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:
- I consider Hong Kong the freest place in the world (and thus worth studying), and
- 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.
Hannibal and Me: life lessons from history 
I’ve been calling myself a moderate libertarian for some time now, but apparently I’m a ordoliberal. Somehow, I don’t think that the term will catch on, alas. Evidence seems to be on the side of the ordoliberals, at least in America. Democrats offer us big government, while Republicans offer big business, and this leads to various populist movements that want to tear the whole system down. The beauty of the U.S. constitution is that its principle is the protection of the individual against the group, giving each of us liberty and space to achieve.
Hi Greg,
“Moderate libertarian” is what I might also call myself, lest the more accurate term (eg, “liberal”) be woefully misunderstood here in America.
At the same time, there is something humorously oxymoronic about “moderate Libertarian”. Almost like “military intelligence”. But that’s because of the intellectual excesses I mentioned at the end.
Ah – a wonderful post. The ordoliberals – a line of thinking that – if forgotten – deserves to be re-discovered. One of the most basic ideas is, to my limited understanding, that uncontrolled freedom has the tendency to destroy this very freedom. This is the fundamental theory underlying any antitrust law of the world or also the bans on naked short selling. Hayek and Eucken clearly continue to influence economic politics in some parts of the world.
Maybe one can even say that between the two opposites of ordo-liberalism and libertarianism, ordo-liberalism is utlimatley the more pragmatic one. It encourages regulation, but without being ideological. Whereas a libertarian would presumably abhor any element of regulation, an ordoliberal can take the approach – let’s try regulation and if it does not work, just take it back. This is, for example, exactly the approach behind the ban on naked short selling, isn’t it? Opposed to that, the sheer belief in the markets may appear a little ideological, I should think.
And this brings us ultimately to a little sensation: a school of thinking originating – at least partly – in the heart of continental Europe paves the way for pragmatism. Ahhh – can that be? I leave the answer to others.
Welcome back, Michael.
Yup, I think you’re right that we might call Ordoliberalism “non-ideological” and “pragmatic”.
Other things we might call it: “Humble” or “modest” in its epistemology. Just as you say, Ordoliberals would observe reality, try to correct excesses, and always be ready to reverse anything that seems to have unintended negative consequences.
Quite a healthy approach to reality, almost scientific in temperament.
I think that most economists would have a hard time defending capitalism without regulation, when we all know that the financial de-regulation and laissez-faire policies of the last decade or so have brought us into the current financial crises. This would seem to imply that most people would lean towards the Ordoliberal view these days, which should result in more stable markets over time, rather than a purist Liberal view with a minimalist government and the resulting boom and bust economic cycles.
Jein is a great “Austrian” ambiguous answer to many questions and you hear this often in my home city of Vienna, Austria. It is usually the opening to a period of negotiation before the Jein becomes a Ja. It’s very much like the answer “Maybe” in English.
Regards
John
That’s how I remember the Jein-ing. 😉
(Just to make that clear, btw: I used that phrase tongue-in-cheek to oversimplify their debate. THEY did NOT use it.)
Regarding your first point: Yes, when the debate is presented as I did above, most people nowadays would choose Ordoliberalism. The controversy starts when you think the two philosophies through to specific cases.
Eg: Health care!
Start with: Have we got “order” or “disorder” in the present system? Debate.
Then: Would allowing pure “spontaneity” lead to a better or worse order?
Or: Which “corrective” order do we need to add?
I had a stab at it once, which left me unsatisfied, however.
Fascinating post again, Andreas. I was under the impression that Austrians and Libertarians have strong differences now. Friedman distanced himself from the Austrian School and current libertarians like Bryan Caplan even has an essay titled: “Why I Am Not an Austrian Economist.”
Just out of curiosity, I know there is no solid line, but when do you think someone stops being a “classical liberal” with their support for government intervention into the economy?
You’re more up to date than I am, Dan. I’ll have a read of that (long) essay.
Re your other point, I don’t know where that line would be. Where would you put it?
I’m not really sure where I’d put it. I tend to think you’re right that liberalism is more of an approach to looking at questions. For example, I tend to start with the assumption that people should be free to act however they choose unless the consequences/externalities are so great as to warrant regulation/prohibition. Of course, practically I’m sure lots of people say they do that but their bar for jumping to regulation is so low as to be practically meaningless.
Honestly, I’m having a bit of a personal conundrum myself. For most of my intellectual life (If I may be pretentious enough to call it that) I’ve favored extremely low levels of government intervention. Now given the state of the economy I find myself writing regular blog posts extolling the merits of government action. Anyone who reads my blog could easily assume I was more leftist than I personally consider myself. I worry (maybe it’s not a worry, idk) that they could be right. After all, people regularly misjudge themselves (why should I be so different?). Yet, I continue to think it is a consequence of the particular circumstances we find ourselves in. I’m trying my best to fight my own bias in my self-introspection. But at a certain point, if it walks like duck and blogs like a duck…
Very thought provoking. Not only is this highly relevant to economic issues, understanding of this issue is fundamental in debates about civil liberties as well.
