culture and can be recognized through theoretical exposition. This much is apparent from Rpkes 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 Germanys 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. Rpke (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 mans 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. 1734)

When Keynes penned these words in his obituary of Alfred Marshall (18421924), 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, Keyness 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 Keyness 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 economists 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 Keyness General Theory were intense not only because Keyness thought played a significant role in reconfiguring most Western economics. Many of Keyness critics were concerned with what they regarded as his effort to change the essence of economics itself.
45

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Efforts to reshape economics are not new. Marshalls Principles of Economics (1890) sought to rescue economics from what he regarded as the chaos into which it had descended in the nineteenth centurys 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 goods 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 Marshalls 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 Rpkes 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 Rpkes diagnosis of trends in modern economic thinking. Over time, Rpke became increasingly concerned about what he thought was happening to economic science and its implications for human freedom. On one level, Rpke consistently warned against rationalisms influence upon economics. But Rpke was also perturbed about Keynesianisms impact upon economic science and economic policy. Sound political economy was, Rpke insisted, impossible if a false vision of economics prevailed, if economists did not recognize their own sciences advantages and limitations, or if they sacrificed the integrity of economic science to the zeitgeists demands.

HISTORY AND ECONOMIC SCIENCE

No-one familiar with Rpkes 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 Rpke. 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 (Rpke, 1936a, pp. 3860). Admitting that such a historical account is difficult because of scrappy and inaccurate data (ibid., p. 38), Rpke 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 Rpkes post-1940 works contain as much historical sociology as strict economics. Then there are Rpkes excursions into economic history, such as his LEconomie mondiale aux XIXe et XXe sicles (1959c). Rpkes attention to these matters did not mean that he had embraced the historical schools methodological claims. None of his writings contains the type of exhaustive statistical compilation and analysis typical of Schmoller and his followers. Nor does Rpke attempt to uncover laws of general historical development, as proposed by early historical school figures such as Roscher. In another sense, however, some of Rpkes writings suggest that he agreed with the historical schools emphasis upon each nations history reflecting differing paths of economic development. In German Commercial Policy and The German Question, Rpke stresses how certain political and intellectual trends helped shape the German economy between 1871 and 1945. Nowhere, however, does Rpke suggest that this history necessitates a highly economically interventionist state in Germany. Rpkes 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. 182214). Defeated Germany, Rpke 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 Rpke, 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 Rpke 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 Rpke 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 Rpkes 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 Rpke, with reflection upon its origins. At the most basic level, Rpke

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maintains that humanitys 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 mans 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 (Rpke [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 Rpke 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). Rpke 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. 11516, 1964e, pp. 7885). Rpkes 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 Rpkes point is not that it is impossible to devise socialist economic theories. Rather it is that a socialist economys workings cannot be explained without comparing them to the theoretical pattern of free prices. Another reason for Rpkes 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, Rpke 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, Rpke 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 Rpke called this spontaneous order over the commanded order. By superiority, Rpke 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. 13, 1953f). Rpke thought that modern economics owed something to peoples 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 Rpkes 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, Rpke 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. 1516). At the same time, Rpke maintained that the development of critical reason and what he called liberal rationalism in the 1700s ([1933d] 1969, pp. 8991) 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, Rpke 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 Enlightenments 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). Rpkes view of the Enlightenments impact upon the way people conceptualized the economy was not uncritical. He believed that the same liberal rationalism which broke mercantilisms sway over mens minds also laid socialisms foundations (ibid.). Nonetheless, Rpke 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, Rpke held, true

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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. 11415).

ECONOMICS AS POSITIVE SOCIAL SCIENCE

To Rpkes mind, the market economys 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 Rpkes vision of economics can be identified. The first is best described as positive-analytical, the other as normative. If, Rpke 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 Rpke, 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, Rpke stated, unique to positive economic analysis. A common error of economists, Rpke 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, Rpke 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 Rpkes 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 Rpke 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 peoples unlimited wants and their limited means to satisfy them that is, the fact of scarcity (Rpke [1937a] 1963, p. 8). By limited, Rpke 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 goods 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, Rpke 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). Rpkes reflections on marginal utility are not remarkable. They reflect commonly accepted elements of marginal theory as developed by Menger and Jevons. But Rpke considered it necessary to elaborate on these points for three reasons. First, Rpke 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, Rpke 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, Rpke insisted, could only be understood against the background of classical theorys own attention to the importance of utility. Much marginalist theory involved the supplanting of classical theorys objective-technical explanation of value with a subjective-economic explanation (ibid., pp. 1718). This rendered

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redundant the classical schools labor theory of value. And herein lay the third reason for Rpkes 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 Rpke 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, Rpke 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, Rpke 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, Rpke maintained, economics is simply the science of alternatives (ibid., p. 14). The third concern of Rpkes 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 (Rpke, 1956i, p. 114). Not only, Rpke 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, Rpke held, people must choose which of three moral stances they want to dominate their economy. At this point, Rpkes understanding of positive economics begins to draw on normative terminology to achieve analytical clarity. The first moral position was described by Rpke 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 (Rpke [1937a] 1963, pp. 2021). Reciprocal exchange and a division of labor are crucial elements of the business method. With this tripartite schema in place, Rpke 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. Rpke 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, Rpkes 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 methods non-economic prerequisites. From a positive-scientific standpoint, Rpke noted that it was difficult to deny that the business methods efficacy depended heavily upon peoples 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 Rpkes view of economics positive-analytical dimensions invoked normative criteria at crucial points, Rpkes treatment of economics normative dimension draws upon his understanding of positive economic analysis. For Rpke, 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 Rpke 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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that is, opportunity costs (ibid., p. 38).1 Using the example of building a bridge, Rpke 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 economys context (ibid., p. 27). The positive aspect of economics was thus a major foundation of the economists normative recommendation qua economist. Rpke 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. 1245). The first and perhaps most important of these was the difficult but essential task of disabusing people of home-grown economics. Economic policy, Rpke 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 economists ongoing struggle against home-grown economic falsities was, Rpke 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 Euckens study of the principles of economic policy (Eucken, 1952, p. 194), Rpke 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. 1267). If anything, Rpke 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 (Rpke, 1956i, p. 127). This brings us to the question of the specific habits Rpke 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, Rpke 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 (16461716): there is no truth which does not have something erroneous comingled with it (Rpke, 1956i, p. 119). This, Rpke 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 (Rpke [1944b] 1948, p. 76). Rpkes 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 (Rpke, 1953b, p. 378). Nonetheless, as if to remind economists of the limits of this caution, Rpke 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 (Rpke, 1956i, p. 119). Economists cannot simply rationalize any abuse that assumes the name of economic policy (ibid.). Here Rpke 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 Rpkes 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 Rpkes phraseology, modification of the fundamental thesis. Fully recognizing the challenging nature of such a role, Rpke 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, Rpke 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 faade 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

Rpkes 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 Rpkes 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? Rpkes 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 (Rpke [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. 1415). Expecting people constantly to behave in economic life like saints should be dismissed, Rpke 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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be entrepreneurs will simply act differently if they cannot be assured of the fruits of their labor (Rpke, 1945f, p. 110, 1949g, [1951h] 1987, p. 8). Correct answers to these questions of order and incentives are, Rpke 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, Rpke 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, Rpke 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, Rpkes 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, Rpke 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 systems external focus is also radically different: coordination and liberty are concerned with the customer; subordination and command concentrate on fulfilling the bureaucracys commands which license, order, seize, allocate, distribute and forbid all with the threat of coercion in the background (ibid., p. 20). Significantly, Rpke 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, Rpke 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, Rpke 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 Rpke 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 markets superior capacity to address scarcity, but also something to be valued for its own sake. Invoking the indictment against collectivism articulated in Hayeks Road to Serfdom, Rpke argues that socialism as an economic technique whether directed by a totalitarian or democratic government demands the economys 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 (Rpke [1951h] 1987, p. 26). Responding to objections that mixed economies need not lead in this direction, Rpke stresses Tocquevilles warnings about how the states 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, Rpke insists, is intimately associated with the question of the control of power (ibid.). Socialism proposes to address this by eliminating capitalisms alleged concentration of power. But there is, Rpke 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, Rpke 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. 3031). By frankly appealing to private initiative, Rpke 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

Rpkes 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. Rpke squarely addressed these matters in the 1940s, most notably in Civitas Humana and an article published in an otherwise obscure Turkishbased journal. For Rpke, 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, Rpke 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, Rpke 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, Rpke 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 philosophys influence upon the sciences (ibid., p. 73), Rpke 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). Rpke 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 (Rpke, 1936e), and

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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, Rpke regarded the claim of some economists that economics should aspire to value-neutrality as absurd. On the most basic level, Rpke emphasized that the entire enterprise of science was premised on the assumption that it was good to know truth (1942a, pp. 16). To this extent, science was inseparable from value-judgments, especially the moral sciences, to which the social sciences inclusive of jurisprudence belong (Rpke [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, Rpke 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, Rpke 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. Rpke 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, Rpke 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 (Rpke, 1942a, p. 5). An example was Pascals description of human beings as being neither angels nor beasts, but rather Medium Creatures (Rpke [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, Rpke 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 societys health as a doctor determines a patients 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). Rpke 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, Rpke 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, Rpke 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, Rpke 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 Rpkes 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 Rpkes 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, Rpke believed that these changes contributed to economic policies that violated certain values and sought to defy certain economic truths. Here Rpke 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, Rpke 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 (Rpke, 1956i, p. 112). Economic science now enjoyed a prestige that had hitherto eluded it, partly, Rpke 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, Rpke held, for deep concern to be expressed about economics development in the post-war period. The economist, Rpke once wrote, has his occupational disease: restricted vision (1959f, p. 234). Stressing that he spoke from personal experience, Rpke 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 (Rpke [1942] 1992, p. 53). Paraphrasing the eighteenth-century physicist Georg Christoph Lichtenburg, Rpke wrote, Whoever understands economics only, understands not even them (1959f, p. 234). By this, Rpke 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 Rpke 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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attempt of socialist economists to reconcile the price mechanism with collectivist economies. How, Rpke 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, Rpke strove to avoid separating economics from the reality of human nature. Though not inattentive to utility, Rpke 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 Rpke 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. 2334). Instead, Rpke 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, Rpke was impatient with those forms of political economy that reduced the study of individual human choice and action to relative insignificance (Rpke, 1942i). This was an inevitable result of scientisms impact upon economics. Rpke 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 Rpke 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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and unbridled positivistmechanistic 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, Rpke would often cite the French philosopher Rabelais: science sans conscience nest que ruine de lme ([1942g] 1992, p. 8, 1963a, p. 199). Rpke also regarded scientism as destructive of humanitys 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, Rpke 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, Rpke claimed, implies simultaneously disdain for synthesis. It means ever more specialization, the breeding of a learned type (ibid., p. 68). In the economics profession, Rpke 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 Rpkes critique of scientisms impact upon economics parallels and draws upon writings of Hayek (ibid., p. 59). In Hayeks 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). Rpke also shared Hayeks 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 lhumanit

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(Rpke [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 Rpke described as eternal Saint-Simonism (ibid., p. 63). Named after the nineteenthcentury French philosopher of scientific socialism Henri de Saint-Simon (17601825), Rpke 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.). Rpke described Walter Rathenau as personifying Saint-Simonist tendencies (1922c) insofar as he, with his engineer friends, invented the term planned economy while managing Imperial Germanys war economy ([1944b] 1948, p. 79). Nothing, to Rpkes mind, could be further from the vision of economic science found in Smiths works. In his Economics of the Free Society, Rpke 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, Rpke 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, Rpke 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, Rpke 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 mathematicalmechanical universe (ibid.). When added to the modern penchant for statistics, this outlook actually limited economists ability to understand phenomenon such as the Great Depression (Rpke, 1938b). Thus, for Rpke, while Smith marks a promising beginning, Keynes embodied a rationalistic regression in economics explanatory power ([1937a] 1963, p. 224).

KEYNES AND KEYNESIAN FALLACIES

Though Rpke did not regard all Keynesian positions as wrongheaded, he did consider Keynesianism to be an unreliable way of economic thinking.

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While Rpke assigned more blame to Keyness disciples (ibid., p. 225,3 [1951h] 1987, p. 3, [1958f] 1998, p. 193), he insisted that Keyness approach to economics had created an old economics and a new economics in which the sense of one was nonsense in the other (Rpke [1952b] 1969, p. 170). Economics had effectively split into two realms of logic (Rpke [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 societys larger social and intellectual life, Rpke insisted that Keynesian economics reflected Keyness mathematicalmechanical outlook on life, as evidenced by Keyness prior work on probability theory in his Treatise on Probability (1921). Hence no-one should therefore be surprised, Rpke concludes, that Keynes viewed the economy as the result of mechanical quanta subject to precise measurement and direction by an omnicompetent technical human intelligence (Rpke [1937a] 1963, p. 224). Rpkes claim that Keynes had a mathematical view of life that dominated his approach to economics is almost certainly unfair. Keyness vision of morality and society was profoundly shaped by his reading of G.E. Moores Principia Ethica (1903). Even later in life, Keynes said that he accepted Moores fundamental intuitions, especially Moores 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 Moores book had protected him from the Benthamite traditions overvaluation of the economic criterion (Keynes [1933] 1972, pp. 4456), so much so that even Rpke acknowledged that Keynes had rejected utilitarianism as a philosophy ([1958f] 1998, p. 276). Moreover, when we examine Keyness 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 Keyness outlook on life, Rpke may simply have been indicating that he thought Keyness 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 Rpkes methodological

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complaint against Keynesianism. According to Rpke, 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, Rpke suggested, made readers wonder if they had stumbled upon a chemistry curriculum (1956i, p. 121, cf. 1953a). Rpkes 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 economys output in that area (Rpke [1958f] 1998, p. 226). Rpkes 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 (Rpke, 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, Rpke argued that the economists 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). Rpke may have been thinking of Paul Samuelsons effort to reconfigure economics on the basis of mathematical language (Samuelson, 1947). For Rpke, 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 Rpkes 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, Rpke 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, Rpke 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, Rpke stressed, were not confined to non-Keynesians. He quotes one of Keyness 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 Rpke [1951h] 1987, p. 3). Drawing upon Mises, Rpke 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 mathematicalstatistical direction, the more it lost sight of that which is un-mathematical and which does not always behave predictably human beings (Rpke, 1956i, p. 122). Though Rpke 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 (Rpke [1951h] 1987, p. 3), but also the dehumanization of economic science

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(Rpke, 1956i, p. 123). Keeping economics human, Rpke 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, Rpkes 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, Rpke 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, Rpke also thought that mid-twentieth-century economics was being negatively influenced by the context of political and economic collectivization in which it was practiced. Rpke even compared Keynes with Pablo Picasso, inasmuch as Picassos purported banishment of real human beings from art paralleled Keyness expulsion of humans from economic science (ibid.). It was no wonder, Rpke 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. 2278).

FROM ECONOMIC SCIENCE TO ECONOMIC POLICY

Though expressed in rather passionate terms, the preceding observation illustrates how closely much of Rpkes views of economic science and the economists role were shaped by his normative concerns. Certainly Rpkes 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 Rpkes 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 Rpkes thought that separating them becomes difficult. Free prices are a centerpiece of his understanding of positive economic analysis, but

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he stresses that their functioning presupposes and facilitates a normative concern for liberty. Likewise, Rpkes criticism of Keyness approach to economics as a science is closely associated with his criticisms of Keynesian policies. The direction of economic policy, in Rpkes 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 Rpkes particular effort to articulate a reformed theory of economic liberalism.

