German Neo-Liberals and the Social Market Economy

In 1977 a group of European and British economists held a small round-table conference sponsored by the Trade Policy Research Centre, London, to discuss the place in recent economic thinking of the German liberals who had markedly influenced the post-war economic policy of the Federal Republic of Germany. It was no accident that this event occurred in that particular year. It had been touch and go whether or not the British Labour Government would move from being supporters of a ‘mixed economy’ to becoming wholehearted supporters of collectivism, a step which some writers whose work is reviewed in this volume might have regarded as inevitable.

The work on the theory of economic systems and on the resulting policy in Germany as well as its outcome can only be fully understood by considering the situation of economics and economic policy at the beginning of the 1930s and during the following decade. In economics, the influence of the ‘Historical School’ and the accompanying neglect of theoretical thinking had passed its peak by the end of the 1920s.² A number of German economists—only a few to begin with—had recognised that the economist cannot do justice to his task without sufficient theoretical training. Walter Eucken, Wilhelm Röpke, Alexander Rüstow and others searched for a new approach to economic problems. They were also encouraged to undertake this search by the discontent with German economic policy, which was at that time being pursued without any clear idea or sufficient analysis of underlying forces.

While acknowledging the possible ‘cognitive advantage’ of all outsiders, Leszek Kolakowski, a philosophy don at the University of Oxford, recently pointed out that most modern intellectuals in exile have chosen their fate (which may induce guilt) often in preference to the ‘half-exile’, innere Emigration. The latter is the condition of man under the ‘unsovereign State’, the ambition of which ‘is to rob its subjects of their historical memory’.² Both Wilhelm Röpke and Alexander Rüstow chose to become refugees in 1933; both felt this as an existential necessity—in Röpke’s case permanently—and both wrote works in exile on a higher intellectual plane than had been possible hitherto. The freedom and polemical sharpness common to their otherwise very different styles stand in contrast to the oblique, elusively ‘value-free’, visibly painstaking terminology a Walter Eucken, the half-exile in Freiburg, would tend to favour under the Third Reich. Without these complementary experiences, the Germans might indeed have been robbed of their historical memory and denied the creative reformulation of principles mistakenly thought by them to be obsolete: a process of prevention and cure in which Wilhelm Röpke, Alexander Rüstow and Walter Eucken played the roles, in Ralph Emerson’s sense, of representative men.³

The ‘social market economy’ (Soziale Marktwirtschaft) is both a reality and a programme. It is regarded as the trademark of the economic system developed in Germany after the currency reform of 20 June 1948 and it is also an economic policy model. The term reflects the dual character of any economic system. On the one hand, it is ‘the totality of realised forms in which, at a given time, the daily economic process takes place in concreto’.¹ On the other hand, it can be used as a yardstick for judgments on economic policy measures, in terms of both intentions and actions. An analysis of the role of the state within the social market economy must correspond to the use of the term. It is therefore necessary to deal with the public sector both from the point of view of the number of people employed and the resources used and as the creator of a deliberate social and economic (as well as governmental) system; state agencies acting in accordance with this system are also included.

In the last ten years the economic and political consensus that characterised the Western world has disintegrated. This consensus, holding that economic growth, full employment and a more or less stable price level could be achieved by macro-economic management of the economy without any fundamental damage being done to the micro-structure of a basically private enterprise system or to that impersonal rule of law on which free economic transactions depend, seemed to signal the end of ideological disputes between advocates of collectivist and individualist forms of social and economic organisation. Indeed, the famous ‘calculation debate’, which divided the two schools in the 1930s and 1940s, seemed to have receded into the textbooks on the history of economic thought.¹

Why devote an essay to this particular man when other chapters survey the collective efforts, views and achievements of the group known as Ordo-liberals? The reason is that Franz Böhm was more than a leading thinker of the group; in my view he was instrumental to its political effect.

Ordo-liberalism stands for a doctrine of economic policy, one might even say of social philosophy; this doctrine has been defined by economists and some jurists like Walter Eucken, Franz Böhm, Alfred Müller-Armack, Leonhard Miksch, Wilhelm Röpke, Alexander Rüstow and others.¹ Its significance is based less on the novelty of the elements or the overall perspective than on its decisive influence on the unfolding of the social market economy after World War II in the Federal Republic of Germany. That influence was introduced into politics particularly by Ludwig Erhard. He was first the Director of Economic Administration in the unified American-British zones of occupation and later Minister for Economic Affairs during the first fourteen years of the Federal Republic of Germany. The influence of Ordo-liberalism still persists. It can be found also in the founding treaties of the European Economic Community and thereby in an international legal system with characteristics similar to a constitution.

The title I have been given invites the inference that there are principles of ‘social policy’ and principles of the ‘market economy’ which, when integrated, provide the overall guiding principles of the ‘social market economy’ and that my task should consist of the identification of those principles as well as the evaluation of actual ‘social’ policies pursued in West Germany in the light of them. I did not expect the task to be simple, not least because the term ‘social policy’, used to identify something intrinsically distinguishable from ‘economic policy’, is inherently ambiguous, but also because I have had to rely essentially upon literature available in the English language and must consequently be prepared to discover that nuances apparent in the German sources have escaped me. But the available literature is extensive enough for me to feel fairly confident that I have missed nothing of fundamental consequence for this reason: my errors are more likely to result from misconceptions that would have emerged whatever source language I had used.

German history of the twentieth century provided exceptionally propitious circumstances for the development of liberalism. At considerable personal risk a small group of people found in the principles of liberal thought the intellectual weaponry with which to combat totalitarianism, collectivism and National Socialism.

Already in the late 1930s, when the Nazi dictatorship was dominating Germany, German neo-liberals began to develop their ideas about a free and just economic system. Opposed to the then prevailing planned economic system with its price-fixing, rationing and suppressed inflation, men like Walter Eucken, Alfred Müller-Armack and Franz Böhm turned their attention to an alternative system for a free society.