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Wilhelm Röpke: A Centenary Appreciation

Röpke Was a Prophet Warning of the Dangers from a Loss of Our Moral Compass

OCTOBER 01, 1999 by RICHARD EBELING

Filed Under : Welfare State, Interventionism

On January 30, 1933, German president Paul von Hindenburg appointed Adolf Hitler chancellor of Germany. One week later, on February 8, Wilhelm Röpke, a 32-year-old professor of economics at the University of Marburg, delivered a lecture in Frankfurt am Main with the title “End of an Era?”

Röpke told his audience that Germany was in the grip of a “revolt against reason, freedom and humanity.” The National Socialists under Hitler were now the dominant force in an attack against the fundamental principles of liberalism and Western civilization. Liberalism, correctly understood, represented a 2,000-year-old intellectual heritage of political, civil, and economic liberty. Liberty required the rule of reason, resting on “truthfulness instead of obscurantism, clarity instead of hysteria, the advancement of knowledge instead of sensationalism for the masses, logic instead of wallowing in moods and emotion. . . . It is only the liberal ideal of the use of Reason in the service of truth that has engendered science . . . that alone has liberated Europe from the stupor and wretchedness of barbarism.”

An additional element in the philosophy of liberalism, rightly understood, Röpke explained, was the idea of humanity. “The idea of humanity is seen in all its full significance when conceived as the rejection of the principle of violence in favor of the principle of reason. Violence is relegated to the very bottom of the scale of value; its use is admitted only as a last resort and with the utmost reluctance. This, ultimately, is the essence of civilization.”

But Nazism was the culmination of Germany’s sinking into “illiberal barbarism,” Röpke said, the elements of which were based on: (1) “servilism,” a “longing for state slavery,” with the state becoming the “subject of unparalleled idolatry”; (2) “irrationalism,” in which “voices” in the air called for the German people to be guided by “blood,” “soil,” and a “storm of destructive and unruly emotions”; and (3) “brutalism,” in which “The beast of prey in man is extolled with unexampled cynicism, and with equal cynicism every immoral and brutal act is justified by the sanctity of the political end.” Röpke warned that, “a nation that yields to brutalism thereby excludes itself from the community of Western civilization.” He hoped Germany would step back from this abyss before its people had to learn their mistake in the fire of war.[1]

Röpke also spoke out against the Nazi dismissal of Jewish professors and students from German universities, which began in April 1933. The Nazis denounced him as an “enemy of the people” and removed him from his professorship at the University of Marburg. After an angry exchange with two SS men sent to “reason” with him, Röpke decided to leave Germany and accept exile rather than live under National Socialism.[2]

Leading Figure

Wilhelm Röpke was a leading intellectual figure of twentieth-century Europe. He combined conservatism with classical liberalism to develop a political philosophy he called a market-oriented “middle way” between nineteenth-century capitalism and twentieth-century totalitarian collectivism. He also became a spiritual guide and political-economic architect of Germany’s “social market economy” in the post-World War II era. As Ludwig von Mises wrote when Röpke died in 1966 at the age of 66,

For most of what is reasonable and beneficial in present-day Germany’s monetary and commercial policy credit is to be attributed to Röpke’s influence. He—and the late Walter Eucken—are rightly thought of as the intellectual authors of Germany’s economic resurrection. . . . [T]he future historians of our age will have to say that he was not only a great scholar, a successful teacher and a faithful friend, but first of all a fearless man who was never afraid to profess what he considered to be true and right. In the midst of moral and intellectual decay, he was an inflexible harbinger of the return to reason, honesty and sound political practice.[3]

Röpke was born October 10, 100 years ago in Hanover, Germany. He grew up in a rural community of independent farmers and cottage industry craftsmen. His father was a country doctor. That upbringing can be seen in his later belief that a healthy, balanced, small community is most fit for human life.

The event, however, that shaped his chosen purpose in life was his experience in the German army in the First World War. War was “the expression of a brutal and stupid national pride that fostered the craving for domination and set its approval on collective immorality,” Röpke explained. The experience of war made him decide to become an economist and a sociologist when the cannons fell silent. He entered the University of Marburg, from which he earned his doctoral degree in 1921. At first, Röpke thought that socialism was the answer to the world’s problems. But he soon discovered that the only realistic solutions were to be found in classical liberalism and the market economy.[4] Among the most important influences in that discovery were the writings of Austrian economist Ludwig von Mises. “It was his book, Nation, State and Economy (1919) . . . which was in many ways the redeeming answer to the questions tormenting a young man who had just come back from the trenches,” Röpke wrote. And it was Mises who “rendered me immune, at a very early date, against the virus of socialism with which most of us came back from the First World War.”[5]

