Greg Kaza serves in the Michigan House of Representatives (42nd District) and is also an adjunct professor at Northwood University.
This year marks the 50th anniversary of the founding of the Mont Pelerin Society, one of this century’s most important groups of free-market intellectuals.
The world was a quite different place when 36 free-market thinkers gathered in April 1947 at the Hotel Park at Mont Pelerin, near Vevey, Switzerland. The Soviet Union, the world’s leading Marxist-Leninist state, had erected an Iron Curtain across Eastern Europe. China, engulfed in a civil war, was on the verge of a communist takeover. In Western Europe, democratic socialist parties formed ruling coalitions; the electoral strength of the Communist Party reached double digits in several countries. The United States was awash in liberal Keynesianism—sound money had been abandoned for the Bretton Woods Agreement, which ushered in the age of inflation. The idea of scientific government economic planning and regulation was in fashion with most intellectuals.
It was against this backdrop of events that Austrian economist Friedrich Hayek organized the first meeting of the Mont Pelerin Society. In 1944, Hayek wrote a seminal book, The Road to Serfdom, which argued that government central planning inevitably led to the rise of the totalitarian socialist state. Marxists maintained that fascism was a form of decaying capitalism, but Hayek’s book also included a trenchant critique of Nazism as a form of socialism. After writing The Road to Serfdom, Hayek toured the United States. The trip contributed to his decision to issue a call to free-market advocates to meet at Mont Pelerin.
I have been surprised, Hayek said in his opening address to the Mont Pelerin Society, by the number of isolated men whom I found in different places, working on essentially the same problems and on very similar lines. Working in isolation or in very small groups they are, however, constantly forced to defend the basic elements of their beliefs and rarely have opportunity for an interchange of opinion on the more technical problems which arise only if a certain common basis of conviction and ideals is present.
Hayek explained, The need for an international meeting of representatives . . . seemed to me especially great as a result of the war which not only has for so long disrupted many of the normal contacts but also inevitably, and in the best of us, created a self-centredness and nationalist outlook which ill accords with a truly liberal approach to our problems.
The First Meeting
A visitor to Mont Pelerin is immediately struck by the breathtaking, panoramic view. A broad piazza overlooks Lac Léman (Lake Geneva) and the alpine Dents du Midi, which are visible in the distance. Across the lake is Evian-les-Bain, France, a spa world-renowned for its bottled water. One nearby resort town is Montreux, home of a well-known international jazz festival. From Vevey, a funicular railway travels up the mountainside to Mont Pelerin, a quiet, semi-rural setting conducive not only for reflection, but for hiking as well. One can hike ten minutes from the railway and stand in a rural field, surrounded by cows and lush green grass. In fact, many of the original Pelerinians, including Hayek, were accomplished hikers and mountaineers.
Pelerin is the French word for pilgrim. Pilgrims, remarked American journalist John Davenport, one of the participants, usually have an idea of the direction they wish to go, though not always agreed on how to get there. Nor is it given to them to know the adventures that will beset them on the road. So it proved to be here. The participants at the Society’s first meeting were a diverse group, a mix of American libertarian economists and European free-market moderates. Disagreements were apparent during the session. One was between Chicago School monetarists and adherents of the Austrian School, another between theists and agnostics. At the Society’s 1984 meeting at Cambridge, England, Davenport elicited a laugh by observing that the original Pelerinians could agree on everything save the subjects of God and gold.
The original participants included Hayek and Ludwig von Mises, the dean of the Austrian-school economists; Wilhelm Ropke, who played a key role in the great German currency reform of 1948, along with Walter Eucken, an anti-Nazi pursued by the Gestapo during the war. Others were philosopher Karl Popper, American journalist Henry Hazlitt, and Lionel Robbins of the London School of Economics. Participants from the newly established Foundation for Economic Education (FEE) were Leonard E. Read, F. A. Baldy Harper, and V. Orval Watts. The emerging Chicago School was represented by Milton Friedman, his brother-in-law Aaron Director, Frank H. Knight, and George J. Stigler.
