The architects of the West German economic “miracle"

Some Constructive Heresies of Wilhelm Röpke

by Joseph R. Stromberg 

Wilhelm Röpke was a pro-market liberal who helped found the Mont Pelerin Society in 1947 along with F. A. Hayek, Ludwig von Mises, and Leonard Read. But he has some significant differences with Anglo-American classical liberals that are worth exploring.

Born in Schwarmstedt in northern Germany in 1899, Röpke came from a family of Lutheran ministers and medical doctors. After his time in World War I he studied law and economics and embarked on a career as an academic economist. A firm opponent of National Socialism, Röpke was forced to “retire” in late 1933 and left Germany. He taught briefly in Turkey before settling permanently in Switzerland, whose tough and sturdy bourgeoisie he came to admire.

The intellectual historian Razeen Sally notes that Röpke produced around 900 publications. His books include Economics of the Free Society (1937, 1963),International Economic Disintegration (1942), The Solution of the German Problem (1946), Civitas Humana (1948), The Social Crisis of Our Time (1950), International Order and Economic Integration (1959), and A Humane Economy (1960; see The Freeman’s review here ^[1]). In Germany, the Röpke Stiftung (Institute) keeps alive his work and memory.

Röpke was closely identified with Germany’s “Neo-Liberals” (or “Ordo liberals”), who included Walter Eucken, Alexander Rüstow, Alfred Müller-Armack, and Ludwig Erhard. Writing in the aftermath of Weimar and National Socialism, these men wanted competition and free price movement ensured by a strong State (more on this shortly). Favoring a social-market economy, they served as architects of the West German economic “miracle.” While Anglo-American liberals claimed to be aggregating and balancing interests, German Neo-Liberals wanted an honest (and rather rational Hegelian) civil service to establish and preserve free competition. Seeing “planless” State intervention in aid of organized interests as the key problem, Neo-Liberals wished to block the influence of private “social power” over State policy and foster the common good.

For conservative economist William Campbell, Röpke was a Protestant thinker in the line of Erasmus and Grotius, despite his adoption of the Catholic principle of subsidiarity. His work displayed distributist and radical Jeffersonian themes along with a dislike of entrenched aristocracies, and he distrusted what Campbell called “scientistic approaches to the production process,” such as Taylorism.

Röpke’s work in technical economics bore considerable resemblance to that of the Austrian school. Believing strongly in the market mechanism and free price movement, Röpke was nevertheless quite critical of modern business practices, corporations, advertising, and more. As he wrote in 1958, “[A]ctually existing forms of market economy . . . are a far cry from the assumptions of theory.” Social conditions shape outcomes “beyond supply and demand.” In 1929-30 Röpke argued that once a depression is under way, modest “reflation” to stimulate new demand may be called for. This argument for compensatory credit expansion can hardly be rejected out of hand—despite a partial agreement with Keynes—and a number of Austrian economists have taken a similar position. (Certainly he later rejected Keynesian methods as a normal part of State fiscal policy.)

One of Röpke’s central concerns was restoration of the world market crippled by World War I. Economically the world before 1914 had been “virtually a unit.” Customs duties were “merely data,” and there were no “raw materials” problems. The “gold standard was a working fiction of a real ‘world money’” with London at its center. In its heyday this order had promoted social and international peace. Pre-war protectionism had, however, fostered domestic monopoly, but Röpke lost little sleep over the modest tariffs of a bygone age. Instead, it was heavy State involvement in national economies (national corporatism) during World War I and between the world wars that concerned him.

The old trading system had not been a self-sustaining natural order but had had an “extra-economic . . . framework of moral, political, legal and institutional conditions.” Röpke’s views on international trade—“liberalism from below” by agreement of independent nations—appear to conflict with the current American top-down globalization model, even if Röpke showed some affection for the Pax Britannica. Under reasonably free trade there would be no special problems of “raw materials” and “living space,” and business as such was not the source of imperialism. Instead, States were the key promoters of monopoly, and if monopoly led to empire, State policy remained the most important cause.