In 1922, Röpke became an adviser to the German government on the problems of reparation payments resulting from the Treaty of Versailles. From 1924 to 1928 he was a professor at the University of Jena, spending part of the time, in 1927–1928, in the United States studying American agrarian problems under the auspices of the Rockefeller Foundation. After returning to Europe he was a professor of economics at the University of Graz, Austria, in 1928–1929. In 1929 he was appointed professor of economics at the University of Marburg, a position he held until his expulsion by the Nazi regime in 1933. He also served as a member of the German National Commission on Unemployment in 1930 and 1931, and as an adviser to the German government in 1932.

After leaving Germany in 1933 he accepted a position at the University of Istanbul, Turkey, which he held until 1937, and during which he undertook the reorganization of its department of economics. He also founded and was the first director of the Turkish Institute of the Social Sciences.

Teaching Career in Geneva

In 1937 he was invited to become a professor of international economic relations at the Graduate Institute of International Studies in Geneva, Switzerland, a position he retained until his untimely death on February 12, 1966. The Graduate Institute had been founded in 1927 by the famous economic historian Paul Mantoux and the internationally respected economist, political scientist, and leading classical liberal William E. Rappard. In the Graduate Institute’s comfortable building overlooking Lake Geneva, Röpke took up his teaching duties. He was in the company of such colleagues as Mises, the eminent Italian historian Guglielmo Ferrero (an exile from the fascist regime in Italy), the Polish free-market economist Michael Heilperin, and the Austrian legal philosopher Hans Kelsen.

After the German occupation of France, Röpke was three times offered a teaching position at the New School for Social Research in New York (in 1940, 1941, and 1943) as a means of escape from Nazi-occupied Europe. But each time he turned down the invitation to leave neutral Switzerland, having decided to continue to be a voice for freedom and reason in a totalitarian-dominated Europe. In the immediate aftermath of the Second World War, Röpke circulated a memorandum offering a “plan for an international periodical” that would be devoted to the restatement and defense of classical liberalism and the free-market economy against all forms of political and economic collectivism. The journal was never established, but the ideas conveyed in the memorandum served as support for F. A. Hayek’s successful founding of the Mont Pelerin Society in 1947, an international association of scholars and opinion makers dedicated to the philosophy of freedom. Röpke served as the society’s president from 1960 to 1962.

In the 1950s, he was an economic adviser to the government of West Germany. He also was one of the leading figures of a group of market-oriented German economists who in the postwar period became known as the ordo-liberals; their purpose and goal was the construction of a “social market economy” that assured both an open, competitive order and minimal social guarantees.[6]

Business-Cycle Theory

In the 1920s and for part of the 1930s, a primary focus of Röpke’s writings was business-cycle theory and policy. His most significant work in this field was his 1936 volume Crises and Cycles, which summarized and elaborated on his earlier writings, mostly in German, on the subject.[7] Röpke argued that a complex division of labor with a developed structure of roundabout methods of production, held together by the delicate network of market prices for finished goods and the factors of production, had the potential to occasionally suffer from the cyclical waves of booms and depressions. The cause of such cycles was periodic imbalances between savings and investment in the economy. While not completely following the “Austrian” theory of the business cycle, Röpke’s approach moved along similar lines, arguing that a monetary expansion that kept the market rate of interest below the level that could maintain a balance between savings and investment would feed investment projects and cause misdirections of labor and resources into production processes in excess of the savings available to sustain them in the long run.

Röpke’s particular contribution to the analysis of the business cycle was his theory of what he called the “secondary depression.” When the boom ended, an economic downturn was inevitable, with the investment excesses of the upturn having to contract and be readjusted to the realities of available savings and the market-based patterns of supply and demand. But while serving on the German National Commission on Unemployment in 1930–1931, he came to the conclusion that there were negative forces at work at that time far beyond any normal type of post-boom adjustment. The failure of cost prices to promptly adjust downward with the decline of finished-goods prices was causing a dramatic collapse of production and employment. Rising unemployment resulted in declining incomes that then created a new round of falling demands for goods in the economy, that in turn brought about another decrease in production and employment. At the same time, growing unprofitability of industry made businessmen reluctant to undertake new investments, resulting in the accumulation of idle savings in the financial markets. Such a sequence of events generated a cumulative contraction in the economy that kept feeding on itself.