The Apprentice Conservative
Stigler later devoted a chapter of his book Memoirs of an Unregulated Economist to the Society’s first meeting. The popularity of Hayek’s book, he wrote, led a conservative midwest foundation, the Volker Fund, to contribute to the support of a meeting he called in Switzerland. . . . I had never met Hayek but my Chicago teachers certified my eligibility for the coming totalitarian firing squads. It showed my lack of inner conviction of the imminence of totalitarianism that the thought never entered my mind.
It was a revealing first visit, Stigler wrote, for the younger participants, including Milton Friedman and me. En route we were depressed as much by the austerity of the British economy as by their food (if an ersatz sausage is indeed food). We were instructed as well as embarrassed by the casualness of French life: We did not learn until we left France that we required food ration tickets. I concluded that the British obeyed all laws, the French none, and the Americans obeyed those laws that deserved obedience—in retrospect, something of a simplification. Indeed the black market was a boon to French economic life; it allowed prices to perform their functions.
Stigler continues, I was instrumental, for the only time in my life, in instructing Friedman on monetary affairs. We sought to convert some dollars into francs at the unofficial exchange rate rather than the official rate that greatly overvalued the franc. I undertook the exchange and approached the clerk at the Grand Hotel, where we were staying. ‘Could you direct me to the closest outlet for the black market in currency?’ I asked. ‘Go no further, gentlemen’ was the response as he extracted a wallet from his jacket.
The discussions at the meeting were at a high level, and were not always harmonious. The protection of agriculture and of agricultural classes generally had strong supporters and opponents, Stigler wrote. The gold standard was the cherished goal of the older members, but not of the younger economists. On the last day Hayek proposed a set of basic principles, not as a doctrinaire creed but as a common ground. The first was that we believed in the dignity and cherished the freedom of individuals. The second was that we believed in the institution of private property. Alas, Stigler wrote, a viper in our midst protested! French economist Maurice Allais believed at the time that private ownership of land was untenable . . . [Allais's] fear turned on the fact that if the interest rate went to zero, as he feared it would, land would become infinitely valuable. Stigler noted, Allais subsequently abandoned his capital theory and this fear.
One of Stigler’s fondest memories involved Eucken, who had opposed the Nazis and yet remained in Germany during World War II. I remember, Stigler wrote, the delight with which [Eucken] ate his first orange in five years. Friedman also remembers Eucken’s simple pleasure in eating the fruit.
The German Economic Miracle
Eucken and his fellow Germans were to prove to be the surprise package of the conference, according to Davenport. Most economists present were theoretically committed to the free market and a civilized order in which the pricing system organizes economic activity and allocates physical and human resources. But few if any had tasted at first hand a situation where such a system had completely disappeared and where a once great economy had been reduced to primitive barter. The Germans had experienced such a catastrophe, and had a hair-raising story to tell.
The German currency was virtually worthless at the end of World War II, cigarettes having emerged as the preferred medium of exchange. In many cases, Eucken told the conference, farmers refused to sell their foodstuffs for any kind of currency. If you lived in a city and wanted food, you packed your furniture and carted it to a farm in search of potatoes. Barter was not merely theory in postwar Germany. The underground economy was economic fact. Moreover, the United States and British military authorities were not disposed to give West Germany a sound currency, or to let free prices and wages restore incentives and a free-market economic order. On the contrary, they attempted to run the nation through a flood of paper directives and allocations, which Eucken termed Der Papier Krieg (the paper war). The paper ordinances were no sooner promulgated than they were disregarded by the German people. In session at the first Society meeting, Eucken pled for sound currency and the lifting of wage and price controls.
Eucken was no doctrinaire libertarian. The free-market partisans around him outlined a program for a return to free trade—liberalism in Europe—without its seeming political flaws. The terms neo-liberalism and ordo-liberalism (meaning support for a free economy operating within an orderly structure) were coined by the Freiburg University School around Eucken. In the totalitarian climate of the Nazi period a small group of thinkers developed the doctrine of what became known as the Soziale Marktwirtschaft, or the socially conscious free-market economy. Under the Nazis the school was a kind of intellectual resistance movement, requiring great personal courage as well as independence of mind. The free-market doctrine rose in opposition to the dominant conditions of Hitler’s National Socialist regime. It sought to construct an ideal system that would embody the opposites of its authoritarianism and guard against relapses. But the world the Freiburg School painted was not of classical liberalism with its laissez-faire ideal. The Eucken group supported some government action.