While opposed to national corporatism, Röpke was perhaps insufficiently critical of the post-1945 (and U.S.-led) multilateral corporatism (“embedded liberalism”) of GATT and the ITO. On the other hand, he criticized exported U.S. inflation from the late 1950s onward and generally frowned on the top-down economic management of the Common Market, ancestor of the European Union.

Reflecting in 1946 on the disastrous course of German history in his Solution of the German Problem, Röpke applied his historical and economic ideas to the renewal of German political and economic life. As he saw it, a proper federal equilibrium had never existed in Germany. In late-medieval and early modern times, communal (town-based) decentralization succumbed to powerful feudal magnates making the transition to absolutism and bureaucratic management (“state feudalism”). On the land in western Germany free peasants emerged; to the east in Prussia “feudal” magnates successfully suppressed the peasantry. This dualism of agrarian structure persisted into recent times. Prussia’s underdeveloped cities posed no counterweight to the East-Elbian landed aristocracy (Junkers), and the factory-like Prussian state made society rational, mechanical, and clock-bound—whence inhuman Kantian “ethics” and the Prussian “cult of the colossal.”

German unification had been less organic than that of Italy. The new central state (from 1871) dominated by Prussia adopted elements of economic liberalism and abandoned them as needed. Here was a top-down social revolution involving proletarianization, population increase, mass conscription, State education, and the rise of atomized mass society. Subsidized, cartelized, hierarchical, and centralized as it was, German capitalism was “the prototype of monopoly-and-proletariat capitalism . . . of rigidly organized industry” looking toward “organized socialism” (italics in original).

The ideal political revolution would have constrained Prussian domination, while the ideal “economic and social revolution” would have required “agrarian reform breaking up the great estates and putting peasant farms in their place,” and tariff abolition to undermine industrial cartels. Interestingly, important Social Democrats opposed agrarian reform as necessarily backward and unprogressive.

Now—in 1946—something positive could be done about German agrarian and industrial “feudalism” and their attendant evils. Ideally, a new German revolution—sponsored by the Allies—would dissolve Bismarck’s imperial edifice in favor of the Länder (states). Local administration had survived the collapse of the National Socialist state, and the Allies could revive the constituent German states by negotiating a separate peace with each one, effectively dissolving the Reich. The Allies, Röpke thought, should also enforce “complete free trade, external and internal, for all these German states” to assure German economic viability in spite of political decentralization, thereby preventing the persistent poverty envisioned in the punitive Morgenthau Plan. Allied-enforced free trade would undermine the old order of cartels. As to Germany’s new political structure, a working compromise between a Staatenbund (confederacy) and a Bundesstaat (federal state—in the unfortunate American sense) would be required.

Röpke’s treatment of the German case reflected a broad historical vision. He spied a “plutocratic taint” in early capitalism and wrote that historical (and actually existing) capitalism featured “monopolies, mammoth industries, stock corporations, holding companies, mass production, proletariat,” and was thus “very misshapen” indeed. (This line of analysis parallels that of Franz Oppenheimer, who was a direct influence on Albert Jay Nock, Rüstow, and Röpke.)

The “feudal-absolutist heritage” resulted in “immense accretions of capital and economic positions of power which endow capitalism with that plutocratic taint which clings to it”—giving it “a false start from the very beginning.” But “violent contrasts between rich and poor, between power and impotence, are rather due to extra-economic (‘sociological’) positions of power” such as “feudal land holding . . . profits from the slave trade . . . war and speculative profits . . . pirates’ and soldiers’ booty, monopoly, concessions granted in the age of absolutism, plantation dividends, and railroad subsidies.” Such things were the basis of later “development.” Some were now gone; some, like “feudal mining properties,” lingered as “strongholds of robber barons. . . .” Thence came the odium unjustly extended to all market activity. As for that emblematic nineteenth-century investment—railroads—they had been premature and inflationary.