Röpke concluded that this secondary depression served no healthy purpose, and the downward spiral of a cumulative contraction in production and employment could only be broken by government-induced credit expansion and public-works projects. Once the government introduced a spending floor below which the economy would no longer go, the market would naturally begin a normal and healthy upturn that would bring the economy back toward a proper balance.[8]

In 1933, when Röpke published in English an article explaining the findings of the German Commission on Unemployment, John Maynard Keynes expressed to Röpke his “great satisfaction” that German economists were reaching the same conclusions as he had, namely, that government needed to take an active role in steering the economy. But Röpke had no sympathy for Keynes’s belief that the market was inherently unstable and permanently in need of government management of “aggregate demand.” In Röpke’s view the Great Depression represented a “rare occurrence” of an “exceptional combination of circumstances” that required “a deliberate policy of additional ‘effective demand’ into the economic system.” But, Röpke continued, Keynes’s construction of a “general theory of employment” based on the exceptional circumstances of the early 1930s was a “counsel of despair” and an extremely dangerous one, because it created a rationale for continuous government tinkering and a strong inflationary bias harmful to the stability of the market economy in the long run.[9] Indeed, Röpke became a leading critic of Keynesian economics after World War II.[10]

The Crisis of Western Civilization

But the central issue that absorbed almost all of Röpke’s intellectual and literary efforts in the 1930s and 1940s was what he considered the crisis of Western civilization, the most stark and terrible symptom of which was the rise of totalitarian collectivism as represented by Soviet communism, Italian fascism, and German National Socialism. He devoted all his efforts to opposing and challenging this horrible trend in a series of important and highly influential books. In 1937 he published Economics of the Free Society, a treatise on economic principles that not only explained and defended the market economy, but also strongly criticized the ideas of socialism and interventionism.[11] This was followed in 1942 by International Economic Disintegration, in which he detailed the disastrous consequences that collectivist economics produced by destroying the international division of labor through trade restrictions, exchange controls, government planning, domestic interventions, and policies of national self-sufficiency.[12]

But the heart of Röpke’s critique of the decay of Western civilization and the path for its renewal was in a trilogy published during the war: The Social Crisis of Our Time, Civitas Humana (later re-issued as The Moral Foundations of Civil Society), and International Order.[13] This was followed at the end of the war by The Solution of the German Problem (1945).[14] And a further reformulation of his conception of a properly ordered and balanced society was offered in A Humane Economy: The Social Framework of the Free Market (1958).[15]

The achievements of the eighteenth century, in Röpke’s view, were the use of reason for a balanced understanding of both the natural and social world; the awakening of an insight into the possibilities of a free, spontaneous order of market relationships; a conception of man that looked at him in proportionate human terms; and a sense of humanity in appreciating and wanting to improve the human condition. Out of these insights came the physical and biological achievements of modern science and medicine; a free-market order that both liberated man from the status and caste society of the past and dramatically improved his standard of living; and the liberal, democratic ideal in which the individual possessed rights to life, liberty, and property, and in which peace and tolerant political pluralism replaced imperial violence and political absolutism.

But as Röpke saw it, many of these achievements and successes had been twisted in the nineteenth century. The use of reason had become “unreasonable,” as there emerged a hyper-rationalism that claimed to have the power to discover the secrets for social engineering. The triumphs of the natural sciences in mastering the physical world had fostered a “cult of the colossal,” in which there was a worship of the things of the material world and the desire for the creation of objects bigger than human life. The grand accomplishments of the market economy had not only freed man from his previous social restraints, but cut him loose from all the societal moorings of family, community, and the harmonies of local life, and in its place reduced man to a proletarianized “mass” in an anonymous, impersonal urban existence. And the ideal of democratic pluralism had been undermined and reduced, increasingly, into an arena of special-interest political plunder.

“Termite State”

The loss of traditional human connections, the dehumanization of man in mass society, and the corruption of the political and economic marketplaces, Röpke argued, had created the sociological and psychological conditions for the emergence of and receptivity to the collectivist idea and its promise of a new community of man, a transformation of the human condition, and a better society designed according to a central plan. All these were false promises and hopes. Collectivism, whether of the fascist or communist sort, meant the end of a rational economic order, threatened the loss of freedom and the end to human dignity, and required the reduction of man to the status of an insect in what Röpke often referred to as the socialist “termite state.”