NOTES
1. Rpke 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 Marxs labor theory of value. Modern marginal theory thereby refuted another staple of Marxist economics ([1937a] 1963, p. 38). 2. In later life, Rpkes 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 Gods place (Rpke, 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 Rpke ([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 Rpke, 1945 Memorandum to Allied Diplomats (cited in Rpke [1945b] 1946, p. 186)

On 7 May 1945, Colonel-General Alfred Jodl, Chief of the Wehrmachts Operations Staff, signed the instruments for Germanys unconditional surrender. Once dominant over continental Europe, National Socialism was extinguished. MarxismLeninism, 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 Hayeks Road to Serfdom in 1944, nothing better symbolized the low regard in which capitalism was held than the Labour partys sweeping victory in Britains 1945 general election. With its explicit commitment to nationalizing the British economys commanding heights and creating a cradle-to-grave welfare state, the Labour governments 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 Plerin Society in 1947. The conference considered questions ranging from monetary reform to Germanys future. The only papers addressing why the world was embracing collectivism were delivered by William Rappard (a close friend of Rpke 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
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factors. One was many societies militarization during two world wars. The second was that Europeans, empowered by democracy but exhausted by the 191445 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.). Hayeks 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). Hayeks 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, Rpke refrained from offering detailed reflections upon economic liberalisms decline. Commenting, however, upon lectures presented by Vivian Wedgwood and Carlo Antoni upon historiographys influence upon the contemporary political context, Rpke 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, Rpke 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 Zrcher Zeitung, published an article by Rpke outlining his arguments for a new market economy combined with a broad program of economic and social reform (1947n). It demonstrated that Rpke had been probing the truth about the development of liberalism and its economic implications for many years. The same article illustrated that Rpke 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 Rpke regarded as nineteenth-

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century liberalisms shortcomings so as to defuse the historical and social forces facilitating the spread of planning.

TREASON OF THE INTELLECTUALS

Rpke 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 (Rpke, 1934a, p. 2). Rpke subsequently unfolds a story of struggle between economic liberalizers and protectionists, in which economic liberalisms gains were wound back, partly because of Germanys 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. Bismarcks economic policies are underlined by Rpke contributing to these developments (Rpke, 1955e). German Commercial Policy, however, presents only part of Rpkes explanation of Germanys turn away from economic liberalism. This is evident from a number of essays penned by Rpke before he left Germany in late 1933. Characterized by its polemical tone, Rpkes 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 intelligentsias 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 (Rpke [1931l] 1969, p. 32), Rpke maintained that the same intellectuals had uncritically embraced a number of erroneous ideas about markets. First, they failed to distinguish between the market economys sound institutions and capitalisms 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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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 socialisms 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, Rpke 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, Rpke insisted that many intellectuals, especially Marxists and nationalist anti-capitalists, had become so intoxicated with forebodings of catastrophe, doom and destruction (ibid., pp. 334, 1933b) that they were actually inclined to resist constructive reforms to address the crisis. Writing fifteen years later, Rpke 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, Rpke 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 (Rpke [1933f] 1969, pp. 767). This was accentuated by growing acceptance of the economic fallacy that capitalism had encountered insurmountable limits in geographical space (Rpke, 1932b), despite the observation of economic liberals that a markets size was not determined by geographical space but rather by the volume of production and purchasing power in an economy (Rpke, 1934c). Above all, Rpke expressed growing skepticism about the masses ability to grasp even the simplest explanation of how market economies work (Rpke [1933f] 1969, p. 74). Part of the problem, Rpke maintained, was that Germanys economic crisis had been sparked largely by the international economys 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, 6970). More worryingly, Rpke contended, German capitalism was faltering in the face of what he called (using the title of Ortega y Gassets 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

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satisfying but economically irrational sloganeering. Explaining free trades 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

Rpkes theme of economic liberalism being suffocated under a wave of populism is reiterated in his other writings from the period (193031), but also in works penned by Eucken (1932a, 1932b) and Rstow in the same time-frame (193233). Looking beyond immediate circumstances, however, Rpke argued that a deeper intellectual problem undermining market economies was widespread questioning of liberalisms key moral commitments. Liberalism and the market economy, Rpke 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. Rpke 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, Rpke wrote, can prosper only in liberty (ibid., p. 85). Part of liberalisms genius was its protection of such individuality from arbitrary power (ibid., p. 85). This led to liberalisms 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 Rpke thought that there were real prospects for conflict between liberty and democracy (ibid., p. 87). This emphasis may have owed something to Rpkes experience of watching mass movements such as National Socialism and Marxism (Rpke, 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 Rpke. Rpke noted, however, that no-one should assume that economic liberty necessarily flowed from liberalisms 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 (Rpke [1933d] 1969, p. 87). But Rpke maintained that economic liberty was more directly a product of a

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second liberal value reason (1924a). Warning against tendencies to associate reason with progressivist and utilitarian outlooks, Rpke defined reason as the pursuit of truth and rejection of bias and obscurantism ([1933d] 1969, p. 88). Historically speaking, Rpke 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, Rpke 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. 9091). An attachment to liberty and reason, according to Rpke, was central to another liberal concern: the idea of humanity. Rpke did not understand this as secular humanism, but rather the unquestioned and absolute respect for every individuals human dignity an idea rooted in Antiquity which Christian, natural law and Enlightenment thought had developed (ibid., pp. 912). 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 (Rpke, 1938a). Once liberalisms essential values were understood, Rpke 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. Rpke regarded this as contrary to the development of an international Western civilization rooted in the worlds of Athens, Rome and Jerusalem (Rpke [1933d] 1969, pp. 935). 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, Rpke stated, by the advent of Ortega y Gassets 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, Rpke commented, was very different from illiberal democracy (ibid., pp. 967).

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And yet for all the energy and historical analysis that Rpke 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), Rpke did not explain how this occurred. The same articles raise questions concerning the coherence of Rpkes 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. Rpkes 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 Atatrks Turkey (Rpke, 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 Rpke and his fellow economist-exile Alexander Rstow 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 Rstow and Rpke spent much time in each others company, even living together in the village of Kadiky on the Asian side of Istanbul (Rpke, 1963a; Reisman, 2006, p. 106). They continued to collaborate after Rpkes departure for Switzerland in 1937.1 A number of scholars have noted that Rpkes thinking about economic liberalism developed significantly under Rstows influence (Johnson, 1989, p. 56; Zmirack, 2001, pp. 10113). Rpke himself acknowledged this influence on several occasions (1963a). This became especially evident with the publication of Rpkes International Economic Disintegration in 1942. It contains an appendix by Rstow and begins with an introduction based on a memorandum coauthored by Rpke and Rstow in 1938. This introduction contains the essential points of Rpkes critique of nineteenthcentury liberalism and begins to articulate a distinct reform agenda. Capitalism, Rpke 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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moral stamina and therefore requires moral reserves outside the market economy (Rpke [1942g] 1992, p. 52). The sources of these reserves were primarily the family and intermediate associations, the importance of which Rpke thought had been ignored by those economists focused on the egoistical atomistic homo conomicus (ibid.). Social cohesion, Rpke added, cannot be based simply on the principle of competition (1942h, p. 6). Unfortunately, Rpke 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 Rstow, Rpke maintained that Smiths 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. Rstow, 1980, pp. 16970, 21516). 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 (Rpke, 1942h, p. 68). How far Rpke and Rstow 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 (Rstow, 1980, p. 458), Rstow argued that the invisible hand is the perfection of the Physiocratic conception of the ordre naturel (Rstow in Rpke, 1942h, p. 270). Careful reading of the Wealth of Nations certainly indicates that Physiocrat ideas are present in Smiths 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 Smiths work explain Smiths 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, 1316), and certain monopolies (ibid., V.i.e, 30). Moreover, Smiths 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 Rpkes writings do not suggest it, he may have been influenced by the focus of many nineteenth-

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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. 15962). 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. 812; Viner, 1991, pp. 2524). Perhaps a better target for Rpkes reservations about metaphysical harmonies may have been the French economistjournalist Frdric Bastiat, whose insights Rpke greatly appreciated, but who came closer to articulating the arguments for invisible harmonies of which Rpke and Rstow were critical. As if aware of potential criticisms that their analysis oversimplified the position of some eighteenth-century economic writers, Rpke conceded that such thinking had never been stated as crudely as he and Rstow put it (Rpke, 1942h, p. 67). Far from being an ordre naturel, Rpke 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, Rpke acknowledged, simply assumed the moral influence of church and tradition (ibid., pp. 689, 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, Rpke claimed, were fatal errors ([1957d] 1988, p. 515). Rpke affirmed that market economies played a role in molding people toward more civilized behavior, but they were only one factor. Rpkes criticisms of economic liberalisms associations with rationalism were extended in The Social Crisis of our Time and Civitas Humana. By rationalism, Rpke 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 conomicus (Rpke [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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smacks of tradition (Rpke [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 mans 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 mens rational behavior. (ibid., p. 49)

Rpke 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, Rpke 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 Rousseaus desire to equalize society (Rpke [1944b] 1948, p. 52). In the realm of eighteenth-century economic science, Rpke maintained that rationalism manifested itself in economic doctrines which were grounded on a theologicalmetaphysical 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. 513). It was not, Rpke believed, the case that nineteenth-century liberals were blind to the social disturbances associated with the spread of capitalist industrialization and what Rpke called the proletarianization of large segments of society (Rpke, 1949j).2 In line with their economic philosophy, however, economic liberals had believed that the market would gradually resolve these problems (Rpke, 1936f, [1942g] 1992, p. 53). When this failed to occur, many liberals began supporting social programs often indistinguishable from socialist measures (Rpke [1942g] 1992, p. 55). None of these criticisms, Rpke 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 (Rpke [1942g] 1992, p. 108). To this extent, Rpke 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

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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 businesss 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 (Rpke [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 (Rpke [1944b] 1948, pp. 1314). 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 (Rpke, 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 (Rpke [1942g] 1992, p. 103, 1960g, p. 223). Equally inadequate, in Rpkes view, were proposals to entrust the economys direction to professional and business associations that incorporated managers, workers and union officials among their membership ([1944b] 1948, p. 38). For Rpke, 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. 935). In totalitarian states, Rpke 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 liberalisms deficiencies, Rpke 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 Rpkes 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, Rpke 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 Lippmanns 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, Rstow, Hayek, Jacques Rueff, Walter Lippmann, Raymond Aron and Rpke himself. Seeking to focus the conference on liberalisms contemporary inadequacies, the opening speech of the French philosopher Louis Rougier (18891992) argued that Lippmanns 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 Rpkes approval was Rougiers 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 Rougiers critique of traditional liberalism by bluntly contending that nineteenth-century liberalisms 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). Lippmanns 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, Rstow 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. 656). Rstow even argued that the world had simply ceased listening to representatives of traditional liberalism. If they have not listened, Rstow stated, to . . . the prophets Adam Smith and David Ricardo how will they believe Mr. von Mises? (ibid., p. 66). Supporting Rstows position, Rpke 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, Rpke was probably thinking of Mises. Jrg Guido Hlsmanns biography of Mises underlines the degree of disagreement between Mises on the one hand, and Rpke and other German neoliberals on the other (Hlsmann, 2007, pp. 866, 86972, 87880, 100511). In later years, Rpke 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 Rpkes 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 Rpke 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 Rpke 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 Rpkes 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 Rousseaus notion of the General Will with all its implications for democratic despotism (ibid., pp. 51415). Western civilizations 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, Rpke stated, were intrinsically linked to Christianitys insistence upon rendering to Caesar what belongs to Caesar, but to God what belongs to God (1955a, [1957d] 1988, p. 515). In summary, Rpke 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). Rpkes neoliberalism was thus underpinned by a commitment to Christian humanism. Making the point explicit in the last decade of his life, Rpke 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 mans 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 Rpkes political economy emphasized the folly of pretending that humans were perfectible.4 But did embracing such ideas mean that Rpke gradually transitioned from liberalism to conservatism? Certainly Rpke grew critical of policies largely justified by appeals to progress in the sense that change constituted its own justification (Rpke, 1951g). He was also sympathetic to domestic American efforts to forge alliances between conservatives and liberals against socialism and communism (Rpke, 1955f, 1956a). In later life, Rpke acknowledged that his liberalism had absorbed some conservative insights of a Burkean variety ([1958f] 1998, pp. 2278): these conservative ingredients are plainly recognizable in our predilection for natural law, tradition, Corps intermdiaires, federalism and other defenses against the flood of modern mass democracy. Such principles also counteracted particular currents within contemporary liberalism that Rpke regarded as elements of moral and spiritual disintegration, most notably progressivism and rationalism (1959f, p. 235). Nevertheless, Rpke 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 Rpke were exemplified by Catholic liberals such as Tocqueville and Acton (Rpke 1950f, p. 20, [1957d] 1988, p. 515) and, at a greater distance, the late-scholastic moral theologian Luis de Molina (Rpke, 1950f, p. 33).5 As a contemporary example of the liberalism he supported, Rpke 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 (Rpke [1957d] 1988, p. 514, cf. 1955a).6 The Christian humanist liberalism increasingly espoused by Rpke enabled him to reinforce his particular normative case for liberalism and the market economy. Rpke favored liberalism and opposed socialism partly on technical grounds. The economic orthodoxy , with which Rpke 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. 2323). By

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contrast, Rpke insisted that only a free economy is in accordance with mans freedom and with the political and social structure and the rule of law that safeguard it (ibid., p. 233). For these reasons, Rpke 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 states 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 capitalisms disarray, Rstow asked how these situations have occurred, [and] whether it wasnt 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, Rpke 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). Rpke had, however, already been thinking about how to reconfigure the states 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, Rpke wrote in the preface to the first German edition of Lippmanns 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). Rpke 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, Rpke 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 Marxs ideas had helped prepare the way for socialist policies in the twentieth century (Rpke, 1951, p. 267). By 1940, Rpke 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. Rpke did not have in mind a middle road between socialism and capitalism. In his Bank of Egypt lectures, Rpke was extremely critical of third way propositions, such as market socialism and cooperativism, because of their destructive effects upon the free price mechanism (Rpke [1951h] 1987, pp. 2021, 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 states broad supervision as highly problematic, not least because it could facilitate a trade-union capture of the economy and the state (ibid., pp. 245). Rpke also observed that many purported third-way programs were central to the economic policies advocated by fascist regimes. But, Rpke noted, the collectivist politics of fascist movements invariably necessitated collectivist economic policies on their part. In this sense, Rpke wrote, Fascist Economics has nothing new to offer, whether in practice or in theory (1935a, p. 100). Rpkes third way closely paralleled the efforts of Eucken, Bhm and Rstow 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, Rstow was perhaps the most influential in shaping Rpkes thinking on this subject. In his 1932 essay Liberal intervention, Rstow 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, Rstow argued for:

88

Wilhelm Rpkes political economy . . . 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. 1845)