Totally. And the realm of “ideas” generally…
In the opposition between liberty and order, these thinkers seems to forget a notion that is present in the french moto Liberté-Egalité(order?)-Fraternité. This third element of the equation makes a difference, I think. Perhaps it is the difference between what we call the «anglo-saxon» mentality and the latin spirit? The communism had try Egality, the capitalism had try Liberty, but we need both of them. And to unit and balance these two necessities, what is better than Fraternity?
Hi Monique,
Yes, those three do seem to belong together, but they are an awkward fit sometimes. (I meditated on the Liberte/Egalite/Fraternite trio here.)
Fraternite, in particular, could actually solve ALL our problems.
But how do you bring that about? I recall that even the original slogan led to some un-fraternal behavior (in the 1790s). It’s a bit like putting “niceness” into a motto, isn’t it?
“…..The liberal tradition is long and deep in the German-speaking countries…….it came roaring back in the post-war years…….”,
This liberalism, coming out of the brains of luminaries of the Teutonic culture, is to do with freedom for the outer self.
Something else which came out of the brains of luminaries of the Teutonic culture, was psychiatry and psychology, which have to do with freedom for the inner self.
Are not, then, liberalism and psychiatry two sides of the same coin?
Why particularly were both so associated with luminaries from the Teutonic culture? Was it a coincidence, or was it to do with the Teutonic culture itself – perhaps a reaction to it?
I think the answer might be simpler: At that time (Freud, Jung, Mises, Hayek, Eucken, Planck, Einstein etc etc) German-speaking universities and German intellectual life was flourishing and the most vibrant in the world. It was like a giant Googleplex, spawning all sorts of ideas. Alas, that didn’t last long.
You notice that not a whole lot in the way of either internal or external liberty thinking has come out of the continent in recent decades….
“……not a whole lot in the way of either internal or external liberty thinking has come out of the continent in recent decades….”
This may be because western Europe has actually been free in recent decades. Hence western Europeans take freedom for granted, so their intellectuals don’t need to agonise over it.
“Freud, Jung, Mises, Hayek, Eucken, Planck, Einstein etc etc” grew up in authoritarian (non-free) societies, which would, paradoxically, have concentrated their minds on the meaning and nature of freedom.
In recent decades, the most cogent European thinking about freedom came out of eastern (communist) Europe. Hence Solzenitsyn, Milosz, Havel etc, had much of value to say about freedom.
@ Philippe
Did you see Tony Judt’s piece (end of September, New York Review of Books) about the new relevance of Milosz’s THE CAPTIVE MIND? He points to (many of) today’s minds as captives of the notion of the market. It meshes well with this post.
@ Jenny – I hadn’t read Tony Judt’s piece. I now just have. *It’s wonderful.*
How sad that Tony Judt should be fatally struck down by one of the most horrible of diseases, which he endured with great courage right up to the end.
The following in Judt’s piece particularly caught my attention:
“……the thrall in which an ideology holds a people is best measured by their collective inability to imagine alternatives. We know perfectly well that untrammeled faith in unregulated markets kills: the rigid application of what was until recently the ‘Washington consensus’ in vulnerable developing countries—with its emphasis on tight fiscal policy, privatization, low tariffs, and deregulation—has destroyed millions of livelihoods. Meanwhile, the stringent ‘commercial terms’ on which vital pharmaceuticals are made available has drastically reduced life expectancy in many places. But in Margaret Thatcher’s deathless phrase, ‘there is no alternative.’
It was in just such terms that communism was presented to its beneficiaries following World War II; and it was because History afforded no apparent alternative to a Communist future that so many of Stalin’s foreign admirers were swept into intellectual captivity…….”
Some years ago, I read EF Schumacher’s “Small is Beautiful”. I have never forgotten his central point, that economics is applied as if people don’t matter. Schumacher, if I remember him correctly, was talking about capitalism. But he could as easily have said this about communism. It is the theory which is important, not people, who must therefore accommodate themselves to the theory.
The self-educated San Francisco longshoreman, Eric Hoffer, wrote much about the mind of the intellectual. He pointed out that – unlike people who work with their hands, and so produce as their legacy, things which people can see and touch – the intellectual has only his abstract intellectual theories to give him his sense of self-worth, and which he’ll be remembered for.
Hence for the intellectual, his theories are paramount.
Hoffer also observed that, deep down, the intellectual despised the “common man”, because the “common man”, being of a practical turn of mind, had no time for the intellectual.
