Chapter VIII in “On Freedom and Free Enterprise,” 1956.
Wilhelm Röpke
Wilhelm Röpke (1899 - 1966)
Written by Shawn Ritenour
Wilhelm Röpke devoted his scholarly career to combating collectivism in economic, social, and political theory. As a student and proponent of the Austrian School, he contributed to its theoretical structure and political vision, warning of the dangers of political consolidation and underscoring the connection between culture and economic systems. More than any other Austrian of his time, he explored the ethical foundations of a market-based social order.
He defended the free market from socialist cultural critics by pointing out that social crises and cultural decline are not the product of the free society; one needs to look to state control, political centralization, welfare, and inflation as a primary source of social decay. Röpke influenced the direction of post-war German economic reform, became a leading intellectual force in shaping the post-war American conservative movement, particularly its “fusionist” branch, and has been compared with Mises as an archetype of the individualist thinker
Röpke was born on October 10, 1899, at Schwarmstedt in Hannover, Germany. He was the son of a physician who brought him up in the classical and Protestant Christian tradition. Serving in the Germany army during World War I, he was shocked by the sheer brutality of war, and it had a profound effect on his life. He became, in his words, “a fervent hater of war, of brutal and stupid national pride, of the greed for domination and of every collective outrage against ethics.”
Consistent with intellectual trends, Röpke initially blamed war on capitalist imperialism and was drawn toward socialism as its only alternative. But he had a change of mind after reading Ludwig von Mises’s Nation, State, and Economy, published in 1919. That work was, “in many ways the redeeming answer to the many questions tormenting a young man who had just come back from the trenches.” A socialist economy was, necessarily, an internationally planned economy. Such a regime would seriously hinder international trade, which generates cooperation between nations and decreases the likelihood of war. The only form of socialism compatible with international trade, he concluded, is the national variety, which Röpke could not abide. He then recognized socialism for what it is: collectivism through empowerment of the state.
A drive to understand the causes and crisis of World War I led Röpke to pursue the study of economics and sociology. He studied economics at the University of Marburg, receiving the Dr.rer.pol in 1921 and the Habilitation in 1922. The following year he married Eva Finke, and they raised three children. His first academic position was at Jena in 1924. Two years later, at the Vienna Convention of the German Association for Sociology, he met Ludwig von Mises. Röpke moved to Graz in 1928, and became a full professor at his alma mater in Marburg in 1929.
Following the political victories of the Nazis in 1932, his uncompromising opposition to fascism earned him the honor of being one of the first professors to be forced out of his job. Röpke left Marburg for Frankfurt, and in early 1933, soon after giving a public address highly critical of the Nazis, he and his family left his homeland. Röpke then accepted an offer to become professor of economics at the University of Istanbul.
Röpke taught at Istanbul from 1933 to 1937, when he accepted a position at the Institute of International Studies in Geneva, Switzerland. There he joined Ludwig von Mises, who had been a part of the Institute’s faculty since 1934. Although Mises left Geneva for the United States in 1940 following the beginning of World War II, Röpke chose to stay, and remained at the Institute until his death in 1966. To restore the broadest possible understanding of freedom, Röpke, along with Mises and F.A. Hayek, called an international meeting of historians, philosophers, economists, and journalists who shared his concern over the steady erosion of liberty, and in 1947 this group formed the Mont Pelerin Society.
Through the Society, Röpke was able to meet with and influence the thinking of Ludwig Erhard, economic minister and Chancellor of West Germany. Erhard later revealed that during World War II he was able to illegally obtain Röpke’s books, which he “devoured like the desert the life-giving water.” The product of Röpke’s influence on Erhard has been tagged the post-WW II “German Economic Miracle,” although Röpke pointed out that the economic success experienced by West Germany was not a miracle at all; it was the result of adopting correct social and legal institutions fostering the market economy. Looking back at the West German economic policies of the 1950s, he lamented that free market reforms had not gone far enough.
Fascism
Röpke’s early work outlined themes that would reoccur throughout his career: the curse of collectivism and scientism, and the central importance of moral and social institutions that sustain the free society. His 1931 analysis of fascist economics, published under the pseudonym Ulrich Unfried, protested against anti-capitalist intellectuals who were using the world-wide depression to pave the way for national socialism. The “capitalism” that the anti-capitalists rail against, he wrote, was not free-market capitalism but state corporatism, characterized by sporadic interventions and government-business partnerships. “And in order to refloat the economy whose functioning has been so largely impaired by past interventions, those same critics of capitalism clamor for more interventions, more planning, and hence a further emasculation of our economy. It is as though one poured sand into an engine and then hoped to start it up again by pouring in more sand.”