Röpke was uncompromising in his insistence that only the market economy was consistent with both freedom and prosperity. Only the market, with its system of private property rights, provided the framework to harness individual incentives and creativeness for the benefit of society. Only the market could generate the competitive process necessary for the formation of prices that could successfully coordinate supply and demand. Only the market gave each individual the freedom to be an end in himself while also serving as a voluntary means to the ends of others through the mechanism of exchange.[16]

Yet in Röpke’s view the market by itself was not enough. The humane society required going “beyond supply and demand,” to the construction of an institutional order that incorporated the market in a wider social setting. It was in this context that Röpke proposed the distinction between “conformable” and “nonconformable” interventions in the market. Nonconformable interventions went against the natural workings of the market through the introduction of price and production controls, which disrupted the normal coordinative processes of market competition. Conformable interventions influenced the underlying supply and demand conditions, and the institutional arrangements on which those conditions are based, for the purpose of modifying the results that competitive process would generate.

Röpke, for example, believed that: antitrust laws were necessary and desirable as a method of limiting some private industrial concentration; urban development restrictions were needed to limit the growth of city size and foster a retention of rural life; income redistribution was legitimate to narrow significant income inequalities; and moderate and limited welfare “safety net” programs were consistent with a humane society that remained essentially market-oriented. In fairness to Röpke it should be pointed out that in the wake of the Great Depression and the growing appeal of socialist planning, a large number of market-oriented economists at the time accepted a greater degree of interventionism and welfare-statist programs than many free-market economists would consider legitimate nowadays.[17]

But by the 1950s, Röpke began to have serious second thoughts about the welfare state and its tendency to grow beyond the narrow bounds that he considered reasonable.[18] Röpke agreed with his German liberal colleague Alexander Rustow, who in a paper delivered at a Mont Pelerin Society meeting in the 1950s referred to the welfare state as “the other road to serfdom.” Röpke feared that the welfare state, in a democratic system open to the pressures of special-interest groups, threatened to grow to monstrous proportions and create an increasing dependency on the paternalistic state. Furthermore, the costs of funding the welfare state and Keynesian “full employment” policies acted as an engine for worsening inflation as government resorted to the printing press to pay its bills.[19]

Finally, Röpke argued that the growing politicization of economic and social life through an expanding interventionist-welfare state undermined the possibility for a successful international order based on peace, mutual prosperity, and a rational allocation and use of the resources of the world. International order required countries to practice sound policies at home: respect for private property, enforcement of contracts, protection for foreign investments, limited government intervention, and non-inflationary monetary policies. Networks of international trade and investment would then naturally and spontaneously connect the world through private market relationships.[20] For this reason, Röpke was doubtful that European economic and monetary integration could be successfully imposed as long as the member states were unwilling to follow the necessary domestic policies of limited government and open, competitive market capitalism. Tensions and conflicts were inevitable in an age dominated by collectivist and interventionist ideas.[21]

Wilhelm Röpke was more than just an economist. During some of the darkest decades of the twentieth century, he sounded more like an Old Testament prophet warning of the dangers from a loss of our moral compass. Collectivism had few opponents in our century with as much of a sense of ethical purpose. Precisely because he was an economist by training, Röpke understood the indivisibility of personal, political, and economic freedom in a way that many other critics of socialism in its various forms could never articulate. The appreciation of history and the historical context in his analyses only enriched the persuasiveness of his message. The rebirth of the market economy in Germany and in other parts of Europe after 1945 owes a great deal to his intellectual efforts and legacy.


