Spontaneity and order

 

Hayek

 

Ten years ago, I began a piece in The Economist about Hong Kong with a paragraph that was, in this particular context, intended to be surprising:

FRIEDRICH VON HAYEK and Walter Eucken parted company over the issue of power formation in the private sector. Hayek, a leader of the Austrian school of liberalism, believed that keeping government small was enough to preserve competition. Eucken, who founded the school’s German branch, felt that anyone with excessive power, whether a government or a company, could threaten economic freedom. It is a pity that neither was alive this week to analyse the case of Hong Kong….

 

Eucken (click for credits)

 

Our local readers in Hong Kong quite enjoyed this framing of what they considered their “little” hometown business controversies, since they don’t usually see their city connected to the big debates among Western intellectuals.

I, however, was fascinated by precisely those local controversies, for two reasons:

  1. I consider Hong Kong the freest place in the world (and thus worth studying), and
  2. I have a personal connection to that debate between Hayek and Eucken, which I’ll tell you about at the end of this post.

Liberalism vs Libertarianism

What reminded me of all this was a post the other day by one of my colleagues about the two isms, Liberalism and Libertarianism. He concludes that the difference is basically about the precise role of government and

which approach is likeliest to lead to the most freedom.

So, because I’ve been parsing Liberalism here on The Hannibal Blog for a couple of years now, I thought I’d add a “continental” twist for those of you who are connoisseurs of all things liberal.

Between Freiburg and Vienna

 

Mises (click for credits)

 

For a lot of “Anglo-Saxons”, in my experience, the first surprise is that that there is a continental twist at all. Surprise turns into shock when the twist turns out to be specifically Germanic. Could Germans really have much to say about freedom?

Well, yes, a whole lot. The liberal tradition is long and deep in the German-speaking countries. Obviously it suffered a near-death experience during the Nazi years, but then it came roaring back in the post-war years.

More to the point, a lot of what we now tend to think of as “Anglo-Saxon” ideas actually have an intellectual pedigree that goes back to these “Germanic” (mainly German and Austrian) thinkers.

Ludwig von Mises (above) was the first giant of the so-called “Austrian School”, and in turn influenced the even more gigantic Friedrich von Hayek. Hayek in turn influenced Milton Friedman, who in turn influenced Ronald Reagan and Margaret Thatcher, thus re-branding Austrian Liberalism in the minds of many people as an “Anglo-Saxon” thing.

 

Rüstow

 

Walter Eucken, on the other hand, founded the so-called “Freiburg School” of Liberalism (after the university town where they hung out), which included liberal thinkers such as Alexander Rüstow (above) and Wilhelm Röpke (below).

 

Roepke

 

How spontaneous is order?

The first and most important thing to understand about all these thinkers is that they were friends. They liked each other’s company and liked debating one another. They viewed themselves not on opposing sides of anything, but on the same side: the side of individual freedom (which is what all classical Liberals agree on).

The subtlety that kept them busy (and I deliberately oversimplify) had to do with order. The Latin for order is Ordo, so the Freiburg School eventually even called themselves Ordoliberals.

Order, as opposed to anarchy, is necessary for individuals to be free. The question, however, is whether or not order comes about spontaneously.

Option 1: Yes

If the answer is Yes, as the “Austrians” basically believed, then the conclusion has to be that we simply need to keep government out of the equation entirely.

The “market” (and this could apply to more than material things — ie, ideas, culture, etc) will then “order” itself spontaneously, though competition. The prerequisite is merely the rule of law.

Option 2: Jein

The Ordoliberals did not counter that the answer is No. Instead, I would call their answer Jein (a contraction of Ja and Nein in German). Yes, markets can spontaneously create order. But that order is not always stable. Worse, that order could be of a sort that robs individuals of liberty.

What they had in mind were cartels, tycoons, cabals, and anybody else who amassed an unhealthy amount of power.

So whereas the “Austrians” worried almost exclusively about excessive government power, the Ordoliberals worried about all excessive power, whether in the private or public sector.

This led the Ordoliberals to the conclusion that government must, yes, stay limited, but must also supplement the “spontaneous” ordering of markets with “corrective” ordering. Government had to crack down hard on cartels and monopolies, for example.