Because America was the land of the “common man”, the intellectual tended to despise America, where he didn’t have, in Milosz’s phrase, “a feeling of belonging”.
As it was for the intellectual then, as it is for him now, that what he pontificates on, says more about what’s going on inside of him than about what he pontificates on.
@Philippe
Thanks for the reading tips. 🙂
@ andreas
“I think the answer might be simpler: At that time (Freud, Jung, Mises, Hayek, Eucken, Planck, Einstein etc etc) German-speaking universities and German intellectual life was flourishing and the most vibrant in the world. It was like a giant Googleplex, spawning all sorts of ideas. Alas, that didn’t last long.”
Why do you think that didn’t last very long?
There were Austrians who believed government had to be kept out of the equation? Well, whaddya know. Never heard of these people. I have a feeling that walking around Vienna quizzing random passers-by about Hayek, Eucken, and the “Austrian school of liberalism” would make for a hilarious Jaywalking segment on the Tonight Show.
Yes, especially with the Viennese wit with which the answers will be delivered.
Which reminds me of a piece in the Onion where they quizzed Tea Partiers about the Founders and the Constitution….
I took to calling myself a libertarian liberal years ago, without knowing anything about formal economics. Pretty much everyone I’ve said this to thinks I’m crazy – our current dialogue puts these two options at opposite ends of the spectrum, and so many people seem unable (unwilling?) to do anything but accept the talking heads version of reality. I’m so excited to know that I can now explain exactly what I mean and give some historical context to help prove I’m not just crazy. Thank you for that!
Let us know if your explanation works, Lainey. If it does, give us the precise wording here, so we can all start using it. 🙂
I’m out of my depth again. But I remember reading (by someone) that one reason The Nazis were successful in the late 20s is that many people preferred (conceded) control for the sake of order. This is huge generalization, but since you brought up the distinction, I have to ask, Is this a thing scholars know?
I have no idea whether scholars “know” this, Mr C. But you’re not wrong, of course: One reason why people during the chaos (hyperinflation, unemployment etc) of the interwar years voted for Mussolini and Hitler was that they made the proverbial (and literal, at the time) “trains run on time”. Ie, order.
That is exactly the opposite sort of order from the type the Liberals (both Ordo and Austrian and other) tried to create: Not one where class/nation/race trumped the individual, but where the individual was supreme.
This is a scary coincidence. Yesterday, I was mulling the following longish sentence from Alan Greenspan’s book “The Age of Turbulence”:
“Conventional wisdom credits the Marshall Plan for Europe’s recovery. I do not doubt that the Marshall Plan helped, but it was too small to account for the remarkable dynamics of the postwar recovery. I would regard freeing of product and financial markets in 1948 by West German economics director Ludwig Erhard as by far the more important spur to the postwar recovery of Western Europe.”
Uncle Lulu hmm?
Hi Temitayo,
I’m absolutely delighted that Uncle Lulu is, belatedly, on the verge of well-deserved fame in Nigeria. 🙂
Re Greenspan’s point:
The logic is compelling. The Marshall Plan covered all Western European nations destroyed by war (in part, in order to make them good American allies in the Cold War). Britain, Belgium etc.
But only Germany had the so-called “Economic Miracle”. Initially, you could argue that it was more destroyed than any other country, and so grew from a lower “base”. But as the growth persisted — through the 1950s, which were Erhard’s heydey — it became clear that it had to be the policies.
Uncle Lulu called them the “Social Market Economy”.
“…..only Germany had the so-called ‘Economic Miracle’………as the growth persisted — through the 1950s, which were Erhard’s heydey — it became clear that it had to be the policies……….”
Eric Hoffer said that an important reason why America became so prosperous was the energy and willingness to work extra-hard which the millions of immigrants to America’s shores brought with them.
Hoffer pointed out that these millions of downtrodden people, escaping persecution and poverty, became new people once in America. Many even took new names, which accentuated this feeling of having a new identity.
Having got rid of their old self, but feeling insecure in their new one, they felt the psychological need to work hard and make money, so to bury the psychological conflict from assuming a new personality. Hence America became rich.
This dynamic may have been a big contributor to the post-war German Wirtschaftswunder, since almost a third of West Germany’s citizenry were expellees from territory taken from Germany at war’s end.
These millions of involuntary immigrants to West Germany may inwardly have felt the same as did the millions of 19th century immigrants to America, and so have acted economically in the same way, and the Wirtschaftswunder was the result.
And not to forget the policies of your Uncle Lulu, of course!!
jenny and philippe,
thanks for the link to tony judt. i find his point of view towards human nature very interesting “…He was also praised for carrying out what he himself described as the historian’s task “to tell what is almost always an uncomfortable story and explain why the discomfort is part of the truth we need to live well and live properly. A well-organised society is one in which we know the truth about ourselves collectively, not one in which we tell pleasant lies about ourselves”.”
andreas,
there was a reference to tony judt using the memory palace technique in his writing. haven’t you also written something about this subject?