When, for example, an agricultural industry began to lose its competitive edge due to changes in the world economy, Rstow 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). Rstow 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, Rstow 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). Rpke 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 (Rpke, 1929f, 1929g), and his participation in the 1931 Brauns Commission advising the Weimar government on how to respond to the Depression. Rpkes 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 Rpkes 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 (Rpke [1944b] 1948, pp. 267, 32, 1952g). Once this choice is made, Rpke maintained that the second step was to implement positive economic policy. Positive economic economy was divided into what Rpke called framework policy and market policy. Drawing explicitly upon the work of Bhm and Eucken (Rpke, 1942e, 1943b, [1944b] 1948, pp. 389), Rpkes 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 (Rpke [1944b] 1948, p. 28). By market policy, Rpke had in mind a version of Rstows liberal interventionism (ibid., p. 39). The key to ensuring that the state intervenes in the way envisaged by Rstow 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 (Rpke [1942g] 1992, p. 160, [1944b] 1948, pp. 289). An intervention that did not interfere, for example, with the price mechanism was market compatible; one that undermined the price mechanism was incompatible (Rpke, 1941b). On this basis, Rpke 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. 2523). By contrast, other devices such as exchange controls and quotas were market non-conforming precisely because they interfere with free prices (ibid., pp. 2523; cf. Sally, 1998, p. 148). The third element of Rpkes reform of economic liberalism economic and social policy ([1944b] 1948, p. 40) concerned the pursuit of specific socialeconomic objectives. As if aware that pursuing some of these goals could considerably compromise economic freedom, Rpke 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, Rpke claimed, constituted a compatible intervention. Monopolies, Rpke observed, were far more common in socialist economies, not least because such systems were based on principles of anti-competition and centralization (Rpke [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, Rpke 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 Rpkes neoliberal economic theory was social policy. This concerned the protection and promotion of nonmarket associations (Rpke, 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 Rpke, these sociological facts needed to be taken into account when it came to the functioning of various market mechanisms.8 This placed him, Rpke thought, at odds with both unregenerate Liberals of the old school and contemporary unregenerate illiberals (Rpke [1944b] 1948, pp. 323). To illustrate his point, Rpke 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 economys ability to absorb external movements in the global economy. But, Rpke 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, Rpke detailed a large number of specific policies. These included the decentralization of political power (1942d, [1944b] 1948, pp. 99114); the decongestion and decentralization of industry in the name of deproletariatization (1943d, [1944b] 1948, pp. 15281); reducing population growth ([1958f] 1998, pp. 3952); the revitalization and growth of peasant agriculture, artisans and smaller trading industries ([1942g] 1992, pp. 20117, 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. 21822, 1948h). For a short time, Rpke 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 Rpke 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. 11190, [1944b] 1948, pp. 18493). Rpke 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, Rpke 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. 1934). But more broadly, Rpke 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 Rpkes neoliberal political economy, and its third and fourth elements. If, as Rpkes 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 Rpkes 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 Rpkes conception of market policy. One example of a compatible intervention, he argued, was a government implementing a currency devaluation to reestablish an economys external equilibrium. Rpke 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. Rpke 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 mechanisms workings otherwise unfettered. By contrast, quotas and clearing agreements resulted in the state suspending the market mechanisms automatism and replacing it with government control (ibid., pp. 16061). 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 states decision to alter the value of a currency vis--vis other currencies constitutes the state setting a price for a good rather than the market. Anticipating such criticisms, Rpke 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 Rpkes compatible/incompatible distinction appears questionable.

FROM THEORY TO PRACTICE

Despite several unsettled contradictions, Rpkes third way differs significantly from most of the theories and policies usually associated with the term. Unquestionably it represents a departure from what Rpke perceived to be the principles and practice of laissez-faire liberalism. However, far from seeking to replace the market economy, Rpke was concerned with furnishing liberalism with a more resilient extra-economic rationale for the market, and devising an economic constitution that reconfigured the states role in capitalist economies without unduly undermining the market itself. One subject to which Rpke 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 Rpke 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.

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NOTES
1. For all their influence on each other, Rpke and Rstow disagreed about some matters. Rpke did not share, for example, Rstows animus against inherited wealth. One should, he thought, at least recognize that death taxes represented a brutal incursion into a familys 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. 2578). 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, Rpke was nevertheless critical of Hayeks apparent failure to acknowledge the associated social proletarianization of much of European society (1954b). 3. Rpke, 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 Rpkes 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, Rpke (1950f, p. 33) underlined his debt to the theologian and later Cardinal-Archbishop of Cologne, Joseph Hffner, a leading theorist of Catholic social doctrine. 6. This did not mean that Rpke was uncritical of particular expressions of Christian social thought. He criticized, for example, John XXIIIs encyclical Mater et Magistra for failing to recognize inflations 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. 16272). In later life, Rpke 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, Rpke 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 companys best interests (Rpke, 1965b). 7. Here Rpke acknowledged some parallels with a market-friendly interpretation of the 1931 papal encyclical Quadragesimo Anno (Rpke [1944b] 1948, p. 38) as well as distributivist ideas associated with Catholic thinkers such as G.K. Chesterton (Rpke 1941a, [1944b] 1948, p. 39). 8. Though consumerist tendencies worried Rpke, 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 (Rpke [1948a] 1969, p. 145). But he also believed that they represented a questionable infringement of individual autonomy (Rpke, 1948b). It does not really matter, Rpke 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 Marxs 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 boombust rollercoaster are often associated with Keynes. Some German economic liberals were, however, prepared to contemplate similar measures. Mller-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). Rpke 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 Rpke served on a government inquiry chaired by former Labor Minister Heinrich Brauns into measures to reduce Germanys catastrophic unemployment levels. Though willing to defend the Commissions work in public (Rpke, 1931a, 1932d), Rpke was shocked when Brauns stated that the causes of unemployment were
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outside the Commissions terms of reference (Rpke, 1931k, pp. 43540). How, he wondered, could one seriously propose solutions if there was no discussion of causes? In many respects, Rpkes 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 Rpkes attention had turned to the broader issue of reforming economic liberalism, Rpkes writings still contained extended reflection on business cycles. Careful analysis of Rpkes work on this subject is important for two reasons. First, the business cycle attracted interest from the periods most prominent economists. Hence it allows us to highlight similarities and differences between aspects of Rpkes political economy and figures such as Keynes and Hayek. Despite some initial similarities between Rpkes and Keyness views on contra-cyclical measures, Rpke became increasingly critical of Keynesian policies designed to prevent economic contractions, and moved closer to Hayeks position. Second, Rpkes 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 Rpkes analyses of business-cycle crises devoted considerable attention to defining the business cycles 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 Rpke, 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 Rpke 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 cycles direction. The second set of information to be excluded from study of business cycles was the underlying trend of economic data (Rpke, 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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long-wave phenomena, Rpke 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 industrializations 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 Wars contribution. Rpkes Crises and Cycles includes a chapter on the history of identifiable periods of economic growth and contraction from 1818 to 1929 (1936a, pp. 3860). But the primary object of his historical survey was not to demonstrate that certain events may have contributed to particular economic upswings and downswings. Rpke was also trying to make a scientific point concerning the inflationary origin of every boom and every crisis following a boom something that Rpke considered relatively neglected in business-cycle research until Keyness Treatise on Money was published in 1930 (ibid., p. 39). Rpkes 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, Rpke 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. 1718). 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. 1819). A third defining element of business cycles, Rpke holds, is their

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duration. The business cycle lies between seasonal variations and longerterm periods of prosperity and recession. Here Rpke 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. 1920). The fourth element of business cycles, Rpke states, is that they first and foremost affect an economys industrialcommercial 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. 2021). This is the least convincing aspect of Rpkes definition of business cycles. It amounts to modern agricultures artificial isolation from the rest of the economy. It also reflects, Rpke concedes, the then relative dearth of studies of the relationship between an economys agricultural and industrial segments (ibid., pp. 212, cf. 1928b). While Rpke 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 cycles upswing begins, Rpke 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 Rpke 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 (Rpke, 1945f, p. 111, 1936a, pp. 224). 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 (Rpke, 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 (Rpke, 1936a, pp. 256). 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 (Rpke, 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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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 (Rpke, 1936a, pp. 279). Rpkes account of the business cycles boom and crisis stages was conventional enough for the time, though it emphasized the monetary dimension more strongly than some of his contemporaries. But Rpke 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 economys equilibrium, or if something different to the cycles 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. 323). With this caveat in mind, Rpke specified that four different variations of the total crisis can be identified. Each of these he drew from Arthur Spiethoff (18731957), 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 (Rpke, 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 systems collapse and a subsequent scramble for cash (Rpke, 1936a, p. 33). Rpke devoted much effort to explaining why credit crises are the most

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dangerous, and used the example of the 1931 credit crisis which prolonged and deepened the Great Depression to underline the point (ibid., pp. 336). The particular danger of the credit crisis, Rpke 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, Rpke 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 Reichsbanks failure to do so quickly in Germany in 1931 provided a salutary example of the political and economic consequences of not observing this principle (Rpke, 1936a, p. 37). Though Rpke 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, Rpke 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, Rpke 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, Rpke says, reminiscent of the historical schools 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, Rpke maintained that we were left with a series of temporary time sequences that cannot explain how past events shaped the future (ibid., pp. 667). To a certain degree, Rpke 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, Rpke suggested, by the division of labors growing sophistication. Both factors increase the economys 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. 7071, [1944b] 1948, p. 200). In a free and productive economy, one must accept a certain degree

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of frictional unemployment a point, Rpke claimed, never acknowledged by full employment advocates, be they National Socialists or Keynesians ([1944b] 1948, pp. 196204). The liberty to consume and save ones monetary income in market economies meant that producers must continually adapt to changes in consumers spending and savings decisions (Rpke, 1928c). Since people can change their spending and saving habits more quickly than producers can adjust, some disequilibrium was natural (Rpke, 1936a, pp. 767). But how, Rpke 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. Rpke 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 (Rpke, 1926a, pp. 25662). 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 (Rpke, 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 Rpke, 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, Rpke 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. Rpke counters that the most obvious difficulty with such arguments is that wage-earners incomes actually rise along with the total income during the cycles upswing (ibid., pp. 858). Rpke 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 Hayeks famous The paradox of saving article (Hayek [1931] 1995), Rpke 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).

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Rpke gives more credence to psychological factors in explaining the causes of crises. As early as 1922, Rpke was attentive to this element (1922b, pp. 7084). Given that economies reflect millions of peoples free decisions, Rpke 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. 945, 1963e, p. 18). Confidence, Rpke 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 Rpke 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 moneys value, such as its quantity and velocity of circulation (ibid., p. 95). Having considered these alternatives, Rpke 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, Rpke 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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and private banks engaged in current-account deposit business. While whatever liquidity was stored up during the previous contraction may help to finance the upswings beginning, Rpke 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 economys 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, Rpke 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 (Rpke, 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 Rpkes account of the boombust 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 Keyness 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. 25865). Another problem, Keynes argued, was that a decline in aggregate demand inevitably followed from the fall in employment. Wage stickiness was such

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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 Keyness 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 Keyness 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 Keyness theory was based on a political assessment rather than economic logic. In this regard, Rpke particularly lamented Keyness apparent unwillingness to accept the need for painful readjustment (Rpke, 1936a, p. 109). More generally, while Rpke praised Keyness Treatise on Money (1930) for its explanation of how the savingsinvestment 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. 74121). Painful readjustment through recession becomes unavoidable. In Rpkes view, Hayek correctly identified credit expansion as the driving force of overinvestment. As early as 1926, Hayek portrayed Rpke 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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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. Rpke 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 (Rpke, 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 (Rpke, 1929c, pp. 2040). Hayek had signaled his disagreement with Rpke on these issues almost seven years earlier in a review of Rpkes Die Theorie der Kapitalbildung. He described Rpke 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). Rpke in turn does not dispute that Hayek had reason to be concerned about capital formation through loose monetary policy. But, Rpke 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. 11718).

THE SECONDARY DEPRESSION

Careful reading of Crises and Cycles underlines how much Rpkes explanation of the business-cycle crisis was influenced by his observations of the Depression, especially in Germany and America. According to Rpke, 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 economys elasticity and ability to adapt (Rpke, 1930a, 1936a, p. 137). But a more fundamental cause, Rpke 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 Germanys enormous capital imports in the interwar period (1930g, 1931c, 1936a, p. 136). The Depressions severity also led Rpke 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

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such a theory while serving on the Brauns Commission (Rpke, 1931k, 1933d). It is possible, Rpke 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 (Rpke, 1936a, p. 119). While the secondary depression is marked by falling prices and shrinkages in the volume of currency, Rpke 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, Rpke 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 (Rpke, 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 (Rpke, 1931d). Families leave their bank accounts idle or actually hoard money because they fear for their financial security (Rpke, 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). Rpke suggests that, in these conditions (especially with confidence so low), not even injecting additional credit into the economys arteries seems to have an effect (1933d, p. 436). Drawing upon the United States experience (Rpke, 1934b), Rpke contends that the banking systems 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 Rpke 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 (Rpke, 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 (Rpke, 1936a, p. 125, 1960c, p. 112). Hence economic growth and recovery is stalled. Rpke was not alone in his efforts in the 1930s to define the secondary depressions causes. He underlines the contributions of Keyness Treatise on Money to this discussion, while signaling his disagreement with aspects of Keyness diagnosis. Rpke also acknowledges the impact of economists who would emerge as prominent skeptics of aspects of Keynesian economics, most notably Jacob Viner (18921970) and D.H. Robertson (18901963), on his thinking about business cycles (Rpke, 1936a, p. 133). But perhaps Rpkes 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. Keyness 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 Rpkes synthetical approach to the subject. By contrast, the General Theory attempts a revolution in economic science itself. Parallels do emerge between Keynes and Rpke, however, concerning the issue of whether one should or can smooth out the business cycle. In 1936, Rpke 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 Rpke was more reticent to employ (ibid., p. 120). Indeed within six years, Rpkes reticence hardened into deep reservations about Keyness thinking about addressing economic crises especially Keyness insistence on incorporating a full-employment policy in any approach to economic downturns.

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BETWEEN ACTIVISM AND BENIGN PASSIVITY

Rpkes approach to alleviating business-cycle fluctuations and the separate issue of how to escape secondary depressions was influenced by the fact that Germanys 1929 economic crisis, and mistakes made by Germanys political leadership in addressing it, helped precipitate the Nazis rise to power (Rpke [1944b] 1948, p. 207). Escalating unemployment propelled large numbers of desperate people into the Communist and National Socialist movements. While Rpke saw drawbacks to intervention (1929f, pp. 8615), 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 Rpke 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 Schtz, 1991, pp. 30925). When it came to addressing unemployment, Rpke 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 (Rpke, 1936d, p. 321). But Rpke 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 (Rpke, 1932c, p. 274). Mises had failed to see, Rpke 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 Hlsmann notes, a flaw in Rpkes 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 Rpke sidesteps is that of unions unwillingness to reduce real wage rates in order to diminish unemployment (Hlsmann, 2007, p. 625). As the following chapter illustrates, Rpkes 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, Rpke 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, Rpke 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)

Rpkes 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 Rpke rejected any policies with inflationary implications. Business cycles were simply a fact of modern economic life. There was no such thing, Rpke 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 Rpke labeled initial ignition (initialzndung) (1933g, pp. 43031). This involved public works, ranging from agricultural improvement schemes to enhancements of the road network. In Crises and Cycles, Rpke integrated these experiences of attempting to cope with a major economic downturn into his thinking about active business-cycle policies. Rpke 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? Rpkes 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 boombust 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 (Rpke, 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 unemployments damaging social effects (Rpke, 1936a, pp. 13841). Part of the difficulty, Rpke writes (in almost exasperated tones), is that people want the booms

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benefits without the inevitable bitter medicine of contractions. This makes the economists 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, Rpke 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. 745). 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. 1267). In his more mature schema, Rpke 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, Rpke 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 Hayeks and Mises minimalist prescriptions. It is also consistent with the framework policy of Rpkes neoliberalism. Rpke 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 Rpkes 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 Reichsbanks slowness to bolster the banking systems position in these circumstances helped, Rpke wrote, discredit capitalism in many Germans minds (ibid., pp. 334). At the same time, Rpke cautions that some of the palliative measures may actually introduce new frictions into the process of recovery (ibid., p. 147). A key element of Rpkes 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, Rpke 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 (Rpke, 1931f, pp. 289307, 1936a, pp. 16061).