To avoid conflicting meanings, Röpke used the term “market economy” instead of “capitalism.” He also rejected denoting socialism as a “planned economy”--every economy is planned, he said; the question is whether it is planned by entrepreneurs and free people, or by the state. Instead, he found it more accurate to refer to a collectivist system as an “office economy.”
Röpke recognized that as a social and economic system fascism is not a third way between the free market and communism. It is merely another form of totalitarianism that sought to “combine its general totalitarianism with the individualistic character of society.” Such a middle-of-the-road policy created an extreme interventionist state whose chief production agent was the government-created monopolist.
Fascism has a grave moral defect, Röpke argued: it fails to recognize the individual as the key social unit. Right economic reasoning, he said, begins not with the nation but with human action, and right social policy begins with the recognition that society is made up of individuals with souls. Fascism, on the other hand, by ignoring the individual soul, is socialism’s close cousin because it exults in the idolatry of the state.
Business Cycles
Much was written in the early 1930s regarding the depression, its causes, and remedies, and in 1936 Röpke gave the English-speaking world his own contribution, Crises and Cycles. Using the monetary and capital theories of Böhm-Bawerk, Mises, Strigl, and Hayek, Röpke backed the view that the initial downturn was the result of prior credit expansion on the part of the central bank. He noted that “modern trade-cycle theory is indeed unanimous concerning the fundamental principle that the alternation of boom and depression is first and foremost an alteration in the volume of long-term investments and thus in the activity in the industries producing capital goods.” Röpke traced the existence of economic downturns to the existence of a complex division of labor, which makes possible the “roundaboutness” of production, combined with an overinvestment in higher-order goods spurred on by credit expansion.
In his textbook, The Economics of a Free Society, first published in German in 1937, he further clarified his point. For such overinvestment to occur, he wrote, “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 populations itself is prepared to undergo via its savings.” In short, the boom of the boom-bust trade cycle will not occur on the free market; it is the result of state intervention in credit markets skewing investment decisions.
A developed division of labor and capital overinvestment can also exist in a planned economy, he argued, so socialism would not be immune to economic downturns. In fact, such a system would be even more unstable. “In a socialistic society it [forced saving] may be replaced by open force exerted by the state, with the effect that the population would be driven, directly and authoritatively, to forego possibilities of consumption in favor of accumulation.” Additionally, a collectivist economy will not have a mechanism by which unwise investments are liquidated, causing economic disruptions to persist. “The economic disharmony which promises to become a chronic ailment of the socialist economy will be markedly different from the temporary disharmonies of the capitalist economy.”
To prevent business cycles, Röpke argued, requires a free market, a gold standard, and no government-created monetary inflation. At the same time, Röpke did not rule out credit expansion or reflation as possibly necessary to move the economy out of a depression, a policy not unlike that advanced by later monetary disequilibrium theorists. Demonstrating uncommon integrity, Röpke later recanted his early acceptance of this Keynesian-style policy.
Critique of Keynes
In the East, collectivism took the form of full-blown socialism. In Germany and Italy, Fascism rose and fell. But the post-war West was not immune to the call of collectivism, and Röpke saw Keynesian economics as paving the way. He argued that the Keynesian program was destructive in both its economic and moral consequences.
In a 1952 critique of the United Nations Report on National and International Measures for Full Employment, Röpke warned that if governments keep interest rates perpetually low, as the “new economics” recommended, chronic inflation is the necessary consequence. Röpke foresaw that a fully implemented “full-employment” policy would result in “stagflation” which the United States experienced in the 1970s.
Additionally, chronic inflation creates political pressure for repressed inflation. Having lived through Germany’s hyper-inflation, Röpke feared the consequences of an unrestrained monetary authority. He developed a theory of repressed inflation based on interventionism and the Austrian theory of economic calculation. The government monetary authorities first inflate the money supply and then impose price and other economic controls in order to mitigate the consequent rise in prices. This only makes things worse, for, as the Austrians demonstrated during the socialist calculation debate, market prices are crucial for rational economic planning on the part of entrepreneurs. The result is that official prices do not reflect actual economic values, and the economy is riddled with bottlenecks, sporadic unemployment, and general economic chaos. This repressed inflation was a major feature of post-war European economies.
