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There is No Third Way

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02/05/2002H.A. Scott Trask

Röpke: Free-Market Liberal?

Was Röpke a classical liberal who stood in the tradition of Jean Baptiste Say, Lord Acton, and Ludwig von Mises? Zmirak says categorically that he was not, for Röpke rejected laissez-faire capitalism, radical individualism, and the night-watchman theory of the state ("deputized to defend property rights and national borders"). Instead, he endorsed a "social market" that not only permitted but required judicious state interventions to mitigate the destructive tendencies within capitalism and stave off even worse interventions from socialists.

Nevertheless, before one dismisses Röpke for having given the game away before it started, one must concede that by the standards of the present day, he is not that bad. His views are sufficiently antistatist and free market to earn the opprobius epithet "neoliberal" were he still living and writing in Europe. Writing during an age in which the expropriation of the means of production by the state and the imposition of full-scale socialism with central planning was a real possibility even in Western Europe, Röpke bravely defended private property, the free market, free international trade, and market-determined prices and wages.

He had learned from Mises the crucial importance of unregulated prices to the efficient functioning of the market. He had also learned the futility of attempting to generate wealth through the printing press. He was a strong proponent of the gold standard. While out of step with the prevailing economic orthodoxies of his time (Keynesianism, command-and-control economies, socialism), Röpke nevertheless helped save at least part of his fatherland from the poverty and stagnation that would have followed inexorably from the statist economic policies favored by German social democrats and Anglo-American occupiers.

In the years after the war, western Germany was suffering not only from the enormous destruction wrought by allied bombing and a catastrophic military defeat but from a depreciated currency and chronic shortages brought on by an oppressive system of price controls. The economy was literally paralyzed. Germans were having trouble just finding enough to eat, much less were they able to rebuild their country. The prevailing idea was that Germany needed more central government planning and control to turn things around and make Germany a productive, wealth-producing country again.

The neoliberal economists of the German Freiburg School, Walter Eucken and Wilhelm Röpke, denied that what Germany needed was more government control of the economy. What Germany needed, they argued forcefully, was less government and more market freedom. They recommended that government price controls be lifted and that a new currency be substituted for the inflated and discredited Reichmarks. Germany was fortunate that the finance minister of the Anglo-American occupation zone in western Germany, Ludwig Erhard, had been influenced by the neoliberal school and that he was listening to the recommendations of Röpke and Eucken and giving them more weight than the statist proposals coming from German social democrats, British Labor socialists, and American New Dealers.

In 1948, he pushed through crucial free-market reforms to save his country from full-scale socialism. The two most important were the introduction of a sound currency (the Deutschmark), the inflation of which would be carefully limited and controlled by an independent central bank (the Bundesbank), and the immediate end of price controls. The new Deutschmark was not a gold mark, but it was certainly preferable to what it replaced. Given the statist intellectual climate of the times, as well as the need to gain Anglo-American approval for any free-market reform, such limited reforms were the most German liberals could hope for. The alternative was not a gold standard, private banking, and complete free trade, but a socialist planned economy with the nationalization of industry, wage and price controls, and hyperinflation.

American social democratic imperialists are continually boasting that "the German Miracle," the revival of the German economy and the rebuilding of that country, of the late 1940s and early 1950s was due to the Marshall Plan. Yet the truth is that the miraculous German recovery was due far more to the neoliberal market reforms instituted by Erhard than to generous infusions of American money beginning in 1948. After all, the United States government and allied banks have been showering various Third World regimes with U.S. foreign aid, cash grants, low-interest loans, and debt relief and forgiveness for decades without a single repeat of the German postwar miracle. Why is that?

Röpke and the Federalist Principle

If there is one area in which Röpke's ideas can be praised without qualification it is in his advocacy of political and economic decentralism and the closely related idea of subsidiarity. Röpke understood that historically the concentration of political and economic power has been followed by a corresponding diminishment of political and economic freedom. His experience as an exile in Switzerland during the world war persuaded him that it was possible to have a decentralized, truly democratic and voluntarist society that was also modern and technologically advanced. Thus Switzerland became his ideal society, the model on which he crafted his social and economic philosophy.

Röpke pointed out that Switzerland was more genuinely democratic than any other Western country because political power was divided between a federal parliament and numerous self-governing cantons. In addition, constitutional changes and federal tax increases had to be submitted to popular referenda. He contrasted this populist federalist system--where the voter had real power, participated in political life at the local level, and kept himself informed on political matters--with the elitist centralized systems prevalent elsewhere in the Western world, where largely passive, apathetic, gullible, and ignorant citizens were either manipulated or ignored by elites.