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Rpke states that he has only modest expectations of attempts to control business cycles (1935b, 1936a, p. 176). Much of the business cycle, Rpke 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, Rpke 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 downturns scale without sacrificing the growth generated by the boom. In Rpkes understanding of the cycles expansionary phase, the bulk of the credit money that fuels the expansion is created by private banks (Rpke, 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 (Rpke, 1936a, p. 153). Rpke 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 booms beginning when raising discount rates is likely to dampen credit expansion and thus act as a safety-valve. Raising and lowering discount rates, Rpke specifies, differs from the strategy of credit restriction. In the latters 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). Rpke 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. 1545). 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 (Rpke, 1936a, p. 154), thereby preventing a total collapse of security markets (Rpke, 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 banks credit policy (Rpke, 1936a, p. 154).

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Another measure contemplated by Rpke 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 states growing share of national economies a trend that Rpke considered undesirable (ibid., p. 157) Rpke 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, Rpke 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. 1567). But while not diametrically opposed to such measures, Rpke 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, Rpke 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, Rpke held that they will be reluctant to implement the mortification of restrictions during the upswing (ibid., p. 158). Indeed, considering Germanys experiences in the late 1920s and 1930s, Rpke suggested that governments tend to do the opposite of what a rational budget policy would demand (ibid., p. 159). In instances of secondary depressions, Rpke 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, Rpke 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, Rpke 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 economys 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. 17980). In 1936, Rpke described himself as belonging, with numerous qualifications, to the expansionist camp (ibid., pp. 17980). 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, Rpke 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 depressions low point is unlikely to have much effect, except further decreasing demand just when it needs to grow (ibid., p. 184). Rpke subsequently calls for using the state to re-expand the economy in secondary depressions, without interfering with the markets competitive processes a clear instance of market policy. Rpke outlines a rather minimal picture of what such measures might entail, while underlining the drawbacks of these policies. In mild instances, Rpke 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). Rpke 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 societys 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. 1989). Hence, Rpke comments, using tariffs to address the secondary depression is not . . . particularly recommendable (ibid., p. 199). If these measures of stimulating the private sector failed, Rpke contemplated as a last resort direct public initiatives that involve enlarging the volume of credit, thereby compensating for the private sectors 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. Rpke 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 markets normal ways and was thus likely to dampen expectations that a new economy was being created (ibid., p. 200). Rpke 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. Rpke worried that what would otherwise be defined as reckless government spending might become viewed as normal (ibid., pp. 200201). Rpke is even more circumspect about public works programs. These normally required creating new and

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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). Rpkes 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 depressions social impact. Their palliative character is derived from Rpkes 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, Rpke 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 depressions psychological effects, Rpke 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 Rpke 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 Rpke 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 (Rpke, 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 (Rpke, 1936a, p. 219, cf. 1930b, 1932a, pp. 13340, 1947d, pp. 13441, 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 (Rpke, 1936a, p. 218). Here Rpke may be referring to Nazi Germanys racially orientated employment policies, which involved expelling Jews from most professions in the name of Aryanization. More generally, Rpke always maintained a generally liberal approach to immigration (1946a, 1947d, pp. 13441, 1959c, pp. 79114), not least because it facilitated an international division of labor that helped meet an ever-growing world populations economic needs (Rpke, 1930b).

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SECOND THOUGHTS ON BUSINESS-CYCLE POLICY

Though Rpke 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. Rpke 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 Rpke, 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, Rpke 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 Rpkes 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). Rpkes thinking was also affected by the failure of Roosevelts New Deal to reignite the American economy (Rpke, 1942c). According to Rpke, it turned out that the original calculation that the Governments boost of purchasing power would set off the private investment drive that was due, was wrong. Every time the Governments injections were withheld, it was as if there was no private initiative which could take the place

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of public initiative (Rpke [1942g] 1992, p. 169). Americas choice, it seemed, was now between wholesale economic collectivization or liberating business so that it could react to the business cycles normal stimuli (ibid., pp. 16970). In the end, the indecision was only overcome when America adopted a war economy in 1941 and an armaments boom ensued (Rpke [1944b] 1948, p. 209, [1952d] 1960, p. 371). Rpke was also perturbed how active business-cycle measures were increasingly used for ends other than escaping severe recessions (Rpke, 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). Rpke 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, Rpke 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, Rpke 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, Rpke 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 periods catastrophic unemployment levels by attempting to guarantee a type of economic stability for all, but also the growing dominance of what Rpke called the new economics associated with Keynes and Keynesians such as Sir John Hicks (190489), Joan Robinson (190383) and Lord Nicholas Kaldor (190886). Analysis of Rpkes 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 Rpke put himself at odds with most postwar economic opinion, especially when it came to employment, inflation and the welfare state.

NOTES
1. Rpke 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 Rpkes business-cycle theory. Rpkes view of the price mechanisms 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 Rpke viewed equilibrium as a conceptual tool. Rather than regarding it as an ideal real state in itself, Rpke viewed equilibrium as one concept among many that enabled him to explore the real economys 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. Rpke 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, Rpke notes, equilibrium is in fact more or less imperfect (ibid.). Rpke 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 Rpkes dynamic vision of ordered anarchy. The economy is thus constantly in a state of flux, and economic equilibrium always unstable. Given, Rpke 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 Rpkes 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. 9091)

Sometimes a books importance lies not in its content but in its timing. The reception accorded to Hayeks 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, Rpke 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 Rpke was an early and vocal critic (1943a, 1943e). Six years later, West Germany took a different economic path. The intense debate preceding Ludwig Erhards 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. 175209; Hook, 2004, pp. 53232; Nichols, 1994, pp. 178233). Less well known is Rpkes extensive pressing of the case against economic planning after 1948. Much of this occurred in the context of West Germanys gradual drift from market policies, so much so that Rpke referred to the ruin of Germanys economic miracle only one month
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before his death (1966b). As early as 1950, Rpke 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, Rpke labored in vain. West Germany began abandoning neoliberal economic prescriptions between 1950 and 1960, as Keynesian policies, personified by the economist Erich Preiser (19001967), rose to dominance, not least because Preiser and others were relatively successful in portraying Germanys economic successes as resulting from Keynesianlike policies (Rittershausen, 2007, pp. 3847; Sally, 1995). Throughout the 1950s and 1960s, Rpke was one of the few German liberals to detect and critique this shift. Ten years after Erhards reforms, Rpke 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 (Rpke, 1958c, pp. 948). The result, Rpke 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, Rpke 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). Rpkes desire to preserve economic and political freedom permeates his writings about the welfare state, employment and inflation after World War II. Like Eucken, Rpke 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 Rpkes obituary of Eucken (Rpke, 1950i). This concern underpinned the increased stridency of Rpkes negative view of Keynes and Keynesianism, to the point where he described himself as a radical Keynes critic (Rpke, 1949h). Rpke once recalled that Keynes had praised him in an article about the Brauns Commission which expressed Keyness happiness that German economists also believed that the state needed to intervene during severe economic downturns. But, Rpke stated, Keyness position that market economies required constant government intervention to manage aggregate demand was fundamentally mistaken. Even worse, Keyness General Theory had established a justification for endless government expansionism and inflationary policies (Rpke, 1951b, 1963g). In his last book, Rpke actually labeled Keynes one of the great intellectual ruiners of history like Rousseau and Marx ([1958f] 1998, p. 219).

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In examining Rpkes analysis of post-war welfare, inflation and employment policies, we see that much of Rpkes 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, Keyness 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 inflations 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 Rpkes critique of Keynesian policies is that they are forever focused on the short term. Rpke 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, Rpkes 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 Rpke, 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, Rpke 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 Tocquevilles soft despotism.

FROM EXPEDIENT TO DOGMA

Rpke 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, Rpke believed, extensive welfare programs, full-employment policies, and blas attitudes toward inflation. On one level, Rpke 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 (Rpke [1952b] 1969, pp. 1712). 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, Rpke 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 (Rpke [1952b] 1969, p. 172). Rpke 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, Rpke traced the drift of post-war economic theory and policies to the dominance of the rationalist mindset. As observed in Chapter 4, Rpke became convinced that rationalist tendencies had exerted a pernicious influence upon the market economys development from the late eighteenth century onwards. Besides producing outright collectivization, Rpke insisted that the same mechanistic mentality underlay the welfare programs that he predicted would emerge after World War II ([1942g] 1992, pp. 1635). Rpke 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. 2278). In Chapter 3, we observed that there are reasons to question Rpkes analysis of Keyness philosophical commitments. Skidelskys biography of Keynes reveals his philosophical ideas as complicated, sometimes contradictory, but difficult to classify as that of a rationalist in Rpkes sense of the term. Furthermore, Rpke himself speculated that Keynes had grave doubts at the end of his life about his followers zeal (Rpke, 1946d, 1946i) and might well have written the most effective correction of Keynesian economics (Rpke [1952b] 1969, p. 175) an observation echoed by Hayek (1994, p. 92). For Rpke, 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 Rpkes 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.

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FULL EMPLOYMENT AND KEYNESIAN CONSEQUENCES

No-one, Rpke observes, regards mass unemployment as anything but disastrous ([1942g] 1992, p. 170). In the 1950s, however, Rpke suggested full employment had become the slogan to justify almost every action of government ([1952d] 1960, p. 363). Moreover, Rpke maintained, Keyness 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) (Rpke [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.). Rpke accepted that mass unemployment can emerge from general disturbances in money flows because of a prolonged breakdown in investment activities (Rpke [1952d] 1960, p. 371). As short-term measures during secondary depressions, Rpke did not regard Keyness recommendations as extraordinary (ibid., p. 371, [1952b] 1969, p. 171). As a general theory and permanent practice, however, Rpke regarded government quests to realize and maintain full employment as a recipe for collectivism. Interestingly, Rpke first expressed alarm about such ideas prior to World War II. National Socialist Germany was the first country to seriously attempt full-employment policies (Rpke, 1936b, 1939b), even if, Rpke stressed, the theory emanated from the Keynes School ([1944b] 1948, p. 217). Using Nazi Germany as a case study, Rpke 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) (Rpke, 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, Rpke 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, Rpke claimed that fullemployment policies attempted to defy this reality. Instead, the state assumes full responsibility for the economic cycle (Rpke [1944b] 1948, p. 211), and uses price, wage, capital, investment, consumption and exchange controls to maintain full employment (Rpke, 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 (Rpke [1942g] 1992, p. 172). Hence Rpke 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. 1723). The economy is thus rendered increasingly inflexible. But this ignored the fact, Rpke 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 (Rpke [1947m] 1969, pp. 11131). 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 (Rpke [1937a] 1963, pp. 21819, [1944b] 1948, p. 213, 1945f, p. 112). Not surprisingly, Rpke notes, most governments committed to fullemployment policies opt for continued credit expansion and cheap money policies. Those whom Rpke 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

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in economic equilibrium, be it movements in consumer demand or technological innovation ([1942g] 1992, p. 171, 1945j). Above all they believe that whatever the economys particular conditions, purchasing power must always be pumped up to a level ensuring full employment (Rpke [1942g] 1992, p. 171). Such doctrines are invariably popular inasmuch as they claim to be able to avert a 1930s-like depression. This, Rpke claims, is exacerbated by the fact that some economists (here Rpke singles out Keynes) tell policy-makers that an unending boom is possible, thereby diverting attention from underlying deeper causes upsetting equilibrium (ibid., pp. 1712). Part of the problem is that thinking in abstract total quantities a principal fault of the school influenced by Lord Keynes (Rpke [1944b] 1948, p. 202) leads to flaws in understanding unemployment and therefore economic policy. In one sense, full-employment policies are blighted, Rpke maintains, by the terms 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. Rpke 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 markets 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 (Rpke [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 (Rpke [1944b] 1948, p. 203). It follows, Rpke 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 . . . (Rpke [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 (Rpke [1942g] 1992, p. 173). This brings Rpke to the moralpolitical dimension of his fullemployment critique the implications for liberty. For Rpke, Keynes seemed unconcerned that full-employment policies imply political centralization. Moreover, Rpke insists that careful reading of Keyness General Theory indicates that Keynes tacitly recognized that full-employment policies inevitably become one of the supporting pillars of a collectivist and inflationary economy (Rpke [1952b] 1969, p. 176).2 The loss of freedom, Rpke specified, lay in the fact that a commitment to endless full employment entailed continuous growth in the states control of production and investment, and the subsequent diminishment of incentives for citizens to save voluntarily and thus acquire substantial private capital (1949k, pp. 14750, 1957b, [1958f] 1998, pp. 20203) 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 Rpkes critique of Keyness full-employment objective was that it effectively bestowed the mantle of his authority on the chronic propensity of all governments to inflate (Rpke [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 (Rpke [1958f] 1998, p. 194). Rpkes negative view of inflation was partly derived from experiencing Weimar Germanys hyperinflation between 1920 and 1923 (Rpke, 1933e, [1937a] 1963, p. 103). Rpke 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) (Rpke [1954g] 1969, pp. 182). Agreeing with Mises that inflation had become the opiate of the post-war world, Rpke 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

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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 (Rpke [1937a] 1963, pp. 99100), precisely because it makes the monetary system independent of governments arbitrariness, ignorance, or weakness (Rpke [1958f] 1998, p. 195). Rpkes endorsement of Mises position was enhanced by what he viewed as Keyness nonchalant attitude toward inflation. Like Mises, Rpke acknowledged the negative aspects of deflationary policies (Rpke [1954g] 1969, p. 185, [1958f] 1998, p. 195). But Keynesian analysis, Rpke 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 (Rpke [1952b] 1969, pp. 17879). One reason for West Germanys economic successes, Rpke 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. 19091, 1957e). Between 1950 and 1960, West Germanys annual inflation averaged 1.36 per cent. After peaking at 3.44 per cent in 1965, the Bundesbanks anti-inflationary policies brought inflation below 3 per cent. Low inflation was typically regarded as a benefit of Erhards 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 Germanys workforce (Giersch et al., 1994, p. 46). This attracted criticism from German and non-German Keynesians alike (Rittershausen, 2007, p. 25). Rpke was not perturbed at these developments. A sudden increase in short-term inflation following Erhards reforms was, he believed, inevitable given that the Nazis had frozen prices at unnaturally low levels, partly because of the regimes full-employment commitment. The grave affliction, Rpke wrote, affecting Germanys 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). Germanys 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 economys natural reactions to the inflationary impact of unending government-initiated credit expansion (Rpke [1937a] 1963, p. 248, 1962h). Collectivism was thus both a cause

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of inflation and an instrument of its repression (Rpke [1947m] 1969, p. 112). The result was a lack of liberty but also extreme economic and social disorder (Rpke, 1951e). Rpke uses the phrase repressed inflation to describe those situations in which prices are supposed to rise, but the state acts to prevent monetary devaluation (Rpke, 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, Rpke 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 ones monetary income becomes less of a stimulus for the production and distribution of goods. Thus, Rpke 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 (Rpke [1947m] 1969, p. 113). It illustrated, Rpke 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 (Rpke [1937a] 1963, p. 248, 1959d). Writing before Erhards 1948 reforms, Rpke attacked socialists and non-socialists alike for failure to accept these facts and their normative implications ([1947m] 1969, pp. 11314). For full-employment advocates, Rpke 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, Rpke states, holds true. Unemployment sometimes reflects corrections in the market economy. In that sense, it is not catastrophic. Politically, Rpke adds, it is always necessary to consider inflations costs vis--vis other, less liberty-damaging ways of combating unemployment (ibid.). The success of Erhards reforms indicated that there were alternative paths to reducing unemployment, such as restoring genuine market competition (Rpke, 1949d, 1953c).