Consistent with this approach, Röpke found mass society and proletarianization central to the twentieth-century crisis. And where had proletarians come from? His answer: Political power made them, even if their numbers (population) increased later. In both eastern Germany and England (especially in the seventeenth and eighteenth centuries) dispossession of peasants created a reservoir of cheap industrial labor. In Röpke’s opinion, Capitalism and the Historians (1954), a book on the Industrial Revolution edited by Hayek, swung “too far the other way,” but could not dispose of proletarians—whatever their caloric intake may have been—and the social “catastrophe” that came with them.

Such phenomena had feudal-absolutist causes in Europe—but why then did we see much the same results in the United States? Here Röpke refers to Oppenheimer’s “political means” to wealth. The State, whether feudal-absolutist or not, made possible interest-group politics, and American democracy had long allowed “vested interests to flourish unchecked.” Indeed, the interpenetration of interests and bureaucracies “has probably reached its highest degree in the United States”! For Röpke the underlying cause of the evil was “the division of labor, pushed to extremes, and interlocking everything in the most complicated manner”—an unnecessary result since division of labor could in fact be “more humane and natural, and less mechanical and proletarian.”

Röpke announced his “Third Way” revisionist liberalism as early as 1941 in the Swiss Journal of Economics and Statistics, calling for the restoration of competitive markets and distinguishing good economic intervention from bad. He contrasted the industrial division of labor—within a firm or factory—with the social division of labor in which markets coordinate “activities of independent units.” Real, functional independence was what distinguished market economies from socialism, while excessive division of labor led “increasingly to mechanization [and] monotonous uniformity.” The obvious antidote for Röpke was widespread ownership of productive assets: deproletarianization through small property. Where possible, the realm of self-provision outside the market should be expanded and competition enforced.

On Röpke’s rather institutionalist view, State and economy are not and cannot be entirely separated except for purposes of analysis. As noted, he—like other German Neo-Liberals—saw interest-group liberalism as false pluralism: “Unhealthy pluralism . . . is not defensive but offensive. It does not limit the power of the state but tries to use it for its own purposes and make it subservient to these purposes.” Here then is a kind of socially conscious liberal cameralism as opposed to corporate syndicalism.

The false or unhealthy market economy rested on “legal forms and institutions”—“stock companies, the corporation, patent law, bankruptcy,” trusts, and so on, supported by legislation. Indeed, “the growth of the corporation with its much discussed but unfortunately too seldom remedied abuses has led more and more to the assumption of risk by the community.” The State’s job was to defend competition and refrain from favoring monopoly.

Röpke favored free movement of prices rather than a command economy, but insisted on a suitable legal-social framework, in stark contrast to the kind of liberal who imagines that private property and free price movement themselves constitute a social order. To achieve such fit legal foundations, Röpke suggested the need to overhaul laws dealing with bankruptcy, corporations, patents, money and banking, and antitrust. He saw economic concentration as being in particular the product of company law and tax policy. The low birthrate of new firms (as of 1960) surely reflected “something fundamentally wrong with the capital market and the tax system.”

For Röpke the best counterweight to the State was “the minimum economic independence for the individual which in turn is based on a minimum amount of property, economic freedom and security of existence.” Only a market economy could produce favorable outcomes—but what kind of market economy? Real independence was “jeopardized by proletarianisation, by concentration of private economic power, by increasing organization and monopoly, by cartels and associations, by agglomerations of financial interests, by corporativism, by the private planning of vested interests, in short by ‘business collectivism’”—which resembled (at best) a kind of feudal-authoritarian decentralization. The market required mutual trust, long-run legal stability, an ethic, as well as “certain psychological-moral reserves.” The economy was not “an autonomous sphere of rational behavior,” and philosopher Max Scheler (an important influence on Pope John Paul II) had shown that “contractual cooperation of men . . . cannot work without genuine communities.”