Röpke viewed inflation as a Keynesian means for transferring wealth. When a central bank inflates the money supply, the new money always enters the economy in the hands of particular individuals. They are the first ones to spend the new money, making their purchases at the original price levels, happy that their wealth has seemingly increased. As the new money works itself through the economy, however, increased demand for goods result in increased prices. Those who receive the new money later or not at all must pay the higher prices and incur a decrease in their real wealth. Explaining this Austrian insight within his moral framework, Röpke argued that this amounts to little more than legalized theft and redistribution.
For Röpke, however, Keynes’s positivistic-scientistic method was an even more damaging part of his legacy. In a critique of Keynes, included in the final 1963 edition of his revised text The Economics of a Free Society, Röpke pinpointed one of Keynes’s most dangerous ideas. Keynes and his followers saw the economic system as part of a mathematical-mechanical universe, with economic activity being the product of quantifiable aggregates, such as consumption and investment, instead of a result of actions by individuals. Keynes took the human out of “human action” and reduced the economic system to a machine. Man became a mere social unit, merely reacting to changed conditions according to economic instincts.
Keynes’s focus on the management of economic aggregates fed the hubris of modern economists by justifying their role as the keepers of the keys to the economic kingdom. Keynesian economists, making Gross National Product their highest end, were advocating an economic variant of scientism. Such economism leads to collectivism, according to Röpke, because it uses government coercion to tax funds from individuals in the name of “growing the economy.”
Welfare, Domestic and International
After the war, the United States Congress and the Truman administration passed the Marshall Plan, which pledged the largest ever transfer of foreign aid to help rebuild war-torn Europe, a plan wholly embraced by intellectual and political establishments on both sides of the Atlantic. But Röpke dissented from this conventional view on grounds that European economic recovery would not be brought about by foreign aid but through a restoration of the market economy that had been hampered during the war. The problem of economic disorder, he said, is the result of repressed inflation, a “policy that created chaos in the name of planning, confusion in the name of guidance, retrogression and autarky in the name of progress, and mass poverty in the name of justice.” Regardless of U.S. aid, “it will still be up to every beneficiary country in Europe whether or not to avail itself of this unique opportunity for liberating the economy from inflationary controls. Unless this is done, however, it is to be feared that the new American billions will trickle away just as the old ones did.”
What’s more, he predicted, Marshall Plan aid could have the deleterious effect of forestalling market reform. The aid will not likely be used to make a transition to the market possible, but rather to subsidize and entrench the current system. In the regions of Europe for which the U.S. government is responsible — for example the American-occupied zone of Germany — the U.S. has “for two-and-a-half years applied economic principles that cannot be described otherwise than as collectivist.” Röpke reminds his European readers that the American economy itself is in many ways planned, inflationary, and collectivistic. “A whole generation of American economists, after all, has been brought up to think of the permanent inflationary pressure implied in the ‘full employment’ policy as an ideal and indeed a necessity.”
In 1958, as Western economies began to replace outright planning and price control with wealth redistribution, Röpke wrote a blistering assault on the welfare state. He cited not only the costs of the welfare state, which far exceeds its supposed benefits, but also the social effects. Compulsory aid “paralyzes people’s willingness to take care of their own needs” and its financial burden makes people depend more on the state and expect more from it. “To let someone else foot the bill” is the “very essence” of the welfare state; moreover, the people who pay are “forced to do so by order of the state” — the opposite of charity. “In spite of its alluring name, the welfare state stands or falls by compulsion. It is compulsion imposed upon us with the state’s power to punish noncompliance. Once this is clear, it is equally clear that the welfare state is an evil the same as every restriction of freedom.”
Monopoly
Röpke was a relentless critic of the tendency towards bigness in economic and political life. And he was one of the earliest modern economists to point out that, like the business cycle, monopoly is not a product of the free market, but a result of government intervention. As early as 1936, he documented that the free market was generating competition, not monopolies. In a later defense of the market economy, Röpke maintained that market capitalism is not bigness per se. Similarly, proper legal institutions are those that foster a truly free market, not “big business” in the name of efficiency. He argued that monopolists were able to maintain their position in the market due to legal privileges, and maintained that government regulation cannot work as a cure for economic concentration. On the contrary, it is the office economy that tends toward concentration. The collectivist economy leads to the politicization of all economic life, resulting in national monopolies and all economic decisions in the hands of central planners.