Notes

  1. Wilhelm Röpke, “End of an Era?” [1933] in Against the Tide (Chicago: Henry Regnery, 1969), pp. 79–98.
  2. Wilhelm Röpke, The Solution of the German Problem (New York: G. P. Putnam’s Sons, 1947), pp. 59–60; and J. Kaufmann, “In Memoriam, Wilhelm Röpke: Humanistic Liberal,” Nieuwe Rotterdamsche Courant, February 19, 1966.
  3. Ludwig von Mises, “Wilhelm Röpke, RIP,” National Review, March 8, 1966, p. 200; also, F.A. Hayek, “Tribute to Röpke,” in Peter G. Klein, ed., The Collected Works of F. A. Hayek, Vol. 4: The Fortunes of Liberalism (Chicago: University of Chicago Press, 1992), pp. 195–97.
  4. Wilhelm Röpke, “The Economic Necessity of Freedom,” Modern Age, Summer, 1959, pp. 227–36.
  5. Wilhelm Röpke, “Homage to a Master and a Friend,” The Mont Pelerin Quarterly, October 1961, p. 6.
  6. For an account of the German ordo-liberals and Röpke’s contribution to their ideas and policies, see Anthony J. Nicholls, Freedom with Responsibility: The Social Market Economy in Germany, 1918–1963 (Oxford: Clarendon Press, 1994); for a critical comparison of the ordo-liberals with the Austrian economists, especially Mises, see my “The Limits of Economic Policy: The Austrian Economists and the German Ordo Liberals,” in Richard M. Ebeling, ed., The Age of Economists: From Adam Smith to Milton Friedman (Hillsdale, Mich.: Hillsdale College Press, 1999), pp. 145–66.
  7. Wilhelm Röpke, Crises and Cycles (London: William Hodge Co., 1936).
  8. Wilhelm Röpke, “Trends in German Business Cycle Policy,” The Economic Journal, September 1933, pp. 427–41.
  9. Wilhelm Röpke, “Keynes Revisited,” National Review, March 26, 1963, pp. 239–41.
  10. Wilhelm Röpke, “The Economics of Full Employment” [1952], reprinted in Henry Hazlitt, ed., The Critics of Keynesian Economics (Princeton: D. Van Nostrand Co., 1960), pp. 362–85.
  11. Wilhelm Röpke, The Economics of the Free Society (Chicago: Henry Regnery Co., 1963 [1937]).
  12. Wilhelm Röpke, International Economic Disintregration (Philadelphia: Porcupine Press, 1978 [1942]); also “International Economics in a Changing World,” in William E. Rappard, ed., The World Crisis (Freeport, N.Y.: Books for Libraries, 1969 [1938]), pp. 275–90; “Fascist Economics,” Economica, February 1935, pp. 85–100; and “Totalitarian ‘Prosperity,’ Where Does It End?” Harper’s Magazine, July 1939, pp. 165–70.
  13. Wilhelm Röpke, The Social Crisis of Our Time (New Brunswick: N.J.: Transaction Publishers, 1992 [1942]); The Moral Foundations of Civil Society (New Brunswick, N.J.: Transaction Publishers, 1996 [1944]); International Order and Economic Integration (Dordrecht, Holland: D. Reidel Co., 1959 [1945]).
  14. Wilhelm Röpke, The Solution of the German Problem (New York: G. P. Putnam’s Sons, 1947 [1945]); also “The German Dust-Bowl,” The Review of Politics, October 1946, pp. 511–27.
  15. Wilhelm Röpke, A Humane Economy: The Social Framework of the Free Market (Chicago: Henry Regnery, 1960 [1958]).
  16. Wilhelm Röpke, “The Problem of Economic Order” [1951], reprinted in Johannes Overbeck, ed., Two Essays by Wilhelm Röpke (Lanham, Md.: University Press of America, 1987), pp. 1–45.
  17. Among American market-oriented economists in the 1930s and 1940s who shared some of Röpke ‘s views on these policy issues were Henry Simon and Jacob Viner at the University of Chicago, and Frank Graham at Princeton University; in Europe the group included F. A. Hayek and Lionel Robbins at the London School of Economics, Walter Eucken and many other market economists in Germany, and Eli Heckscher in Sweden.
  18. Wilhlem Röpke, “Is the German Policy the Right One?” [1950] in Wolfgang Stutzel, Christian Watrin, Hans Willgerodt, Karl Hohnmann, eds., Standard Texts on the Social Market Economy (New York: Gustav Fischer, 1982), pp. 37–48.
  19. Wilhelm Röpke, “Welfare Freedom and Inflation” [1964] in Overbeck, pp. 49–103; also “Repressed Inflation” Kyklos, vol. 1, no. 3, 1947, pp. 242–53; “Inflation—Hot and Cold,” National Review, January 18, 1956, pp. 15–17; and “The Creeping Inflation of Our Times and Values,” Freedom and Union, September 1961, pp. 12–15.
  20. Wilhelm Röpke, “Economic Order and International Law,” in Recueildes Cours, vol. 86, pt. II, 1954, pp. 202–71.
  21. Wilhelm Röpke, “Political Enthusiasm and Economic Sense: Some Comments on European Economic Integration,” Modern Age, Spring 1958, pp. 170–76; A World Without a World Monetary Order (Johannesburg: South African Institute of International Affairs, 1963); “European Economic Integration and Its Problems” Modern Age, Summer 1964, pp. 231–44; “European Prosperity and Its Lessons,” South African Journal of Economics, September 1964, pp. 187–98; and “The Place of the Nation: Beyond the One World,” Modern Age, Spring 1966, pp. 119–30.

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