Röpke insisted that free markets require a moral framework outside themselves in order to work optimally. The market is only defensible “as part of a wider general order encompassing ethics, law, the natural conditions of life and happiness, the state, politics, and power.”

Röpke could perhaps be seen as wanting precisely the combination of “free market and strong State” some writers associate with Margaret Thatcher and Ronald Reagan. But in that model (also called “neo-liberal”) the strong State pursues a two-pronged strategy of “starving” the welfare beast while feeding the military-industrial one—the latter being (beyond controversy) a great den of special interests. Empirically, then, it appears that the Thatcher-Reagan regimes involved the triumph of new political coalitions working—free-market rhetoric notwithstanding—wholly within the logic of interest-group liberalism. (Financial magicians might also be mentioned.)

In Röpke’s Neo-Liberalism the State is “strong” in an ethical and not just a structural sense and is therefore able to resist special-interest pressures, whatever their ideological coloration. It is of course nearly impossible for Americans to believe that a neutral and ethical civil service can exist (or ever has existed) anywhere. But as John Taylor of Caroline, Hans-Hermann Hoppe, and Röpke have suggested, republican forms of government are the special prey of well-organized, rent-seeking interests.

Liberal and Libertarian Constructs

But, alas, Röpke frequently mentioned “regulation” and even “planning.” Here acquired reflexes will inevitably kick in, with sundry classical liberals shouting “statism” in a crowded tea party. But does Röpke’s model really differ so much from certain liberal-to-libertarian constructs? Let us consider some of those. In the educational model associated with F. A. Hayek, dedicated scholars put in decades of work, eventually turning the tide of public opinion, whereupon the State relents and gives us free markets. This plan is as old as the Physiocrats’ idea of persuading an absolute monarch to impose their vision of free internal markets on all of France. A good idea, no doubt, but it was the State that would do the imposing.

Next comes the model in which a libertarian legal code solves all our problems. All we need do is have a revolution of some sort. In one variant a kind of Patriot King will rally the masses behind a right-wing populist agenda. This “libertarian” man on horseback will then dismantle the State and give up his own (State-like?) power when his State-smashing frenzy is over. The law code being in place, we are asked to believe that thenceforward individual contracts undertaken in a complete ethical vacuum will constitute society.

(This version does not have probable success written all over it.)

So here we arrive at some common paradoxes of libertarian policy-making. Everyone concerned wants a government of laws and not of men, but this unlikely outcome demands some automatic mechanism to replace the fallible men. Have we ever seen such a mechanism? In practice it seems, everyone wants the State, or some suitably stateless-looking substitute for the State, to impose his or her program. On balance, Röpke’s ideal of a genuinely neutral and ethical civil service with a limited agenda subordinated to the common good does not seem more utopian than the proposals just sketched.

Institutions and Culture

Röpke’s Third Way, with its revision of liberalism and its slight tilt toward distributism and agrarianism, has the virtue of foregrounding issues of economic sociology, institutions, and culture, which everyday classical liberalism and libertarianism contrive to ignore. His specific insights and themes—however radical-reactionary and Romantic they may seem—ought to be of interest to all who see a need to combine the insight that markets are very useful with “thicker” social theory able to take account of community, shared values, and nonmaterial interests. Front Porch communitarians, “civic republicans,” left libertarians, conservatives, and many others might do well to revisit Röpke from time to time.

Perhaps Röpke was mistaken in thinking that, absent his ideal ethical and neutral State, people surrounded by “thin” markets could not generate essential “thick” (intermediate) social-cultural relationships. If he was wrong, then arguably it is naturally generated thick libertarianism that would in fact be the true Third Way. Röpke’s own experience, however, convinced him that non-neutral States and capitalism (in a negative sense here), working in tandem, had done so much damage (as in Germany)—and for so long—that it would be idle to rely on society to reconstitute itself in the short run.