This discussion about degrees of freedom and shades of meaning is altogether too delicate, a luxury that can be indulged in only if we take our freedoms for granted. Perhaps it is the result of economic considerations of affluent and comfortable times, I don’t know.
Of course there is a role for the state, but the worry is not for loss of its influence but for its excesses. If we are in any doubt about this, we need to take another long, hard look at the tragedies of the twentieth century.
Wherever there is authority, you may be sure that it will be abused. That is true of this era as of any other. Daily and at every turn, freedom at its most basic has to be won and preserved. Always its loss is raw, uncompromising and ruthless. Unless there is a perpetual restlessness under authority, the quest for natural order is under threat. Denial that there is such a natural instinct for order, progress and decency is an arrogance of power and intellectual dessication which needs perpetually to be opposed by impassioned personal conduct led by individual conscience and respect for others. An opposite conclusion is despair for inherent human goodness.
Arrogance in power is not, of course, exclusive to the state.
It is not helpful, Andreas, to draw modern national lines on a matter of fundamental concern to humanity at large which has been the subject of such sacrifice through all generations and peoples and in such widely differing circumstances.
I had been pondering an intervention here. Richard has come up with what I wanted to say and could not formulate clearly enough to write it.
I agree with his comment and thank him for it.
Many thanks for your post and response to my comment.
Unknowingly, your Uncle Lulu has been influencing how think of economic policies. Though his name never stuck, his ideas did. Also, your post better helped me to appreciate the kerfuffle in America. That is, tea party v Republicans v Democrats.
Three books I enjoyed, in addition to Greenspan’s, are “Saving Capitalism from Capitalists” (the authors make the case for portable safety nets) and “The Truth About Markets”.
Above all your uncle’s idea are espoused by a Nigerian academic and politician I admire.
Thanks for the book recommendations. We’re all curious now about who that Nigerian politician might be. 😉
By the way, by pure coincidence I just saw this article on Ron Paul (the “intellectual” behind the Tea Party right) and how he was shaped by Hayek and, in particular, Mises. A good read.
Just shows how the ideas of these dead intellectuals continue to inflame passions — yes, passions — today, which I mention here as my only not to another comment (not yours, Temitayo) which seems to rant about a certain bloodlessness in the post above.
Oh dear, Andreas, that other rant (wherever it may be) certainly seems to have roused passions in its own right.
I am not well versed in economic theory. In fact, I am not well educated in that field either. My understanding of economics is on a personal level. I earn, I save, I make cautious purchases and investments (most of the time). On the style of economics for countries, I lean toward what I think is the real “American” model: a constant tug of war between free market and central control. The market adapts to regulation and builds ways around and through them. This leads to government (central control) inventing new regulations in order to adapt to the changing market. Neither should reign supreme, I think.
I also think this applies to social structure within the US. That might be a bit more complex to explain.
Thanks Andreas for the link on Ron Paul.
Joshua Green writes well. Given the length of the article, he clipped words tidily I didn’t want to stop till the end.
PS: Pat Utomi is the Nigerian politician I mentioned.
Thanks Andreas for the link on Ron Paul.
Joshua Green writes well. Given the length of the article, he clipped words tidily I didn’t want to stop till the end.
PS: Pat Utomi is the Nigerian politician I was referring to
Hello again! Sorry I haven’t been by in a while. Great stuff here as usual, but an exceptionally clear presentation here of this often opaque and thorny issue.
I have a habit of wrangling about definitions but here of course how we define liberty is essential. Of political/social liberty (i.e. how we relate to each other and not whether, say, my literacy makes me free to study philosophy), if it is simply freedom from coercion, then short of physical violence you are free. The more you add to that definition, the more the government has to do to impose liberty and force egalitarianism. Such seems to me to be the door opened by the “ordoliberal” answer, which seems to creak open ever wider once opened. Too that answer seems to involve an inherent compromise with liberty, paradoxically, for the sake of liberty.
Speaking of names, Hayek wasn’t a fan of the “libertarian” moniker either (see “Why I am Not a Conservative,” which I was coincidentally just reading/writing about.) It seems to have caught on better than mine, “Jeffersonian Democratic-Republican–Conservative Classical-Liberal Capitalist.”
Love the way you think, Nicholas.
“… if it is simply freedom from coercion, then short of physical violence you are free…”
Aha. But (since you have “a habit of wrangling about definitions”), how do you define “coercion”?
Can social customs coerce?
Can the way options are presented be a form of coercion? (For example: opt into a 401(k) as opposed to opt out from one)
Does a bus full of whites in the 50s merely intimidate or actually coerce a black woman to go sit in the back?
Can a private company (or a mob) coerce people as a government can?