According to Zmirak, Röpke opposed the supranational economic and political organizations that began emerging in the wake of the Second World War. He regarded the European Community (EU), the General Agreement on Tariff and Trade (GATT), the World Bank, the International Monetary Fund (IMF), and various UN agencies as irresponsible bureaucracies and nondemocratic institutions that had little to do with free trade or economic liberty. They stood for managed trade and international corporatism. Although Röpke defended the autonomy of historic regions within larger political entities, he also defended the independence of the sovereign nation-state as a bulwark against the emergence of such supranational bureaucracies.

Röpke and the Conservative Critique of Capitalism

According to Zmirak, Röpke accepted many of the socialist (Marxist) and traditionalist criticisms of historic capitalism. Röpke thus stands in a tradition that includes the English Catholic distributists (G. K. Chesterton and Hillaire Belloc), the Southern Agrarians, and Russell Kirk and other American paleoconservatives. According to this conservative critique of capitalism, the unfettered free market was a mixed blessing. On the one hand, it had produced enormous wealth and raised the standard of living for millions of Western citizens. On the other hand, it had polluted and defaced the natural world, depleted precious resources, and undermined traditional society. It had subverted natural social hierarchies, destroyed communities, weakened the traditional family, subverted religious faith and patriotism, and rendered rewarding work and real property ownership the privilege of only a privileged few. In its stead, it had substituted excessive labor specialization, dehumanizing work, subsistence wages, crass materialism, social atomism, personal alienation, the excessive concentration of wealth, unhealthy factory production, and the proletarianization of society.

Some thinkers in this tradition went so far as to charge capitalism with destroying the social and cultural preconditions that made capitalism possible in the first place. It did this by causing displaced, confused, and exploited workers to turn to the government for economic security and protection. Unbridled capitalism created an environment so intolerable that the masses chose socialism and the welfare state as preferable alternatives. Even worse, untrammeled capitalism led inexorably to concentrations of irresponsible wealth and economic power--monopoly capitalism. The conclusion: laissez-faire capitalism led inexorably to socialism. Röpke made this argument in The Social Crisis of Our Time (1942), as Belloc had done in his Servile State, and as Joseph Schumpeter would do throughout his writings.

What is to be done? Röpke argued that the destructive tendencies implicit in capitalism could only be restrained by strong independent social structures--the family, the church, community, and widespread ownership of land and small businesses. However, as such restraining institutions were themselves vulnerable to the assaults of revolutionary capitalism, it was necessary that the state intervene to shore up these institutions and in general restrain the worst excesses of the free market. Thus, Röpke advocated antitrust laws (to break up monopolies and preserve competition), estate taxes on the rich (to help diffuse property ownership), a safety net of social services (to help the unemployed and other victims of capitalism's creative destruction), and various subsidies and tax breaks to support family farms, small businesses, and home ownership.

Röpke understood that he needed to formulate some kind of rule to distinguish the limited and "market-friendly" interventions that he favored from the unlimited market-hostile interventions favored by social democrats and other Fabian-style socialists. One rule was that market-"compatible" interventions were those that did "not interfere with the price mechanism," while "incompatible" interventions were those that "paralyzed" this essential mechanism. Zmirak explains that Röpke had other criteria as well. Interventions had to be "warranted by some grave social necessity," designed to "counteract the corrosive elements inherent within the market economy," to preserve "the social and political framework that made freedom possible over the generations." However, they should "interfere as little as possible with the free economic choices of individuals," and never go so far as to "subject men's lives to constant bureaucratic tinkering" or "radically distort the incentives that drove private enterprise."

Can Röpke or Mises Rescue Us from a Collectivist Age?

Röpke made a fatal concession to the socialist cause in agreeing that unrestrained capitalism had proven socially destructive and unsustainable. He compounded this error with an even worse one in allowing for a role for the state in defending freedom from the steady advance of socialism and totalitarian politics. Röpke's proposed "solution" only served to further entrench an increasingly integrated corporatist welfare state by providing additional justifications for intervention and allowing the defenders of government to pose as defenders of a free society and market in opposition to communist central planners and big-business robber barons.

There are three inherent weaknesses with Röpke's distinction between compatible (market-friendly) and incompatible market interventions. First, no government intervention is market friendly. They all produce market distortions of one kind or another, infringe upon private property, restrict liberty, and affect prices. Second, in the real world it is impossible to draw a line to permit only a certain kind or level of interventionism. Once the principle of even moderate interventionism is admitted and then carried out, further more radical interventions are sure to follow. There is far too much subjectivity involved in making distinctions between interventions that are harmful or beneficial to a free and healthy society. What goes too far for one does not go far enough for another. Once the door is open and the principle that the state can intervene has been conceded, then nothing is left but to fight over the details of each and every proposed intervention endlessly.

