Redeeming Capitalism in Post-Nazi Germany

Seventy years ago, a middle-aged German economist suffered a heart attack and died in the midst of a lecture series he was giving at the London School of Economics. At the time, Walter Eucken was not well known outside Germany. Eucken was, however, that rarity: a genuine intellectual innovator who pioneered understanding of how law and institutions influence economic life. The identification and design of the right legal and constitutional settings, Eucken believed, played a decisive role in preserving markets and freedom more generally.

Ordoliberalism, as the school associated with Eucken’s thought came to be called, exerted considerable influence upon postwar German economic policy and the formation of key EU institutions like the European Central Bank. But to comprehend ordoliberalism, it’s critical to understand Eucken’s own journey, one which was shaped by the debates that preoccupied his country following the catastrophes which engulfed Germany from 1914 onwards.

From the Trenches to the Academy

Born in 1891, Eucken grew up in an upper-middle-class Protestant family notable for its academic distinction. His father, the philosopher Rudolf Eucken, won the Nobel Prize for Literature in 1908 for his work on idealist Kantian ethical theory. Among Eucken Sr.’s many writings is a critique of socialism published in 1920. He also believed that the development of free societies could not be left to chance; they required definitive philosophical and spiritual choices. His son would later incorporate this insight into his own thinking.

Walter Eucken decided to study economics and received his doctorate from the University of Bonn in 1914. But like all German men of his generation, the formative experience for Eucken was World War I. He served as an officer in the Kaiser’s army on the Western and Eastern fronts. Eucken emerged from the war as a conservative nationalist and decidedly suspicious of the Weimar Republic.

Within a short time, Eucken disassociated himself from the nationalist right, partly because of growing doubts about economic policies—tariffs, subsidies to politically connected sectors like agriculture and heavy industry, and corporatism—promoted by that brand of German politics. Living in Berlin in the early 1920s, Eucken observed how such policies corrupted politics, produced sub-optimal economic outcomes, and were rationalized as being for the common good.

Here Eucken’s path tracked that of other market-orientated German economists like Wilhelm Röpke and Alexander Rüstow. They too advised government officials throughout this period on topics ranging from reparations to unemployment. The experience helped turn them against dirigiste policies. Eucken noted how interest groups would effectively capture the drafting of laws which determined economic policy, and the ways in which private actors used devices like contracts to establish cartels to exclude competitors from particular markets.

In retrospect, Eucken decided, a pivotal event had been the German Supreme Court’s 1897 decision to legalize cartelization. As Eucken later commented, “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 question of how to inhibit interest-group capture of entire economic sectors came to dominate Eucken’s thought, especially after he joined the University of Freiburg in 1927 and started working closely with two legal scholars, Franz Böhm (1895-1977) and Hans Grossmann-Doerth (1894-1944).

Law and Economics in Freiburg

Though Eucken’s disciplinary background differed from that of Böhm and Grossmann-Doerth, they shared the desire to identify the constitutional and legal principles needed to protect a free economy from efforts to acquire privileges via the state. They also believed that, once known, these universally valid principles needed to be chosen. As early as 1932, Eucken was insisting that there had to be a definitive political decision to create and protect a free competitive economy by minimizing arbitrary coercive power.

The state’s responsibility, Eucken affirmed, was to sustain the free economy’s constitutional and legal framework while simultaneously refraining from meddling in the process of market competition, particularly the price mechanism. Undergirding Eucken’s framework for markets were one fundamental, seven constitutive, and four regulative principles.

The fundamental principle required for free competition, Eucken stated, was a free and efficient price system. The constitutive principles included a commitment to a stable anti-inflationary monetary system; protection of private property; open markets and free trade; freedom to contract (without allowing people to contract in ways that curtail others’ liberty to contract); liabilities for people’s formal choices (thereby associating risk with responsibility); consistency in economic policy to minimize uncertainty; and, lastly, acknowledging the interdependence of these constitutive principles.

Whatever natural law’s place in Eucken’s thought, he had no doubt that the essence of capitalism’s crisis lay in the normative realm. Resolving it, he maintained, required a return to a “comprehensive spiritual order of life”

Concerning more direct government interventions, Eucken sought to limit these by arguing that they had to conform to what he called “regulative principles” which were consistent with a competitive order. One such principle was prohibiting practices like cartels that unreasonably compromised other market actors’ liberty. The second principle was “incomes policy.” Here Eucken meant redistributive policies when market outcomes proved socially unacceptable or politically destabilizing. Third, under the heading of “economic calculation,” Eucken identified measures to address the external costs of economic progress, such as environmental protection. Eucken’s fourth regulative principle concerned the labor market. He was willing to countenance a minimum wage and the formation of trade unions, provided they respected the limits established by market competition.

According to Eucken, upholding all these principles required a state strong enough to resist interest-group manipulations but whose own authority was limited by the same principles. For Eucken, Böhm, and Grossmann-Doerth, the political order consequently had a two-fold task: first, to embody strong checks and balances that inhibited arbitrary state power; second, to secure the independence of those with the authority to make laws from pressures exerted by the powerful and well-connected.