My personal interest

I mentioned a personal connection to the debate. Well, I wrote my Master’s thesis at the London School of Economics about it (or rather, about an obscure aspect of it). My dad had once written his PhD thesis about another obscure aspect of it. And that was probably because his uncle and godfather was somebody by the name of Ludwig Erhard (“Uncle Lulu“). Here they are in the sixties, Lulu on the left, dad on the right:

And if Hayek influenced Ronald Reagan and Margaret Thatcher, and thus “Anglo-Saxon” policy, the Ordoliberals shaped Ludwig Erhard and thus post-war West German policy, for Uncle Lulu was West Germany’s first economics minister and then its second chancellor.

Postscript: Liberal v Libertarian (again)

So back to those two isms.

In essence, I think that Libertarians trace their evolution back to the Austrians featured here, and Liberals to the Ordoliberals.

However, those Austrian and Ordo-Liberals themselves, if we were able to bring them here today, would be puzzled by the debate. They would abhor some of the intellectual excesses committed in both names, and remind us that they were originally almost indistinguishable.

What Uncle Lulu would do today

Gerhard Kluth Ludwig Erhard

What would my great-uncle Lulu, better known as Ludwig Erhard, West Germany’s first and most famous economics minister and subsequent chancellor, do today if he were a policy maker in Washington?

The question comes from Cheri, and it got me thinking. So I asked my dad (pouring tea for his uncle and godfather above). Dad, who is also an economist, knows best how the gears of Lulu’s mind ground.

(Disclaimer: I am writing this not as a correspondent of The Economist, but only as a family member of Erhard’s.)

So, thirty-one years after Lulu’s death, dad had this to say:
The first question is what he would have done before all of this transpired: Would this catastrophe have happened in the first place?
I think he would have fought much earlier and more vehemently against this absurd “compensation” culture in America. (He was known as the Masshaltekanzler–ie, the chancellor who keeps things measured and reasonable.) The bonuses and salaries of some of the characters at the center of the current American crisis were obscene, and the short-term basis of their calculation counterproductive. So maybe this alone would have sufficed to prevent some of today’s excesses.
He probably also would have railed against the unrestrained consumption mania that prevailed in America during the good years (which would have made him very unpopular in America). Savings rate = 0. This is why the crisis is now hitting so many so hard.
He was always and implacably for a politically independent–completely independent!–central bank [ie, “Fed”] which was to have only one mandate: to preserve the value of the currency. (The Fed’s mission, by contrast, is to mind both the economy in general and prices in particular; but since Greenspan, economic growth seems to take precedence over prices and the currency.)
Lulu was always very well informed and interested in new trends in banking, and he almost certainly would have demanded strict controls over these exotic new breeds of securities [credit-default swaps and what not].
One question is whether he would have succeeded with these policies in America. Probably not. His style was to educate, and appeal to, the public directly. At his height, he was so popular and trusted among ordinary voters that he could cajole his own party into following his ideas in direct contravention even of the party’s platform. This style would not work today, and certainly not in America.
What would he do today? The heart attack has already occurred, so now the patient first has to be kept alive. The trick is to keep him on life support without changing the underlying structure of the economy in ways that could lead to irreversible damage in the future.
For example, Lulu would have been against giving Detroit, under the guise of life support, carte blanche to merge or form alliances that might become, in effect, cartels or quasi-monopolies. Even and especially in the banking market, he would have been concerned about creating super-institutions [“too big to fail”] that will sooner or later demand special treatment in Washington.
Above all, he would have already started campaigning, with stump speeches and such, for free trade internationally, lest anybody anywhere jump to the disastrous conclusion that protectionism, even in specific industries, might be the answer. Such a turn would actually kill the “protected” industries in the medium term and lead to a cascade into even worse disaster [as happened during the depression: see the Smoot Hawley Tariffs].
Most urgently: Re-establish confidence (perhaps Obama has the flair that Lulu once had). And get the inter-bank lending market working again.
But he would have been concerned that the Fed’s current approach of just printing money might lead to inflation before long. He would also note that America has a pretty shoddy infrastructure today. If somebody were to fix it in a big way now [as Obama appears intent on doing], à la Keynes, even Lulu would find a sympathetic word. ;) [Ie, ordinarily he would not be a Kenesian.]