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Just as repressed inflation was linked by Rpke to full-employment policies and a decline in freedom, so too was what he regarded as the greater danger by the 1960s: wage inflation (Rpke [1937a] 1963, p. 105). Not all wage increases, Rpke acknowledges, have inflationary consequences. Many flow from factors such as technological change (Rpke [1958f] 1998, p. 204); others come from marginal productivity improvements (ibid., pp. 2079). Writing, however, in an era when trade unions were establishing labor monopolies throughout parts of Western Europe, Rpke claimed that this was pushing wages beyond the point where all of an economys available workforce could be employed at current wage rates. Unemployment ensues, despite the prevailing prosperity (Rpke [1952d] 1960, p. 378). One way to resolve this problem is to allow wage rates to adjust to demand (Rpke [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 Rpke regarded as increasingly unlikely as unions became more powerful ([1957f] 1987, p. 89). Unfortunately, Rpke 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 wageprice spiral in motion and prevent labor from pricing itself out of the market (Rpke [1957f] 1987, p. 91, [1958f] 1998, p. 211). Rpke 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, Rpke argues, is the full-employment schools 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, Rpke 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 governments pursuit of cheap money policies does not allow this to occur (Rpke, 1962c). Keeping interest rates artificially low in the name of full employment, Rpke insisted, would result in inflation (1956f, pp.

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1517, 1961g, pp. 1215) 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 (Rpke [1948j] 1969, pp. 14041). Breaking this nexus, Rpke 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 (Rpke [1957f] 1987, p. 85). A determined effort to reduce union power was also necessary (Rpke [1958f] 1998, p. 216). But in the long term, Rpke 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 Rpke 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 (Rpke, 1945f, p. 113, [1957f] 1987, pp. 856). They can hardly be blamed for doing so (Rpke [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 (Rpke, 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 (Rpke [1957f] 1987, pp. 858). Every act of saving, Rpke comments, diminishes the pressure of demand on available supplies, thereby dampening inflationary trends ([1958f] 1998, p. 201). But, Rpke wondered, are enough people willing to save sufficiently to allow this to occur? Rpke noted that it was increasingly difficult for people to transcend the status of wage-earner in a welfare state precisely because peoples surplus income was heavily taxed in order to pay for social welfare programs ([1958f] 1998, p. 170). Tax increases to fund welfare programs, Rpke 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, Rpke 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, Rpke 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, Rpke had in mind Tocquevilles 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 (Rpke, 1950f, pp. 6575). Midtwentieth-century Western attitudes toward inflation reflected, Rpke stated, a moral disease, a disorder of society . . . which can be understood and remedied only in the area beyond supply and demand (Rpke [1958f] 1998, p. 192). Rpke thought it remarkable that even the 1871 Paris Communes hard-line leftist leaders refrained from confiscating the Bank of Frances gold reserves to finance their insurrection (ibid., p. 218). But what Rpke denotes as the counter-forces of a spiritual, moral, and social nature that restrained the Commune from debauching Frances monetary system were, he thought, waning in twentieth-century Western Europe (ibid., p. 217). Rpke was conscious that the global march toward welfare states had begun in Bismarckian Germany (Rpke [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 Mller-Armack, often supported extensive welfare measures. Over time, Adenauers Christian Democrats came to vie with the Social Democrats in terms of who could provide the most in terms of state pensions. Ironically, Rpke observed, this situation was not helped by the fact that Germanys liberalized economy furnished the government with

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large surpluses throughout the 1950s which many viewed as the means to pay for greater welfare (Rpke, 1956c). Eventually the link between pensions and contributions was broken in 1957 when Adenauers government indexed pensions to the earnings of those working. Wage increases thus automatically triggered pension increases a policy Rpke described as an alarming sign of the times ([1958f] 1998, p. 181). The new policy helped the Christian DemocratsChristian 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 states remorseless encroachment upon private income and future private investment (Bark and Gress, 1993 pp. 3967; Nichols, 1994, pp. 35055). Not coincidentally, some of Rpkes most impassioned critiques of the welfare state were published in 1957. This reflected his failed effort to convince Germanys 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 Rpke insisted that West Germanys government had already exceeded the ratio of the states utilization of the social product because such a large segment of the states expenditure has assumed a compulsory character because of the substantial social-welfare requirements ([1950e] 1982, p. 47). Left unchecked, Rpke 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 states financial requirements; and the constriction of that part of the productive sector regulated by the market (ibid.). This led Rpke to call for major cuts in public disbursements (ibid.) seven years before West Germanys government did the opposite. But Rpkes concerns about welfare went beyond policy developments of the 1950s. Rpke was convinced that particular moralcultural problems were contributing to the welfare states growth in the West. These manifested themselves, in his view, in the widespread embracing of language such as Roosevelts freedom from want. This represented, Rpke 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). Rpke 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, Rpke contended, was antithetical to Western civilizations other-

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regarding dimension ([1942g] 1992, pp. 1634). 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 Rpke was the degree, organization and spirit in which they operated (1956g, [1957f] 1987, p. 59, 1958a, p. 13). For this reason, Rpke 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 (Rpke [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 (Rpke [1958f] 1998, p. 175) and facilitating the states tendency to level everything in the name of equality (Rpke, 1950f, pp. 6575). 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 (Rpke [1942g] 1992, p. 165). Not only did this represent, Rpke insisted, profound moral decline; it also relied upon economic fictions for its credibility. Drawing upon Bastiat, Rpke 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 (Rpke [1957f] 1987, p. 77). Are we to call it progress, Rpke 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 peoples willingness to live at the expense of others (Rpke [1944b] 1948, p. 95, [1958i] 1969, p. 204). To this extent, Rpke believed that attitudes towards welfare reflected profound differences in social philosophy (1956e, [1957f], 1987, pp. 623). Writing in one of Germanys leading newspapers one year after West Germanys 1957 pension policy changes, Rpke 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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wealth of the individuals encompassed by the welfare state. ([1958i] 1969, p. 208)

Almost inevitably, Rpke suggests, welfare states lurch in the second direction. Moreover, prefiguring what would later be called public choice theory, Rpke suggested that there is an entire class of bureaucrats and politicians whose self-interest lies in the welfare states 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 (Rpke [1958i] 1969, p. 206, 196566, pp. 3540). Like progressive taxation, once one accepts the basic principle, there is nothing in the welfare states conception to set a limit to it (Rpke [1958i] 1969, p. 204). If politics becomes an exercise in attempting to diminish lifes uncertainties by providing security for growing numbers of people, then welfares expansion becomes easily justified and any attempt at retraction very difficult (Rpke [1957f] 1987, pp. 756). Social security effectively becomes politicized with large constituencies being created who will vote against any attempt to reduce welfare (Rpke [1958f] 1998, p. 167, 1959e). Moreover, the high taxation required to maintain welfare payments progressively undermines the middle class (Rpke [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 societys collectivization (Rpke [1958f] 1998, pp. 1623, 1966b). Economically, Rpke associated the welfare states 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, Rpke 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, Rpke 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 states costs necessitated spreading income-leveling taxation to incomes which have their origin in genuine productivity (Rpke [1957f] 1987, p. 79, [1958f] 1998, p. 170). This created immense disincentives to creating real wealth (Rpke [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, Rpke 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 (Rpke [1957f] 1987, pp. 7980, 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 (Rpke [1957f] 1987, pp. 67, 79). Citing Tocqueville, Rpke states that the welfare states 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
Rpke had no illusions that avoiding this scenario would be easy. The economic downturns integral to boombust cycles fostered popular pressures for economic policies that, in their own subtle way, undermined freedom. Unlike Keynesians and some Austrian economists, Rpke was less concerned with escaping the business cycles 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 Rpke proposed to employ to this end were compatible with his commitments to the market economy. To limit welfare, Rpke 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 (Rpke [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. Rpke also stressed that meaningful welfare reform should require a high burden of proof being met before any extension of welfare ([1958i] 1969, pp. 2056). In no circumstances, Rpke 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. 1778). One test, Rpke argued, was to identify the point when state welfare weakened voluntary self-help. Rpke cited Switzerland as an example of a country where the introduction of old-age pensions in 1946

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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, Rpke cautioned, depended upon high mass and real income. This in turn relied upon investment being financed out of genuine savings rather than inflation (Rpke [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 (Rpke, 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. Rpke 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, Rpke indicated that he viewed democracys emergence as an ambiguous development. To the extent that it represented the diminishment of absolutism and caste-power, Rpke considered democracy a positive development. He had, however, thoroughly absorbed Tocquevilles warnings about modern democracys potential to develop into a centralized mass democracy of Jacobin complexion ([1958f] 1998, p. 7). Here Rpke had in mind, first, the manner in which the French revolutionaries had effectively established in the name of Rousseaus 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 (Rpke [1958f] 1998, pp. 2267), and which often condemned these institutions in democracys name (Rpke, 1963d). The same outlook lent itself to a growing welfare state, full-employment policies, and a willingness to employ inflationist policies again, in the peoples name. To counteract these trends, Rpke advocated neither enlightened absolutism nor a benevolent aristocracy of talent. Instead he drew upon the socialeconomic dimension of his neoliberalism. Rpke sought not to overcome democracy, but rather to build up economic, cultural and political bulwarks against its potential for Jacobinism and soft despotism. Politically, Rpke believed that a states 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 (Rpke, 1952h). To achieve this end, Rpke underscored Montesquieus 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, Rpke 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, Rpke 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, Rpke 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, Rpke 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. 11727). A combination of these principles, Rpke 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. 100102). 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 anothers 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 Rpkes 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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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 Rpkes 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 Rpkes proposed fragmentation of state power might actually make such resistance harder. Possibly anticipating this criticism, Rpke stressed that his decentralization policies were not designed to unduly weaken the state. A degree of differentiation in the states 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, Rpke 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, Rpke 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 economys capacity to satisfy peoples needs ([1942g] 1992, pp. 1316, [1958f] 1998, pp. 3952). Rpke also encouraged the revitalization and maintenance of a strong peasant-based agricultural sector as an anti-collectivist bulwark ([1942g] 1992, pp. 20112, [1944b] 1948, pp. 18293). Convinced, moreover, that large businesses tended to collude with governments to reduce market competition, Rpke advocated encouraging the development of small businesses over large corporations, primarily through indirect means such as tax breaks ([1944b] 1948, pp. 16981). Rpke 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, Rpke 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 Rpkes stress upon a general expansion of property ownership ([1944b] 1948, pp. 1569). In certain instances, he was willing to contemplate property redistributions (ibid., p. 158). This may owe something to Rpkes abiding hostility to the large Junker-owned East-Elbian agricultural properties that successfully lobbied for subsidies from the German state after 1870 (Rpke, 1934a, p. 40). The efforts of Chancellors Heinrich Brning (18851970) and Kurt

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von Schleicher (18821934), Rpke implied, to reduce this aid and investigate instances of corruption surrounding its distribution helped soften resistance in Prussian Junker circles around Weimars last president, Paul von Hindenburg, to Hitler becoming Chancellor (ibid., p. 42, 1945a). But Rpke 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 societys 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 Rpkes 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 Rpkes recommendations. Rpke 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. 12021)

By contrast, some conservatives would praise a number of Rpkes culturaleconomic proposals on the assumption that such policies enhance the ability of long-standing social traditions to reintegrate society over and against what Rpke considered competitions socially disintegrative side-effects ([1942g] 1992, p. 181). At the same time, some of Rpkes proposals would be criticized by social conservatives and economic liberals alike. Many classical liberals would argue that Rpkes warnings about population growth some of which verge on the catastrophic (Rpke [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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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 Rpkes culturaleconomic propositions often appear to contradict his free-market commitments. This is especially evident in his treatment of agriculture. On numerous occasions, Rpke argued against agricultural protectionism and subsidies, describing these as instances of agricultural nationalism (1942h, pp. 13249, [1944b] 1948, pp. 1857).3 They often damaged particular agricultural industries (Rpke, 1934a, pp. 5863) and did much to poison the international atmosphere of commercial policy (ibid., p. 65). Later in life, Rpke condemned the European Economic Communitys agricultural policies as amounting to agricultural autarky (1964f, p. 243). Rpke 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 liberalisms strongest supporters until their position was undermined by the establishment of particular agricultural monopolies (1937b, pp. 4950, [1944b] 1948, pp. 1856, 194). On other occasions, however, Rpke 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, Rpke argued, to the seasons effects, certain supply and demand peculiarities, an idiosyncratic labor market (1934a, pp. 4952, [1942g] 1992, pp. 2445), and radical price fluctuations ([1944b] 1948, p. 187). Insofar as tariffs might temporarily alleviate some of these problems, Rpke 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 (Rpke, 1942h, pp. 13261), Rpkes prescriptions for agriculture remain rather vague. In describing a third way between laissez-faire and agrarian collectivism, Rpke 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

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of free markets ([1944b] 1948, p. 193). Beyond these general principles, however, Rpke 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, Rpke 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 Rpke advocated economic social positions which seem difficult to reconcile with his free-market ideas. No doubt, biography played a role. Rpke cherished the memory of his upbringing in the small town of Schwarmstedt in lower Saxony (Brandt, 1966, p. 247). Rpke also had a life-long aversion to bigness ([1942g] 1992, pp. 6271), something accentuated by impressions he formed of the United States (1964f, p. 244) during his Rockefeller Foundation-sponsored visit of 192627. 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 monarchistconservatives, Austrian Catholic corporatists and vlkish-nationalists. Indeed the core reasons that Rpke offered for providing special help to agriculture were extra-economic. He considered it unlikely, for example, that peasant agriculture would long survive all the markets disciplines ([1944b] 1948, p. 193). But his primary justification for certain forms of state assistance to peasant agriculture was Rpkes conviction that the small farmerpeasant 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, Rpke believed this created large urban masses susceptible to the temptations of political extremists or mass democracy, with all of their liberty-negating potential. From Rpkes standpoint, the benefits of averting these trends made worthwhile the economic cost of assistance. Rpke admitted that some of his views on these matters might be perceived as nave or romantic ([1944b] 1948, p. 169, 1965d). But there was at least one market-friendly purpose to Rpkes 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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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 (Rpke [1958f] 1998, p. 155) and a corresponding growth in private economic activity. In the end, however, Rpkes culturaleconomic 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, Rpke 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 Rpkes neoliberal theory as this does not offer ways to reconcile the demands of framework and market policy, with the implications of pursuing an active economicsocial policy. At an even deeper level, it may also reflect conflict between Rpkes 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. Rpke 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, Rpke wrote, external economic relations have proved to be another dangerous source of inflation ([1956h] 1969, p. 188). But Rpkes 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, Rpke had drawn attention to the growing anti-collectivist sentiment in Britain and the United States (1942b, 1942f). 2. Rpke cannot, however, resist stating that in his [Keyness] 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. Rpke 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, Rpke used the example employed by Rstow in 1932 to show how a compatible intervention into a struggling agricultural industry could occur without undermining market competition (Rpke [1942g] 1992, pp. 1889).