It is in this context that we must consider Röpke’s remarks on the negative consequences of capitalism as it developed historically. Röpke occasionally used strident language to criticize how the rise of capitalism also fed forces of monopoly and urbanization. But these negative consequences are not, however, to be attributed to free-market capitalism, but should be seen instead as a holdover from the feudal system. Economic power was concentrated, not because the free market necessarily led to such concentration, but because pre-liberal property arrangements went largely unchanged after the free-market system developed. Feudal lords enjoyed certain social and legal privileges over the serfs, and these were not abolished with the rise of capitalism.
While opposing some aspects of industrialization, Röpke criticized what he called “agricultural nationalism,” the drive to keep industrialization at bay for the sake of protecting traditional ways of life at the expense of social progress.
Röpke attacked all manner of interventionist policies, not just those that stopped short of socialism. Intervention creates more problems than it solves. “The more stabilization, the less stability.” Like Mises, Röpke pointed out that pursuing an interventionist policy of price controls, trade quotas, and exchange controls starts “a chain of repercussions necessitating more radical acts of intervention until we finally arrive at a Collectivist Economy pure and simple.” Furthermore, such measures are doomed to failure because “economic life is dependent on the psychological attitude of countless individuals.” Economic agents make free choices. They are not cogs in a giant national economic machine.
Political Theory
After World War II, Röpke turned his attention to promoting economic and political institutions that would prevent another world conflict. Building on his theory that centralization and decentralization are the two countervailing principles that determine all aspects of social and political life, he turned his energies to analyzing how these principles impact on the international political order. Some type of international economic order is necessary. His colleague Mises had described the ideal of a classically liberal supranational state. But Röpke, recognizing the impracticality of such a state, attacked all plans for political integration, particularly those that called for a European-wide regulatory power.
A supernational or multinational government is not likely to embrace the liberal ideal because a political regime insulates itself from the people it rules. It grows increasingly oppressive and corrupt, raising up welfare states and trampling on private property. For this reason, the centralization of decision-making power is incompatible with free market economies. As the alternative, Röpke embraced the 19th century “universalist-liberal” solution to the problem of an international order: vibrant commerce between politically autonomous small states. In order to allow for international trade to take place, a truly international monetary system is necessary. Instead of a world-wide currency, national currencies backed by a non-political gold standard should serve as the arbiter of exchange.
Röpke agreed with other economists in the Austrian tradition regarding the importance of international trade to peaceful cooperation between nations. Protectionism undermines the division of labor, inhibits productivity, and reduces incomes, and, if carried far enough, transforms a nation’s economy into a type of giant firm, with all of its monopolistic drawbacks. Moreover, Röpke distinguished between international trade and international political intervention. Free trade and imperialism are not linked but are opposed to one another. It is possible to sacrifice economic liberty in the name of international trade or economic development. For example, pushing other countries to buy an exporting nation’s goods is contrary to the Röpkeian ideal. Government control of “investment,” whether domestically or internationally, is never a wise path, especially not in underdeveloped countries. What these countries need are not capital or technology per se, but the cultural and social conditions allowing for development (i.e. private property rights enforced by a morally just legal system).
The decentralization of the political process, Röpke argued, is incompatible with mass democracy. Under democracy, politicians are prone to be swayed by masses of privately interested voters, so that the economic system degenerates into a spoils system where the victors are the mass that can muster 51 per cent of the vote. Such a system only serves to bring about and legitimize centralized power. The only legitimate government is a government by rulers that are widely recognized as competent and socially beneficial. If the political system is decentralized, those that are the most capable and are recognized as possessing the most integrity would be those who the various locales would allow to rule for any length of time.
Social Theory
During and following World War II, Röpke broadened his research interests beyond economic and political theory and into cultural and even religiously based analytics. His resulting critique of modern society developed out of his conviction that trends in the sciences and politics were undermining and even destroying the idea of the individual soul and replacing it with the concept of mass man. Röpke began to concentrate on this problem with more focus beginning in 1942 with the publication of the book that would later be translated into English as The Social Crisis of Our Time. He sought to trace the evolution of thought and action that led to the crisis of collectivism he saw, and sought to defend freedom in the face of statism of all stripes.
Röpke was also skeptical of the role of economist as social engineer, whether in promoting “efficiency” or “social justice.” He followed Mises’s method in viewing economic agents as homo agens, humans who act, rather than homo oeconomicus, individuals motivated by purely material motives. “The ordinary man is not such a homo oeconomicus,” he writes, “just as he is neither hero or saint. The motives which drive people toward economic success are as varied as the human soul itself.” Because life is indeed more than food, and the body more than raiment, one cannot look only to economics to provide a life worth living.