The inside dust jacket deserves to be quoted at length to illustrate how easy Röpke 's ideas lend themselves to providing legitimacy to social democratic expropriation and coercion masquerading as socially responsible freedom:

A passionate critic of socialism and the welfare state, Röpke was nonetheless keenly attuned to capitalism's destructive elements and the intrinsic limits of the market. Röpke's influence can be seen in the ascendance of political ideas--including "compassionate conservatism," which draws explicitly on Röpke's work--that seek to give the market its due while also recognizing the claims of higher, communal goods. . . . Röpke's

"Third Way"
provided a way to make principled distinctions between legitimate and illegitimate government interventions in the market place and became the basis of Christian Democratic public policy. [italics mine]

What is Bushite "compassionate conservatism" if not an endorsement of the permanent and ever increasing welfare state and the implicit condemnation of any free-market or libertarian opposition as mean-spirited, selfish, and extremist? What does the German Christian Democratic Party stand for if not the mixed economy, the welfare state, and national corporatism? While George Bush's speechwriters and Christian Democratic spokesmen are clearly not justified in invoking Röpke as a legitimate authority for their hyper-statism, they can get away with it precisely because Röpke failed to draw a firm theoretical line against all government intervention in principle. Röpke 's analytical imprecision, concessions to the socialist and traditionalist critiques of capitalism, and allowances for minimal government allowed him to be used by Anglo-German social democracy masquerading as "conservatism" and "free-market" capitalism.

While the conservative critique of capitalism identifies many of the worst features of modern life, it errs in attributing these ills to capitalism and the free market (freedom). For example, to ascribe the erosion of Christian faith, traditional values, and the nuclear family to capitalism seems to fall in the category of the bum rap. After all, the collapse of religious belief began well before the age of industrialism. Besides, such an explanation conflicts with the Christian idea of personal moral responsibility.

Furthermore, Röpke and other traditionalists have failed to observe how a truly free market reinforces culturally conservative and socially healthy mores. Commercial society with minimal government rewards personal initiative, hard work, saving, and long-term planning. Governmental welfare policies, compulsory wealth transfers, punitive taxation, and currency inflation reward precisely opposite mores. Economic exchange and social cooperation both require and reinforce personal reputation and trustworthiness and individual responsibility. Government coercion does the opposite. Even such mundane capitalistic practices as the credit report institutionalize personal accountability. Compare the service, efficiency, and financial accountability of a private corporation with a government bureaucracy. Is there any comparison at all? It is the state, not private enterprise, which is the destroyer of traditional society, Christian mores, natural hierarchy, and social diversity (inequality).

Not only can most of the ills of modern life more fairly be ascribed to the rise of democracy and the growing power of centralized states, but so can the rise of socialistic welfare statism. Is it a coincidence that democracy was followed by the welfare state, or that socialist and communist parties have found their mass support among those with little or no property? Was it the disruptive tendencies of capitalism or the opportunity to expropriate their neighbor's property, get something for nothing, and shake down their betters that motivated such voters? A Christian or a writer well versed in classical political philosophy should have no hesitation in answering that question. Röpke was wrong. It was democracy that led to socialism and the welfare state, not free-market capitalism.

Consider "the problem" of the concentration of economic power, especially the emergence of giant corporations and agribusinesses. In a free market, market combinations that are not creative, productive, or profitable will collapse of their own weight through the pressure of competition. Concentrations of economic power seem to be a problem only when the state encourages or sustains them through tariffs, subsidies, and other forms of state capitalism. Once again, Röpke got it wrong. It was corporatism that led to harmful, inefficient, and predatory forms of economic concentration, not the free market.

Röpke also failed to learn from Mises the dynamic of escalating interventionism. Initial state interventions in the nineteenth century created a dynamic that led to additional interventions in the twentieth. Initial welfare state measures created a sense of entitlement and expectation among beneficiaries for additional measures. Protective tariffs, state subsidies, and central bank-induced credit inflations sustained uncompetitive and inefficient enterprises, misallocated resources and capital, and caused business cycles resulting in mass bankruptcies and unemployment. The people then blamed private enterprise and turned to the state to rescue them.

This pattern of statist remedies for problems created by previous statist remedies is with us still.

Röpke's argument that the state must intervene in the economy to preserve freedom and prevent future interventions that are even worse is self-defeating and contradictory. Freedom needs no help from the state--which is its natural enemy, not its ally. Freedom promotes natural order, inequality, and the decentralization of enterprise, wealth, and culture. It is government that imposes false kinds of order, false equality, uniformity, and centralization. We need Mises, not Röpke, to save us from the despotic hand of the modern Welfare Corporatist State.



H.A. Scott Trask

Historian Scott Trask was an adjunct scholar of the Mises Institute.