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 Rpke (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. 45). Among twentieth-century economic liberals, Rpke 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 Rpkes 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, Rpke 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, Rpke was involved in shaping war reparations policy after 1918, and believed that nationalistic sentiment had undermined any sane resolution of this question. Finally, Rpke 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, Rpke witnessed several language groups living together in relative harmony. Hence, it is not surprising that, as Rpke 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 Kaisers army, Rpke had been fascinated by the nation-states relative absence from medieval
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Europes cultural landscape, in which most people primarily identified themselves first as Christian, then as members of relatively small communities (1966c, p. 119). And while Rpke 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. 11534, 165221, 1960a, 1965c). This chapter explores Rpkes 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, Rpke thought that the same moral goods should be central to international economic relations. There are, however, crucial differences between the ways that Rpke thought these values should be realized at the domestic and international levels. This raises questions about the extent to which Rpke believed that aspects of his neoliberalism applied to the international order. While Rpke insisted that governments had a proactive albeit limited role in ordering a countrys 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 Rpke envisaged for governments at the national level.

INTEGRATION, DISINTEGRATION, CONFUSION

Throughout Rpkes writings on world economic history, the theme of relatively spontaneous emergence, rapid collapse and faltering renewal prevails. No-one and no country, in Rpkes 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 (Rpke, 1959c, pp. 1317). 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 (Rpke, 1931m, pp. 1012). Indeed Rpke 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 (Rpke, 1934a, p. 9, 1959c, p. 12). Rpke 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 (193031, 1934a, p. 15).1 Taken together, Rpke 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 (Rpke [1954d] 1959, pp. 1559). Rpke 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 (Rpke, 1936g). Rather it reflected the accuracy of the insight of the Scottish Enlightenment philosopher, Adam Ferguson (17231816), concerning institutions which emerge as a result of human action but not human design (Rpke [1954d] 1959, pp. 767). The fact that Britain the nineteenth centurys pre-eminent economic and naval power committed itself to free trade in the 1840s was, in Rpkes 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 (Rpke, 1923b, 1942h, pp. 756). Neither of these developments was planned, let alone directed by an international institution seeking to construct an international economy. But beyond these specific circumstances, Rpke 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, Rpke 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 (Rpke [1954d] 1959, pp. 74, 89, 1959c, pp. 489) the lex mercatoria which themselves were necessitated by the growth of what Rpke called the medieval world economy ([1942g] 1992, p. 238).

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Despite early-modern Europes splintering in the wake of growing national absolutism and Western Christianitys sixteenth-century schisms, Rpke 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 (Rpke [1954d] 1959, p. 89, 1959c, p. 50). Rpke 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 (Rpke, 1959c, p. 50). The full fruits were not realized until the nineteenth century in accordance, Rpke 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 Rpke 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 (Rpke [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. Rpke 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 Bismarcks wars of aggression against Denmark, Austria-Hungary and France. Rpke 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. Rpke was certainly fond of quoting Keyness famous idyllic description of the pre-war London gentleman to capture the ethic pervading the globally integrated economy that imploded in 1914 (Rpke, 1959c, pp. 1617). But it is unfair to describe Rpke as romanticizing the pre-1914

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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 (Rpke, 1935d, 1942h, p. 76) and their gradual violation of liberal economic principles at the domestic level. Nationalisms insistence upon the nations primacy above all else, Rpke argued, led to an increased willingness to prosecute war. In the Great Wars case, this instantly reduced the hitherto highly integrated world economy into militaryeconomic blocs, symbolized by the gold standards 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 (Rpke, 1938d). This, Rpke explains, had immediate implications. Governments, for example, accorded fewer protections to foreign-owned property and ignored failures to repay loans to foreign banks (Rpke, 1942h, p. 77, 1946e, p. 203). The growth of international trade, Rpke wrote, could be explained in economic terms such as comparative costs and an increasing division of labor (1923b, p. 5, 1925b, pp. 55102). 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. 110, 1943c). Flouting these moral and legal norms, Rpke 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, Rpke 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, Rpke 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 (Rpke, 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 (Rpke, 1922b, p. 132, 1928a, pp. 2445). This implied abandonment of the gold standard and the end of a truly international monetary system (Rpke, 1942h, pp. 1917). It also gave impetus to top-down economic planning, not least because exchange controls are integral to planned domestic economies (Rpke [1954d] 1959,

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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, Rpke 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, Rpke observed, that interwar radical German nationalists invariably embraced autarkic language, even before the National Socialists came to power (1934a, pp. 223). These reflections led Rpke 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 (Rpke [1942g] 1992, p. 239). Instead, international economic relations became characterized by the development of closed blocs, such as Hitlers economic Grossraume, linked together by imperialistic claims, compulsory bilateral economic agreements and autarkic aspirations (ibid., pp. 23941). This combination enhanced the probability of war because increased imperium was a sure way of increasing a blocs or a nations dominium (Rpke, 1942h, p. 96). This trend was compounded by the tendency of autarkic policies to associate increases in a countrys 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 (Rpke, 1934c, 1944a). Efforts to revive a truly international economy after World War II much occupied Rpkes post-war thought. The picture emerging from Rpkes 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, Rpke 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, Rpke insisted that interventionist domestic policies had profoundly disintegrating overflow effects. Rpke 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 interventionistprotectionist agendas. Nor, Rpke 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 (Rpke, 1966a). They were often forced to choose between altering their exchange rate, softening their currencys purchasing power, adopting capital import controls (Rpke, 1952f, 1967a), or worst of all giving up and effectively placing their monetary policy, as Rpke 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 Rpke impressed with post-war top-down approaches to resolving international economic problems (Rpke, 1959c, p. 39). This skepticism flowed from Rpkes sense that many post-war international organizations had been captured by Keynesian ideas and subsequently committed to full-employment policies (Rpke [1952d] 1960). More generally, it reflected Rpkes 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 (Rpke [1954d] 1959, p. 224). For example, he viewed the economic principles guiding the World Banks 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. 20910).2 Like all instances of non-market formation of capital (or what Rpke 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 (Rpke [1952e] 1969, p. 165). Rpke 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. Rpkes 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 Rpke 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 Rpkes view of international

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aid programs. Concerning one such exercise the Marshall Plan Rpke argued that Europes problem was not so much a lack of resources, but rather the absence of market economies. Without a restoration of free markets, Rpke 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, Rpke 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. 3625). Countries such as Italy, Rpke 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 (Rpke [1947j] 1969, pp. 1267). Other European nations, however, used Marshall Aid to fuel inflationary investment. This was not helped, Rpke 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. 1278). Consequently, Rpke 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). Rpke 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, Rpke claimed, a result of their governments following the prescriptions of economists such as Gunnar Myrdal (18981987) who advocated welfare states, nationalization and inflationary investment policies in their own countries (Rpke [1958f] 1998, pp. 1823, 291, 1960a). It was not, Rpke cautioned, that underdeveloped nations had nothing to complain about. He was acutely aware of colonialisms 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 (Rpke [1958f] 1998, pp. 1889, 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 Rpke 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. 1889, 1961b, p. 212). Rpke 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 Rpke 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. 4043). Rpke 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. 1823, 1959b). Highlighting the question of values, Rpke 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 Rpke 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 (Rpke, 1959c, pp. 1127), Rpke 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 (Rpke, 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. Rpke may have underestimated the willingness of governments to continue pursuing flawed policies long after the failures have manifested themselves. As noted, Rpke 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 Rpke 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. 24850, 1964f, p. 238). Rpkes 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 Rpkes vision of international political economy had no place for creating an international organization that fulfills any of the functions assigned in Rpkes neoliberalism to the state at the national level, Rpke identified three decisions essential to restoring a truly integrated international economy. Consistent with Rpkes 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, Rpke held, to unilaterally abolish exchange controls and restore free currency convertibility (1949a, 1950a), thereby removing a major obstacle to international capital movements (Rpke [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. 2445). 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 Rpke, essential for international monetary reform (1944c, [1961i] 1969, pp. 2313). 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 (Rpke [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. 22530). By contrast, the old liberal economys 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 (Rpke [1954d] 1959, p. 252). The second ordering decision that Rpke 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 (Rpke [1954d] 1959, p. 232), Rpke held that the Soviet blocs very workings especially its collectivist approach to foreign trade (1954a, 1956d) and its militaristexpansionist tendencies (1961h, pp. 5965) 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 (Rpke, 1950b, 1959c, p. 120). But it was not just the Soviet blocs internal refusal to adhere to the workings of free exchange and prices that was problematic. Even more dangerous, Rpke 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, Rpke 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 MarxistLeninist ideology meant that they did not consider themselves bound by such normative imperatives (Rpke, 1951c, 1954a). Rpke 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 blocs collectivist methods and disregard for a renewed ordre public international from infecting the international economy (Rpke [1954d] 1959, p. 234, 1955d, 1956b, p. 50). Rpke 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 Rpkes 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, Rpke 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 Rpkes 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. Rpke 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 markets superior wealth-creating capacities. One explanation for these deficiencies may be that Rpke never ceased to put post-war economic relations in the context of the Wests 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. 11819). This may seem extreme, but it should be understood that Rpke 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 Rpkes standpoint, justified. Beyond quarantining Communist states, Rpke 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 standards often difficult demands into domestic economic policy, then it could not work as an international monetary standard (ibid.). The old gold standard broke down, Rpke 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 (Rpke, 1924b, 1944g). Rpkes 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, Rpke had disputed the notion that one nations 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 (Rpke [1954d] 1959, p. 235),4 Rpke 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). Rpke was thinking of such countries embrace of collectivist policies and the subsequent abandonment of many institutions and practices introduced by Western colonialism. Unfortunately, Rpke does not indicate how developing nations are supposed to develop all the habits of action noted above. How can a nations integration into a global economy begin from below when the necessary habits do not, in large measure, exist at national or local levels? Rpke 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, Rpke 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, Rpke acknowledged, limited their ability to do this. Perhaps, Rpke 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 (Rpke [1954d] 1959, p. 235). From Rpkes standpoint, this reflected economic, legal and moral realities in developing countries. The capacity, however, of Rpkes 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 Europes situation differed greatly from post-colonial developing nations. The former still possessed much of the humus that Rpke considered essential for any countrys successful integration into a liberalized global economy (Rpke, 1952c, p. 2), despite Europes shift towards socialist policies (Rpke 1949i). For Rpkes 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 worlds regions, Europe provided the setting in which his theories about reintegrating national economies could be best tested. Europe as a civilization, Rpke maintained, was a real cultural unit (1964f, p. 233). Reflecting on this matter in the immediate post-war period, Rpke argued that the success of any proposal for European economic integration depended upon accurate recognition of Europes sociological identity and history (1948g, 1948i, 1948k, 1948l). A primary political context for Rpkes thoughts on this subject was an internal debate within West Germanys government concerning its attitude toward the European Economic Community (EEC). In 1947, Rpke 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, Rpke warned against the protectionist tendencies that he associated with the Schuman Plans 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 Republics 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. 2446). Though Ludwig Erhard was at one with Adenauer (and Rpke) in underscoring the need to resist Soviet aggression, Erhard (and Rpke) 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, Rpke pressed the case against the EEC among other German economic liberals. This culminated in Rpkes public attack on the EEC at a 1957 meeting of the Aktiongemeinschaft Soziale Marktwirtschaft (Rpke, 1957a; Nichols, 1994, p. 346), and his pursuit of the free-market case against the EEC in the pages of the journal Ordo (Rpke, 1958e). Rpkes hostility to nationalism is well documented. The tendency of nationalists to associate themselves with anti-market economic policies reinforced this perspective in Rpkes thought (1925, pp. 97105, 1945e, 1945i). But diminishing nationalist tendencies did not imply, Rpke stated, reducing national sovereignty though establishing authoritative supranational institutions (1966c, p. 122). Instead, post-war Western Europes economic reintegration should proceed from the premise of unity in diversity (Rpke, 1956j, p. 30). European integration, Rpke 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 lEurope des patries an idea, Rpke noted, articulated by modern Europeans ranging from Montesquieu to Charles de Gaulle (Rpke [1954d] 1959, p. 52, 1961d, p. 15, 1964f, p. 235) translated into a federalism which maximized individual nations autonomy (Rpke [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 (Rpke, 1964f, p. 234). As a practical example, Rpke 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 (Rpke, 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 (Rpke, 1944e, 1964f, p. 235).

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According to Rpke, the sociological preconditions for reintegrating Western Europes 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, Rpke 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 Rpke, 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 Europes moralcultural patrimony of Enlightenment and Judeo-Christian values (Rpke, 1964f, p. 234). An obvious link exists here with Rpkes 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. Rpke 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, Rpke 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, Rpke claimed that this translated into a closed European integration inspired by rationalistscientistic 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 EECs 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. 7073, 7785). There were, Rpke 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 (Rpke, 1966c, p. 126). Rpke 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 (Rpke, 1951d). The same bloc was also effectively extracted from that community of price, market, and settlement which formerly the whole world represented (Rpke [1944b] 1948, p. 231). While Rpke never suggested that the EEC was akin to Napoleons Continental System or Hitlers 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 Beaverbrooks Empire Free Trade (Rpke, 1958d, p. 171). The first was that, for all the EECs 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, Rpke commented, the price of the integration of the Six becomes less integration vis--vis the rest of the world (1958b, p. 17); the EECs 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 (Rpke, 1958d, p. 171, 1964f). The very existence of a high tariff wall between EEC members and non-EEC European states, Rpke stated, would actually further economic disintegration across Europe (1964f, pp. 24041). There was, for example, every reason to assume that the EECs common external tariff would be higher than those hitherto maintained by member countries. This would be the price of membership demanded by the EECs stronger, more protectionistinclined nations most notably France (Rpke, 1958d, p. 171, 1964d), despite Jacques Rueffs relative success in restoring monetary discipline and considerable elements of the market economy following de Gaulles overcoming of the near political anarchy of the Fourth Republic (1964f, p. 238). Rpke 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, Rpke 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, Rpke 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 (Rpke, 1958b, p. 15, 1958d, p. 175), not least because