Another participant, Wilhelm Ropke, helped persuade Eucken’s pupil Ludwig Erhard, then economics minister in West Germany’s provisional government, to abolish price controls, and so make possible the famous German economic miracle of the postwar era. Erhard lifted regulatory controls over a weekend, only to be threatened with jail by the Allied military authorities. Erhard replied, Ah yes, General, you may put me in prison, but you cannot imprison prices.
Ludwig von Mises at Mont Pelerin
The Austrian School was also represented at the Society’s first meeting. The dean of the Austrian economists was Ludwig von Mises, another refugee from Nazi totalitarianism. His views provided a sharp contrast to those of the Chicago School and the Freiburg School.
Mises was the first economist to demonstrate that socialism could not possibly work because of the absence of a price system. In Economic Calculation in the Socialist Commonwealth (1920), he had shown that without the guiding hand of the price system, there was no way to allocate scarce resources intelligently. Mises remained an implacable foe of government economic intervention; this steadfastness brought him into conflict with many of the other attendees, particularly over the role of gold in the monetary system.
To Mises, a monetary system based upon fiat paper currency under the control of the government was a dangerous and unnecessary concession to government economic intervention. He advocated, rather, a gold-based monetary system. This brought about a vigorous debate with the Chicago School monetarists. Having grown up under the gold standard and having seen the economic destruction brought by unrestrained issue of paper money in Germany after World War I, Mises, as Davenport puts it, was not above snubbing those who doubted the efficacy of the yellow metal as a medium of exchange and more importantly as a store of value.
Mises also clashed with participants who were willing to concede to the government some role in the redistribution of income. This topic led to some spirited discussions. According to Friedman, Mises walked out of one of the meetings, declaring, You’re all a bunch of socialists.
Looking Back—and Ahead
The legacy of the Mont Pelerin Society is substantial. It helped to keep alight the lamp of classical liberalism and free-market thought at a time when the damp winds of socialism and interventionism threatened to extinguish it. Pelerinians Hayek, Friedman, Stigler, and James Buchanan (and four others) have won the Nobel Memorial Prize in Economic Science. Many others have played key roles in advising governments worldwide on how to move their economies toward the free-market ideal. Asked to assess the Society’s place in history, Milton Friedman answered, That is an open-ended question we cannot answer. . . . It certainly played a part.
Indeed it did. At age 50, the Mont Pelerin Society is still going strong, boasting as members some of the best minds working in the realm of economics. Inspired by their illustrious predecessors, they will, I am confident, continue to keep that lamp burning brightly.
1. According to Milton Friedman, only three survive from the original group of 36: Friedman and Aaron Director of the United States, and Maurice Allais of France.
2. Friedrich Hayek, Opening Address to a Conference at Mont Pelerin. Hayek delivered the address April 1, 1947, the first day of the proceedings. Published in Hayek’s Studies in Philosophy, Politics and Economics (Chicago: University of Chicago Press, 1967).
7. Others attending the original conference were Carlo Antoni, Rome; Hans Barth, Zurich; Karl Brandt, Stanford, Calif.; Stanley R. Dennison, Cambridge; Erick Eyck, Oxford; H. D. Gideonse, Brooklyn, N.Y.; F.D. Graham, Princeton, N.J.; T.J.B. Hoff, Oslo; Albert Hunold, Zurich; Bertrand de Jouvenel, Chexbres, Vaud; Carl Iversen, Copenhagen; John Jewkes, Manchester; Fritz Machlup, Buffalo, N.Y.; L. B. Miller, Detroit, Mich.; Felix Morley, Washington, D.C.; Michael Polanyi, Manchester; William E. Rappard, Geneva; Herbert Tingsten, Stockholm; Francois Trévoux, Lyon; and Miss C. V. Wedgwood, London.