What’s in a word: “Liberal”

Adam Smith

As you may have noticed by now, I am a lover of words–to the point of pedantry–and it gives me indigestion to hear people abuse my little darlings. Americans are especially prone. For example, they are scandalously liberal with the word … liberal.

Traveling around America, we at The Economist get at least two questions in any gathering. 1) Why don’t we have bylines? 2) Are we liberal or conservative?

Folks, the way you (the Americans) ask that second question, it does not make any sense! You, unique among nations, did something quite uncivilized to this word, liberal. You unilaterally and wantonly changed its meaning, without telling the other 6.3 billion of us. You cannot do that! As The Economist has demanded before, it’s our word and “we want it back.”

Here is what liberal means: It comes from the Latin liber, free, and refers both to a philosophy and worldview that treasures individual freedom (as in Liberalism) and to the habits and learning befitting a free individual (as in Liberal Arts). That’s all.

The origins of liberalism go back to classical Greece (the “left leg” in this analogy of the Western Tradition as a “body”). It thrived during the Enlightenment, especially its Scottish flavor; found a permanent fan group when The Economist was founded; came under undignified attack in the past century; was defended valorously by people like my great-uncle Ludwig Erhard; became a whipping post in France (especially in the phrase “neoliberal”) for people who like to roll tractors through McDonald’s outlets; and now lives this bizarre American double life among barely literate TV-show hosts.

Liberal means: Tolerant, even enthusiastic, about the eccentricities of individuals and the diversity of lifestyles, as long as nobody is harmed. Hence, a modern Liberal is likely to support the right of gays to marry, as The Economist has done far longer than any other major publication that I’m aware of.

It also means being tolerant, even enthusiastic, about the willingness of individuals to take risks for gain, without any sour-grapes Collectivist outbreak of envy after the fact.

It means skepticism about huge efforts to change human nature; about naive faith in governments or companies always being “good”; about any attempt to subordinate the individual to society.

But Liberalism does not mean (as anti-Thatcherites in Britain once tried to imply) denial that there is such a thing as society.

And it does not mean (duh, really!) salivating over “big government”. Whatever that is called, it is not Liberalism.

Finally, is it the same as what Americans call Libertarianism? In theory, it comes close. In practice, not. American Libertarianism tends to attract a lot of loonies.

Liberals are not loonies. They don’t foam at the mouth. If you need an image, it is of a dour Scot like Adam Smith, pictured above. Slightly dull, but excited about the fun that others get up to. Sort of like The Economist.

Uncle Lulu

That guy with the cigar on this West German stamp from 1987 is my great-uncle, Ludwig Erhard, or “Onkel Lulu” in our family.

Why is he on this blog?

Newspaper cutting of my dad and his uncle

Newspaper cutting of my dad and his uncle

Because is life is one of those I trace in my book, to show that that what happened to Hannibal and Scipio happens to all of us, one way or another.

My dad pouring tea for his uncle, the chancellor, in the 60s

My dad pouring tea for his uncle, the chancellor, in the 60s

In Germany and continental Europe, Ludwig Erhard is a household name. In America, he is not, but should be. He is famous for being a founding father of post-war (West) Germany, its first economics minister, the father of its currency (the Deutsche Mark), and then its second chancellor (ie, prime minister). He is credited with causing the stunning economic growth of the 1950s, sometimes called (but not by him) an “economic miracle”. And he is probably the most steadfast proponent of freedom, tolerance and open and fair markets in German history.

Dad and Lulu again

As my father’s uncle and godfather, he practically raised my father after my grandfather died. I only met Lulu when I was very small (he died in 1977). He liked to hide Easter eggs for me in his steep hillside garden by the Tegernsee, an Alpine lake south of Munich. His influence lives on, in Germany, in our family, and now in my book.

My mom with Lulu in New York, where I was born

My mom with Lulu in New York, where I was born