The Roots of Order

Reading over these principles, it’s not hard to see the potential conflicts which might arise between, say, regulative principles concerning politically destabilizing market outcomes and the fundamental principle of free competition. Inevitably, resolving such conflicts had a political dimension. And politics, Eucken well understood, involves consideration of more than just technical issues. It invariably engages normative questions.

Philosophically speaking, Eucken’s support for markets was not grounded in utilitarianism. To his mind, the ultimate foundation for free economies was the principle that humans are ends in themselves. This reflects Kantian influences on Eucken’s thought but also his belief in the concept of ordo, in the sense of “the meaningful bringing together of diversity to a whole.” As summarized in the Ordo Manifesto published by Eucken, Böhm, and Grossman-Doerth in 1936, this meant “viewing individual economic questions as constituent parts of a greater whole. The treatment of all practical political-legal and political-economic questions must be keyed to the idea of the economic constitution.”

On one level, Eucken presents this as a matter of positive social science inquiry. Indeed, in his posthumously published Grundsätze der Wirtschaftspolitik [Principles of Economic Policy] (1952), Eucken specified 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.” This is the voice of the strict social scientist. Yet in the same book, Eucken held that his free competitive order was “in another sense . . . a natural order . . . one which corresponds to the nature of things and of Man.” That might be construed as the language of natural law. So too might Eucken’s claim in his Die Grundlagen der Nationalökonomie [Foundations of Economics] (1940) that there was an order of things which transcended historical circumstances and that violating it invariably had negative consequences.

Whatever natural law’s place in Eucken’s thought, he had no doubt that the essence of capitalism’s crisis lay in the normative realm. Resolving it, he maintained, required a return to a “comprehensive spiritual order of life” because human life could “only be given a comprehensive meaning again by religion, by the belief in God.” Liberalism, Eucken wrote in a letter to Rüstow, had degenerated “as soon as it lost its religious and metaphysical content.” In other words, freedom required grounding in specific normative sources. Eucken even told Rüstow that he himself would be unable to live or work if it wasn’t for his Christian faith and certainty about God’s existence. These words also reflected Eucken’s concern that the West was experiencing a deep civilizational crisis and his search for solutions outside the realm of economics.

Resistance, then Reform

In many ways, Eucken was fortunate to survive the Third Reich. His status as a combat veteran, ex-army officer, and son of a Nobel Prize winner likely accorded him some protection. Nonetheless, it wasn’t unusual for Eucken’s lectures to be interrupted by Nazi students. Nor did his protest against the 1938 Kristallnacht pogrom go unnoticed by regime officials. Likewise, the economic ideas outlined by the ordoliberals in publications from 1937 onwards contradicted National Socialism’s embrace of unrestrained economic nationalism and autarky, subsidies, corporatism, and massive government spending to stimulate specific economic sectors. Above all, Eucken’s wife, Edith Eucken-Erdsiek (a philosopher in her own right), was half-Jewish and thus constantly at risk.

Nazi antipathy towards Eucken didn’t prevent him from joining clandestine groups in Freiburg of other religiously motivated scholars, civil servants, and clergy who opposed Hitler. By 1943, some of them were contemplating the path forward for Germany after what was increasingly seen as a lost war. Eucken believed that post-war Germany’s economic future need not be socialist, and said so in a memorandum that he co-authored at the request of the theologian Dietrich Bonhoeffer which proposed the formal establishment of a market economy.

Though he was arrested following the failure of the July 20 bomb plot in 1944, Eucken avoided the terrible fate of many prominent conspirators. He was thus around to assist figures like Ludwig Erhard who saw the unique conditions prevailing in occupied Germany as an opportunity to make the type of political choice envisaged by Eucken as the sine qua non for a free competitive order.

In 1947, Erhard appointed Eucken and Böhm to a board of advisors designed to develop currency reform proposals. This became a vehicle for ordoliberal ideas to enter wider political discussion. It was no coincidence that one of Eucken’s students, Leonhard Miksch, a convinced ordoliberal working in Erhard’s economics administration, drafted the ordinance by which Erhard abolished most price-controls in June 1948.

Ordoliberal ideas also made their way into the Dusseldorf Program adopted by the Christian Democratic Union before the 1949 Bundestag elections. To most Germans, capitalism remained a discredited idea. The CDU thus wanted to counter criticism that Erhard’s economic program represented a return to the past. It subsequently embraced ordoliberal language concerning the state’s duty to provide a framework for market competition. “The social market economy,” the Program stated, “is a socially orientated economic constitution of the commercial economy in which the productivity of all free and industrious people are brought into an order, which brings the highest measure of economic use and social justice for everyone.”

A Goal amidst Flux

This mixture of ordoliberal and social Christian phraseology and aims helped the CDU circumvent some of the political challenges of the immediate postwar period. But it likely stored up longer-term trouble inasmuch as appeals to social justice would be used by different interest groups to justify the type of exceptions to general rules which Eucken viewed as undermining a sound economic constitution.

Yet as Eucken specified in one of his never-delivered London lectures, economists are “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.” Navigating the particularities of the moment is a perennial challenge for anyone trying to advance society’s overall well-being in a principled way. What Eucken did was to present an ethical and economic objective—ordo—for which economists could strive in an imperfect world. More than ever, those who believe in market economies need such benchmarks today.