Röpke set out to defend liberty against leftist criticism by highlighting the fundamental social problem man has to face: how can conflicting interests in society be successfully harmonized? Individuals having different value scales are not immune to the temptation of taking advantage of others when they have the chance. Freedom and voluntary exchange is crucial if the conflicting interests of different parties are to be coordinated peacefully. Collectivism, on the other hand, necessarily means coercion and conflict between competing interests. But for an individual to be truly free, he must have control over his economic will. For a society to take advantage of the division of labor, it is necessary to have an institutional framework that allows for a freely adjusting price mechanism and the private ownership of the tools of production and competition. Such is the only modern economic system that maintains the integrity of the individual person.
A prime virtue of the free market is that it erects a wall of separation between politics and society. Businessmen need not rely on government privilege or a party’s favor in order to enjoy financial security. The only way for even the most greedy entrepreneur to reap profits for any length of time is by rendering a valuable service to the consumer. Röpke writes, “Freedom, immunity of the economic life from political infection, clean principles and peace--these are the non-materialist achievements of the pure market economy.” Röpke, like Mises, likened the individual’s decisions to purchase or to refrain from purchasing as a daily ballot, electing the most successful entrepreneur. In fact, Röpke thought the market election more just and efficient than a political election, because the market is not a winner-take-all mechanism.
Although Röpke was a critic of the ethics of materialism, he did not embrace intervention as a means to suppress displays of consumerism. For example, Röpke rejected the possibility of categorizing goods into “luxuries” and “needs” because the exercise “presupposes that bureaucracy knows better that he consumes what is good and useful.... In other words the government has the astonishing audacity to require of us that we should prefer its arbitrary list of priorities to our own.”
All market activity, international or otherwise, presupposes a moral, social, and institutional framework, and Röpke identified religious convictions and natural hierarchy as institutions that have historically served as effective bulwarks against state power. In order for individuals to retain their freedoms, continually expand the division of labor, and live full lives, they must own property, embrace family and community, participate in civic associations and churches, and enjoy the security of certain traditions. These points, he thought, were too often neglected in classically liberal literature. Röpke writes:
“The market economy, and with social and political freedom, can thrive only as part and under the protection of a bourgeois system. This implies the existence of a society in which certain fundamentals are respected and color the whole network of social relationships: individual effort and responsibility, absolute norms and values, independence based on ownership, prudence and daring, calculating and saving, responsibility for planning one’s own life, proper coherence with the community, family feeling, a sense of tradition and the succession of generations combined with an open-minded view of the present and the future, proper tension between individual and community, firm moral discipline, respect for the value of money, the courage to grapple on one’s own with life and its uncertainties, a sense of the natural order of things, and a firm scale of values.”
From his earliest years, Wilhelm Röpke fought collectivist and statist power in every way an intellectual could. His tools included not only economic theory but also a vision of moral goodness rooted in Christian faith. As Hayek said of Röpke: “let me at least 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.” If are we concerned about fostering societies where people can live more humane lives, Röpke’s advances in both Austrian economics and his vision of the good society deserve close attention.
Bibliography
Röpke, Wilhelm. Against the Tide (Chicago: Regnery, 1969).
______. Civitas Humana (London: William Hodge and Company, Limited, 1948).
______. Crises and Cycles (London: William Hodge and Company, Limited, 1936).
______. “The Economics of Full Employment,” in Henry Hazlitt ed., The Critics of Keynesian Economics (New Rochelle, New York: Arlington House Publishers, [1060] 1977) pp. 370-74.
______. The Economics of the Free Society (Chicago: Henry Regnery Company, 1963).
______. “Fascist Economics,” Economica (February 1935): 85-100.
______. A Humane Economy (Chicago: Henry Regnery Company, 1960).
______. International Economic Disintegration (Glascow: William Hodge & Co., 1942).
______. International Order and Economic Integration (Dordrecht, Holland: D. Reidel Publishing Company, 1959).
______. “The Problem of Economic Order,” in Two Essays by Wilhelm Röpke, Johannes Overbeek, ed., Lanham, MD: University Press of America, 1987 pp. 1-45.
______. “Repressed Inflation,” Kyklos 1 (1947)
______. The Social Crisis of Our Time (University of Chicago Press, 1950).
______. “Socialism, Planning, and the Business Cycle,” Journal of Political Economy 44, no.3 (June 1936).
______. Welfare, Freedom, and Inflation (Tuscaloosa, Alabama: University of Alabama Press, 1964).