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Frances high labor and social costs had nothing to so with superior economic productivity and everything to do with interest-group pressures (Rpke, 1950h, 1958b, p. 15, 1958d, p. 174). In this light, there was considerable danger that the common market [could] turn into a common dirigisme (Rpke, 1958d, p. 174). Strictly speaking, Rpke 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, Rpke thought, would tend to oscillate toward the monetary policy of the least disciplined but most powerful members (1958b, pp. 1415). Given Rpkes 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. Rpke 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, Rpke 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 EECs development was one of interventionism, dirigisme, and Keynesianism. The EECs permanent heads in 1964 were, Rpke claimed, mostly socialists and ingrained interventionists, as were most member countries heads of government (ibid., p. 236). The Zollvereins economic regionalism was thus part of and a momentum for an accelerating economic liberalization in depth and breadth across the world (Rpke, 1958d, 1964f, p. 237). Conversely, the EECs 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 (Rpke, 1964f, p. 236). The EEC, however, was attempting to integrate nations with different framework policies, such as relatively free-market Germany and dirigiste France (Rpke, 1957c), and countries with dissimilar approaches to welfare (personal responsibility versus extensive state assistance). Further complicating matters were crucial monetary differences. The Zollvereins 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 (Rpke, 1964f, p. 236). France, Rpke noted, had refused to accept the EECs 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 states 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 (Rpke, 1958g, p. 58, 1966c, p. 123) or the reestablishment of something like the gold standard. Consistent with his distrust of top-down international planning, Rpkes 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 (Rpke, 1955c, pp. 7580), only to be surpassed, Rpke argued, by the European Economic Commission, which he labeled an enormous administrative machine (1964f, p. 238). Rpke 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. Rpkes 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 Rpke 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, Rpke 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. 18798). Rpke acknowledged that such policies were often difficult to implement and less popular than protectionism and welfare states (1962f, pp. 356). But neither market economies nor monetary discipline, he insisted, should be sacrificed on the altar of Europe ([1954d] 1959, p. 264). Rpke 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 Rpkes 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. 2312, 262, 1954f, 1959a). Crucially, however, the EPU lacked the EECs inclination to bureaucratic dirigisme (Rpke, 1958e, pp. 3545). Likewise, the OEEC lacked the Coal and Steel Communitys complicated structure, thereby allowing the former to move, when it is desired, from a preferential to a general non-discriminatory system (Rpke [1954d] 1959, p. 262). Moreover, given its focus on securing free trade (Rpke, 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 EECs closed-regionalist approach (Rpke, 1960h, 1964f, p. 238). Throughout Rpkes 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, Rpke 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 EFTAs genius, according to Rpke, was that it embodied a liberal associative non-political approach that focused on coordination instead of the EECs imperial political model of subordination and discrimination against non-members (Rpke, 1964f, pp. 241, 243). Frances 1963 veto of Britains entry into the EEC, for example, had proceeded largely from de Gaulles particular political concerns about Britain (Rpke, 1963f, 1966d). Thus, Rpke noted, the EECs political character had inhibited a

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Western European country from being integrated into the EECs economic structures. If it had been a question of admitting Great Britain into the definitely non-political club of the EFTA, Rpke 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 Rpkes preference for free association is that it left the authority of nation-states untouched. This seems at odds with Rpkes oft-expressed concerns about the nation-states 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 Rpke had no reservations about sovereignty per se. Neither war nor economic nationalism, in Rpkes 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 Rpke 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, Rpke 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 Rpke, this is not only bad morality but also bad politics. Machiavellisms claims to being realistic were belied by the fact that it seemed to lead inexorably to a heap of ruins (Rpke, 1953g, p. 9) and reduced the state, in the words of St. Augustine, to nothing more than a great band of robbers (Rpke [1954d] 1959, p. 36). This did not mean that Rpke 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. 367). Sovereignty, Rpke held, would cease to be an issue if each national government freely subordinated its action in the international sphere to

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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. 1256). 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 Sallys suggestion that Rpke 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, Rpkes 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 Rpke 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 Rpke, 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, Rpkes 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 Rpke sees a far less prominent role for the state in international economic relations than in domestic economies. At the same time, Rpke 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. Rpkes thinking on international political economy embraces a broad canvas. It involved lengthy reflection on matters that initially seem remote from economics but which, as Rpke 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 Rpkes 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, Rpkes 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 Rpkes 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 Rpkes political economy as a sufficiently coherent set of propositions revolves.

NOTES
1. Oddly enough, Rpke notes, economic liberalism emerged as a force in Britain partly because Queen Victorias consort, Prince Albert, had absorbed Smiths insights while growing up in Germany ([1946k] 1969, p. 102). 2. Rpke 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, Rpke 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. Rpke 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), Rpke 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 pricecost relationships; and partly because it was ultimately controlled by one powerful and ruthlessly dominating country, that is, the Soviet Union (1966c, p. 128). 6. Rpke acknowledged that one inspiration for the Steel and Coal community was the desire to prevent monopolies and cartels from arising in this industry. Rpke 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. Rpke considered it an open question whether all these views can be attributed to Machiavelli himself (ibid., p. 33). 8. Rpke dismissed those who associated Christianity with idealistic visions of international order by reminding his readers of the Christian traditions warnings against imagining that the eternal peace of heaven can be replicated on earth (ibid., p. 40).

8.

Between humanism and social science

Wilhelm Rpke 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 Rpke before his death in 1966 Ltat dpensier (1967b) was published posthumously in a collection of essays honoring his friend and fellow economist Jacques Rueff. Rueffs life and work enjoyed curious parallels to Rpkes own odyssey. Like Rpke, Rueff devoted much time to rethinking economic liberalism, most notably in Lordre 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 Rpke helped to prepare the way for West Germanys economic liberalization, France adopted Rueffs proposals (known as the RueffPinay Plan) for economic reform in 1958. These successfully balanced Frances national budget and secured the francs convertibility. Intellectually Rpke 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 Smiths death in 1790, but which accelerated after 1946. Rpkes 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 states rapidly expanding share of national economies. But, Rpke 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. 2378). Consistent with Rpkes previous writings, Keynes is squarely
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identified as linitiateur (ibid., p. 237) of these changes. Rpkes blend of economic and moral reflection continues with a fierce critique of John Kenneth Galbraiths The Affluent Society. Describing Galbraith as one of the chief proponents of expanding government finances, Rpke 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 Rpkes sharper critique of Galbraith is that the latters attack on opulence in developed countries was driven not so much by worries about a consumerist culture but rather by Galbraiths conviction that the consumer economy effectively robs governments of the financial resources they require to fulfill a myriad of tasks that, in Galbraiths view, the state must undertake (Rpke, 1967b, pp. 2446). In this connection, Rpke was struck by the strength of Galbraiths 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 Rpke, this normative presupposition on Galbraiths part in favor of the public and against the private was essential to understanding Galbraiths prescriptions for growing state interventionism. While Rpkes 1967 article epitomizes the interplay between economic analysis and normative concerns that defines his thought, questions remain concerning the overall coherence of Rpkes political economy. In 1986, one Rpke-sympathetic economist wondered if the modern elements in Rpkes thought were compatible with the more traditional aspects (Ancill, 1986, p. 39). Assessing Rpkes political economy, however, goes far beyond the issue of the success or otherwise of Rpkes 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 Rpkes post-war thought, especially that published in the English-speaking world, notes his critical view of Keyness effect upon the economic way of thinking and Keynesianism upon economic policy. Yet such commentaries rarely enter into lengthy discussion of the reasons for Rpkes position beyond noting his concern that it would lead to excessive government intervention. But, Rpkes

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dispute with Keynesian thought goes beyond the appropriate scope of the governments economic role. Rpkes 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 Rpke 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, Rpke thought many economists had effectively compromised their intellectual integrity. But even more dangerous, in Rpkes view, were the effects of the implicitly positivistic underpinnings of the new economics upon the coherence of economic inquiry and policy. One of Rpkes 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, Rpke believed, to be the starting point of the economists 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 empiricalpositive dimension of economic reflection becomes questionable. By underlining this intrinsic dependence of empirical economic inquiry upon normative principles, Rpke 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, 1.12). An unanswered question is why Rpke singles out Keynes as particularly responsible for the direction of post-war economics and its interventionist inclinations. In his analysis of Keyness 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 Rpke 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 Keyness mantle. Rpkes own writings identify the positivist and scientist mentality as preceding Keynes by many decades. Rpke 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, Rpke was deeply concerned that Keyness thought lent legitimacy to inflationary policies. In the late 1950s, Rpke 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 Theorys publication, Rpke did not regard these as diminishing the fact that Keynes truly was the father of the new economics. The radical character of Keyness General Theory lay, Rpke 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, Rpke 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 Keyness 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, Rpke 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, Rpke 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?
Rpkes 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, Rpkes 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 Rpkes effort to explore economic liberalisms historical and philosophical underpinnings and his attempt to bolster these without undermining the efficacy of market processes and institutions. In this connection, perhaps Rpkes 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 Rpkes analysis was his oscillation about Smiths place in economic liberalisms association with rationalism. Rpke acknowledged that Smiths interests ranged far beyond the strictly economic realm and that he could hardly be accused of economism. In other places, however, Rpke indicated his agreement with Rstow that Smith had somehow contributed to the market economys ties to rationalist thought. This position is more difficult to defend. Certainly the question of whether Smiths 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 Smiths invisible hand may well have reflected Deistic tendencies on

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Smiths part, there is little doubt that Smiths political economy presupposes a more complex philosophical and sociological context and set of foundations than suggested by Rstow. Rpkes difficulties with Smith, however, should not obscure the fact that Rpke 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 Rpkes 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 Rpke 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 liberalisms rationalist undertones. For Rpke 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 Rpkes case, it was also an indication of his conviction that it was historically incongruous to try to separate the market economy from the Western classicalChristianEnlightenment 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 Plerin meeting rejected Hayek and Rpkes proposed designation of their group as the ActonTocqueville Society reflected many liberals unease with this line of thought. Frank Knight, for example, expressed strong objections to the Mont Plerin Society being named after two Roman Catholics (Hartwell, 1995, p. 44). Over time, it also proved difficult for Rpke and other neoliberals to keep Germanys Christian Democrats from drifting away from core neoliberal economic commitments. But at an even broader level, the viability of Rpkes project surely depends upon sufficient numbers of people believing that there is a distinct Western tradition and that it is worth preserving. Rpke 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 Rpkes particular

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proposals for facilitating more stable non-rationalist foundations for the free economy in these parts of the world. A further complication arising from Rpkes 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 Rpkes 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 Rpke explain precisely how they should occur. One way that Rpke 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 Rpkes 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 Rpkes reflections on national economies and dwarfed by his attention to historical sociological context. In some respects, the ordoliberalism of Eucken and Bhm 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 Rpke. 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 Rpke 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 positivisms 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 Rpke attempted to reform liberalism involved significantly rethinking the states 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. Rpkes work on business cycles illustrates that this aspect of his political economy preceded his efforts to revise economic liberalisms philosophical foundations. He was not the only economic liberal to rethink the states 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 Rpkes 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 competitions socially corrosive effects. On several levels, however, Rpkes neoliberalism is marred by unresolved tensions. At different points, Rpke changed his mind about the compatibility of

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various forms of intervention with market economies. His position on antitrust laws is a good example. As time passed, Rpkes skepticism about the efficacy of various interventions seems to have increased. This suggests that Rpke 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 Rpkes neoliberal theory undermine its first (framework) and second (market) elements. As noted, Rpke occasionally wondered whether his neoliberalism would result in the states undue expansion. One is also struck by the number of times Rpke suggested that a policys 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 Rpkes neoliberalism, however, were supposed to limit the states 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 Rpkes 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 Rpkes 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 Bhms ordoliberalism adequately addresses the issue of expansive state power. Like Rpke and Rstow, 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 Bhms 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 RPKE
The strength of Eucken and Bhms approach to political economy is the manner in which it integrates jurisprudential analysis and philosophical

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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 Bhms critical view of the German historical schools tendency to historicism. Rpke, however, was more sympathetic to the efforts of Rstow and Mller-Armack to draw upon historical sociology to develop economic theory. This need not imply, however, that Rpkes 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. Smiths 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 normativesociological purpose: to identify the moral, historical and social preconditions for the realization and maintenance of the civilization of natural liberty that, to Smiths 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 Smiths 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, Rpkes historicalsociological liberalism begins to look rather Smithian and Scottish in character. Certainly Smith and Rpke approached political economy from different directions. Rpke 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 Rpke worked and the phenomena to which they were responding also varied. Smiths work reflects and anticipates the rise of modern commercial society. Rpke was seeking to save and reinvigorate this order amidst the ashes of nineteenth-century liberal capitalism, two world wars, and the modern states unprecedented expansion. Yet while

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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 Rpkes 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, Rpkes willingness to think about the states economic role in a non-laissez-faire manner seems more attuned to Smiths political economy than what might otherwise be supposed. As Jerry Z. Muller notes, Smiths 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. 1313). A significant difference between Smith and Rpke may lie in their understanding of order. Rpkes political economy embodies the idea of ordered anarchy. This insight parallels Smiths invisible hand and Fergusons 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, Rpke 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 Rpke. 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 Rpkes political economy that can be criticized. It may well be that, like Smith, Rpke 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. Rpkes 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, Rpke 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

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should have, thus leaving important questions unanswered. That Rpke 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 Rpkes political economy.

RPKES CHALLENGE
When Rpke 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 (Rpke, 1945f, pp. 1078). A similar dehumanization, Rpke 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 Rpkes perspective, these were not isolated phenomena. Excessive abstraction at the level of economic theory facilitated particular economic policies which in turn affected a societys ability to uphold and reconcile values such as liberty and order. Rpke 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, Rpke himself sought to develop theories about the causes and effects of a range of social, political and economic phenomena. Rpke 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 Rpke 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,

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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 Rpkes writings penned during the same historical period underline how far removed Rpke 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 Hayeks 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 persons will, not for the first persons sake, but for the coercers 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. Hayeks 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). Hayeks 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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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 movements 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, Hayeks 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 Rpke observed, skepticism is essentially a self-refuting position insofar as one purports to know that we can know nothing with certainty ([1944b] 1948, pp. 735). 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 Wests 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 Hayeks 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 empiricalpositivist 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). Rpke 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, Rpkes 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). Rpke regarded

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empirical methodology as a powerful tool, especially when applied to the realm of positive economics. Rpke 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 Rpkes standpoint, were subject to and derivative from human experience and observation. Nevertheless Rpke 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 Rpke, 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 Rpke, 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 Rpke refused to romanticize the pre-modern world, he also accepted Burkes axiom concerning the wisdom contained within inherited institutions (something accepted by Hayek), not to mention Smiths 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. Rpke 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 Rpkes 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 Rpke 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.

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Rpkes 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. Rpkes free-market convictions did not fit well with some conservatives. But his willingness to rethink economic liberalisms premises and the states 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--vis most of the post-war economic profession. But for Rpke, 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, Rpke 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 Rpke 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 Rpke 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 Rpkes inquiries may have contributed to a number of substantial tensions and even apparent contradictions in his work. Nevertheless Rpke 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. Rpkes 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

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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 Rpke 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, Rpke 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 selfs immediate passions, and a society in which people learnt this selfcontrol from institutional sources that extended beyond and often preceded the law. For Rpke, the only conceivable modern alternative to a society of self-possessed, well-formed, even virtuous individuals was Ortega y Gassets mass man, which in turn lent itself to the development of the type of populist economies that Rpke associated with Communism, National Socialism and, in the post-war era, neo-Keynesian inflationist-inclined welfare states. Rpke 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 everyones 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 Rpke 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 Rpke, 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, Rpke 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 Rpke 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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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 states 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 Rpke 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 firms 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 RPKE
(1922a), Dei Arbeitsleistung im deutschen Kalibergbau, unter besonderer Bercksichtigung 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, Jahrbcher fr Nationalkonomie und Statistik, 122, 6780. (1924b), Freihandel und sozialpolitik, Soziale Praxis, 20 November. (1924c), Probleme der Deutschen handelspolitik, Der sterreichische Volkswirt, 8 March. (1924d), Zum reparationsproblem, Jahrbcher fr Nationalkonomie und Statistik, 122, 52736. (1925a), Die neue wirtschaftsstrukur Deutschlands als grundlage seiner knftigen handelspolitik, Schriften des Vereins fr Sozialpolitik, 171 (1), 146. (1925b), Geld und Aussenhandel, Jena: Gustav Fischer. (1925c), Konjunkturtheorie und konjunkturpolitik, Bankwissenschaft, 1 and 15 August. (1926a), Kredit und konjunktur, Jahrbcher fr Nationalkonomie und Statistik, 124, 24385. (1926b), Sozialisierung 2, Handwrterbuch der Staatswissenschaften, 4th edn, Jena: Erganzungsband, pp. 47390. (1926c), Spekulation, Handwrternuch der Staatswissenschaften, 4th edn, Jena: Erganzungsband, pp. 50923. (1927a), Amerika in neuen bchern, Frankfurter Zeitung, 9 October. (1927b), Die sdstaaten der Union, Frankfurter Zeitung, 20, 21 and 24 May. (1928a), Auslandkredite und konjunktur, Schriften des Vereins fr Socialpolitik, 173 (2), 21546.
183

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(1928b), Das agrarproblem der vereinigten staaten II. Die gegenwrtige lade der landwirtschaft, Archiv fr Sozialwissenschaft und Sozialpolitik, 59, 96120. (1928c), Investitionskonjunktur und konsumkonjunktur, Maschinenbau, 15 March. (1928d), Zur mythologie der reparationen, Magazin der Wirtschaft, 20 December. (1929a), Amerikanische prosperitt und Europische armut, Mitteilungen des Universittsbundes Marburg, 12 November. (1929b), Die kapitalbildung, Sparkasse, 1 March. (1929c), Die Theorie der Kapitalbildung, Tbingen: 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 (Verffentlichungen der Friedrich-ListGesellschaft), pp. 15122, 32964. (1929f), Staatsinterventionismus, in Handwrterbuch der Staatswissenschaften, 4th edn, Supplementary volume, Jena: Erganzungsband, pp. 86182. (1929g), Wirtschaftstheorie und wirtschaftpraxis, Maschinenbau, 19 September. (1930a), Die kreditschpfung durch banken und ihre volkswirtschaftlichen auswirkungen, Bankwissenschaft, 5 January. (1930b), Die sozialkonomische betrachtungen des abnehmenden bevlkerungsberschusses, 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 fr Nationalkonomie, 2, 10312. (1930f), konomische diagnose unserer zeit, Frankfurter Zeitung, 12 January. (1930g), Zum transferproblem bei internationalen kapitalbewegungen, Jahrbcher fr Nationalkonomie und Statistik, 133, 22540. (19301931), Liberale handelspolitik, Archiv fr Rechts- und Wirtschaftsphilosophie, 35, 35470. (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. 24970.

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(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 19081913 und 1924 1929, in B. Harms (ed.), Kapital und Kapitalismus, Berlin: Hobbing, pp. 289307. (1931g), Die verantwortung der Reichsbank, Frankfurter Zeitung, 26 July. (1931h), Ein weg aus der krise, Frankfurter Zeitung, 7 May. (1931i), Ewige prosperitt, Der Deutsche Dolfswirt, 6 February. (1931j), Geldtheorie und weltfrise, Deutsche Dolfswirt, 25 September. (1931k), Praktische konjunkturpolitik, die arbeit der BraunsKommission, Weltwirtschaftliches Archiv, 34 (2), 42364. (1931l), The intellectuals and capitalism , reprinted in Wilhelm Rpke (1969), Against the Tide, translated by Elizabeth Henderson, Chicago, IL: Regnery, pp. 2544. (1931m), Weltwirtschaft und Aussenhandelpolitik, Berlin and Vienna: Spaeth & Linde. (1932a), Krise und Konjunktur, Leipzig: Quelle & Meyer. (1932b), Les conditions du relvement conomique, Journal des Nations, 14 and 15 March. (1932c), Review of Ludwig von Misess Ursachen der Wirtschaftskrise, Zeitschrift fr Nationalkonomie, 4 (2), 2735. (1932d), Un plan allemande de relvement conomique, LEurope Nouvelle, 27 June. (1933a), Autarkie ein abgenutztes Schlagwort, Der Deutsche Volkswirt, 6 January. (1933b), Die skulare bedeutung der weltkrisis, Welwirtschaftliches Archiv, 37 (1), 1936. (1933c), Die skulare krise und ihre berwindung, in K. Koch (ed.), Economic Essays in Honour of Gustav Cassel, London: George Allen & Unwin, pp. 55368. (1933d), End of an era, reprinted in Wilhelm Rpke (1969), Against the Tide, translated by Elizabeth Henderson, Chicago, IL: Regnery, pp. 7997. (1933e), Reflation oder reexpansion, Bank-Archiv, 15 June. (1933f), The secular significance of the world crisis, reprinted in Wilhelm Rpke (1969), Against the Tide, translated by Elizabeth Henderson, Chicago, IL: Regnery, pp. 4577. (1933g), Trends in German business cycle policy, Economic Journal, 43 (171), 42741.

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Index
[Please note that W.R. stands for Wilhelm Rpke] 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 Elektrizitts-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 8990 Antoni, Carlo 72 Aquinas, Thomas 61, 157 Aristotle 14, 157 Aron, Raymond 82 Atatrk, Kemal 2 Austrian school of economics 18, 114 versus historical school 18, 248, 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 212 Beveridge Plan (1942) 117 Bismarck, Otto von 19, 20, 27, 28 wars of aggression 145 bloc economies 164 Bhm, Franz 335, 36, 40, 42 economic liberalism of 3, 18, 29, 39 Wettbewerb und Monopolkampf 34, 35 Bhm-Bawerk, Eugen von 24 boom-bust cycles 978 credit expansion 103, 104, 1056, 109 disadvantages of booms 1089 Hayek on 1034 Keynes on 1023, 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 1478 Britain adoption of free trade (1846) 23, 25 anti-collectivist sentiment in 141 Brning, 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 99102 defined 959 as distinct economic fluctuation 96 duration 97 and economic liberalism 39, 41 effect on industrial-commercial sector 97

207

208

Wilhelm Rpkes political economy classical economic theory 24, 25, 512, 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 1256 Colloque Walter Lippmann 82, 86 COMECON 164 commodity-market crisis 98 Communism 83, 107 competition 57 framework policy 889 and German economic liberalism 20, 32, 34, 36, 3742, 40 perfect 38, 116 confidence, collapse in 99, 101 Congress of Vienna (1815) 145 conservative liberalism 15 conservatives 1378, 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 989 credit expansion 103, 104, 1056, 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 1356 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

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 11112 and short- and long-term economic changes 96 typical course of 96, 97 see also boom-bust cycles business principle 523 Caldwell, B. 278 Calvinism 41 capital crisis 98 capitalism 3, 6, 13, 778 anti-capitalist sentiment 73 crisis of 31, 86 German 18, 1920 and laissez-faire economics 82 liberal 32 and Marxism 19, 28, 389, 39, 52, 94 natural disturbances in 99 nineteenth- and early-twentiethcentury 39 nineteenth-century 87, 93 pre-1914 78 post-war 118 Rstow on 389 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

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 213, 33, 134 discount rates 110 division of labor 11 dogma, Keynesian 120 Dollfuss, Engelbert 81 dominium 145, 146, 147, 153 Dostaler, Gilles 1678 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 1743 inadequacies 6 new 423, 7192 Prussia 234 and rationalism 169 in Weimar Germany 29 economic liberty 11, 756 economic nationalism 23, 32 economic policy 79 and economic science 6970 positive 88 economic science and economic policy 6970 and history 467 nature and purpose 9, 18, 27, 28, 45 economics as border science 68 and economic policy 79 and historical sociology 3742 home-grown 54 laissez-faire see laissez-faire economics

209

modern 48, 49 and morality 67, 14, 26, 59 as normative social science 536 origin 4750 as positive social science 503, 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 545 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 Rpke 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 67, 14, 26, 52 Eucken, Rudolf 29 Eucken, Walter 12, 20, 31, 32, 35, 40, 42, 94, 120 economic liberalism of 3, 18, 2933, 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, 15961 European Free Trade Association (EFTA) 161 European integration 156, 1603 European Payments Union (EPU) 161

210

Wilhelm Rpkes political economy 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 1743 German League for Free Economic Policy 43 German Peoples Party (DVP) 23 German Question, The (W.R.) 8, 13, 1718, 47 German-Jewish exiles 77 Germany Berlin 212 defeat in war 28 economic crises 20, 73 inflation in 22, 312 neoliberalism 37, 44 war economy 65 see also Nazi Germany; Weimar Germany gold standard 32, 1245, 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 56, 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 1034 and economic liberalism 24, 27, 34, 82, 83 Road to Serfdom 8, 58, 71, 176, 177 Hegel, Georg 25 Hennecke, Hans Jrg 3, 4 Heraclitus (Greek philosopher) 78 Hicks, Sir John 115, 168 High Middle Ages 39 historical interference 87

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 889, 91 Frederick the Great 26 Frederick William I, King 26 free markets, crisis of 1921 free price system 36, 48, 57, 6970, 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 (Rstow) 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 1214 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, 1920

Index historical relativism 30 historical school of economics 18, 26, 27, 28, 30, 79, 99 versus Austrian school 18, 248, 174 historical sociology 3, 3742 history, and economic science 467 Hitler, Adolf 6, 17, 147 appointment as Reich Chancellor of Germany 1, 137 Hffner, Joseph 93 Hohenzollern monarchs 27, 28 home-grown economics 54 homo economicus 11, 78, 79, 82 Hlsmann, Jrg 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, 312 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 735 intellectus (reason contemplating deeper strata of being) 178 interdependencies 12, 50 interest-rate policy 32, 978, 103 inflation 1278

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, 1723 liberal 88, 89 intuition 50 Istanbul, University of 2, 8 ius gentium 145, 171 Jacobinism 6, 41, 134 Jena, University of 78 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, Gnther 8 Keynes, John Maynard 6, 8, 45 as antithesis of Smith 65 on boom-bust cycles 1023, 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 659 limitations of 67, 70 Rpke 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 Mller-Armack on 39, 40

212

Wilhelm Rpkes political economy market policy 88, 89, 912, 112 market socialism 87 Marshall, Alfred 45, 46 Marshall Plan 148, 149 Marxism 19, 28, 389, 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 1112, 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 Hlsmanns biography of 83 publications by 124 on socialism 29 wage policy 107 modern intellectuals 56 modern liberalism 12 Molina, Luis de 85 Molina Cano, Jernimo 3 monetary policy 128 monetary theory 31 monopolies 7, 77, 89, 109, 112, 127 and economic liberalism 36, 38 Mont Plerin Society 6, 35, 71, 170 Montchrtien, Antoyne de 10 Montesquieu, Charles de Secondat, Baron de 61, 135 Moore, G.E. 66 morality 67, 14, 26, 59, 66 More, Sir Thomas 157, 180 movement of individual prices, doctrine 67

and rationalism 7781 Rstow on 38 law, role in economic life 18, 34 LEconomie mondiale aux XIX et XX sicles (W.R.) 47 Leibnitz, G.W. 55 lex mercatoria 144 liberal capitalism 32 liberal international economy 14264 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 757 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 Lordre social 165 Lutheranism 41 Machiavellism 162 macroeconomics 67, 123 mankind, W.R.s understanding of 15 Marburg, University of 7, 8 marginal theory 512 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 489

Index Muller, Jerry Z. 175 Mller-Armack, Alfred 42 on contra-cyclical monetary measures 94 economic liberalism of 3, 18, 29 on historical development 41 historical sociology and economics 3942 on welfare measures 129 multilateralism 144, 147 Myrdal, Gunnar 149 National Liberal Party (Germany) 19, 21, 23 National Socialist German Workers Party (Nazi Party) 12, 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 45, 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 8692 of Rpke 109, 111, 134, 151, 172 sociological 40, 42 term 18, 44 Neue Zrcher Zeitung (Swiss newspaper) 72 New Deal policy 114, 149

213

new economics 66, 678, 119, 123, 124 and business cycles 11516 Nichols, Anthony 2 Nixon, Richard 169 non-employment 123 normative perspective 1011, 12, 13, 523, 57 economics as normative social science 536 Nrr, Knut Wollgang 33 North German Confederation (1869) 19 Nouveaux Principes dconomique politique (Sismondi) 14 objectivity 59 office economy 57, 58 old economics 67, 1669 open market operations 110 order 489, 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 334, 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 4750 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, 1312, 1334, 135 perfect competition 38, 116 Peukert, Helge 3 Phillips, A.W. 168 philosophical anthropology 43 Physiocrats 78 Picasso, Pablo 69

214

Wilhelm Rpkes political economy 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 11112 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 Rpke, Eva (wife of Wilhelm) 1 Rpke, Wilhelm career 78 early life 4, 139 Rstow 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 Rstow, Alexander 3, 17, 42, 78, 82 on capitalism 389, 86 economic liberalism of 18, 29 Freedom and Domination 38 on historical development 41 historical sociology and economics 3742 Rpke contrasted 93

planned and command economies 57 political capital 149 political economy Austrian school versus historical school 18, 248 society and values 1216 study of 1012 population growth 137 positive social science, economics as 5053, 54 positivism 9, 28, 59, 162 pre-1914 global economy, romanticizing 1456 Preiser, Erich 118 price mechanism 36, 48, 57, 67, 6970, 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 99100 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 234, 26 Hohenzollern monarchs 19 psychological factors, and crises 101, 109 public initiatives 112 public works programs 11213 pump-priming 114, 115, 129 pure economics, post-Ricardian 11 Quadragesimo Anno 93 Rabelais, Franois 64 Rappard, William 712 Rathenau, Walter 22, 23, 65 ratio (what can be done) 178 rationalism 64, 120 and laissez-faire 7781 Cartesian 63 constructivist 178

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 258, 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 635 Scottish Enlightenment thinkers 12, 15, 16, 174 Second World War 16, 147 secondary depressions 1046, 111, 112, 113, 116 secular humanism 76 self-interest 26, 31, 38 servility 76 Shlaes, A. 2 Sismondi, Jean Charles Lonard 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, 16970, 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 social science and natural sciences 65 and Scottish Enlightenment 12 and value-judgments 60 social science, economics as 6, 48 normative social science 536 positive social science 5053 socialism 4, 29, 37, 52 and bureaucracy 81 and capitalism 58, 87 economic theories 48 Rpkes opposition to 856 and unemployment 107 socialized capital formation 148 sociological economics 11 sociological neoliberalism 40, 42 Solow, Robert 168 sovereignty 1623 Soviet bloc 152, 153 speculation crisis 98 Spiethoff, Arthur 98 spontaneous order 489 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 1334, 135, 156 symbols, of mathematics 67 syndicalism 87

215

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 Rpkes political economy Verein fr 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 1367 wage inflation 127 wage policy 90 wage stickiness 1023 Wagner, Gustav 26 war, W.R. on 45, 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, 12933, 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

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 945, 102, 103 frictional 100, 123 mass unemployment 121, 123 and non-employment 123 and socialism 107 unilateral liberalization 15055 United States anti-collectivist sentiment in 141 New Deal policy 114, 149 Rpke on 139 and secondary depression 105, 106 Smoot-Hawley Tariff Act (1930) 23 universities, independence of 135 utilitarianism 30, 66, 1778 utilities, marginal 51, 52 value, labor theory of 24, 25, 52 value-judgments 59, 6061, 62 values 5960, 178 Vanberg, Viktor 35