Walter Eucken (1891-1950)

Leland B. Yeager

Was Walter Eucken a pioneer in law and economics? Perhaps not, not if the field is conceived narrowly as ‘the use of economics to explain common - that is, judge-made - law’ and ‘to understand and explain the emergence of legal doctrines in areas of law that do not seem, on the surface, to be suscep­tible to economic reasoning’ (Boudreaux 1994, p.

With reference to the yearbook Ordo that Eucken and Franz Bohm launched in 1948 as the ‘discussion platform’ of the Freiburg school, its adherents are often called Ordoliberals (Grossekettler 1989, p. 42).² ‘Order’, a central con­cept in their thinking, means something like ‘system’, ‘basic structure’, ‘institutional framework’, or ‘organizing principles’.

Ordoliberals emphasize that just as various economic magnitudes are inter­dependent, so are economics and politics and all other areas of life. Policymakers must take this interdependence among subsystems of society into account when shaping and adapting the corresponding institutions. Eucken and Bohm conceived of an economic constitution corresponding to the polit­ical constitution; both require checks and balances to prevent arbitrary use of power (Johr 1950, pp. 274-5; Streit 1994, p. 512). Eucken called for ‘Unity of Constitutive Principles’. Political decisions on the economic constitution must apply, for example, not only to basic laws but also to special laws like those of bankruptcy. Lawyers can properly help draft the required legal instruments only if they understand and apply the findings of economic research (Streit 1994, p. 13; Eucken 1982a, pp. 130-31; Eucken 1952, pp. 13­16; Bohm et al.

The early membership of the Freiburg school reflects Eucken’s vision of close relation between the two fields (Johr, p. 273). Key personalities in­cluded at least two lawyers, Bohm³ and Hans Grofimann-Doerth. A joint seminar of jurists and economists began meeting as early as 1933-34 (Streit 1994, pp. 508-509). A 1936 manifesto by Bohm, Eucken, and Grofimann- Doerth explained why the problems they dealt with required both the methods of reasoning and research of law and economics. Yet they knew that blurring the boundary between them would disfigure both (1936, p. 25). Economic and legal thought could work together on, for example, the treatment of cartels, general business law, the international monetary system, and other questions of economic and legal policy (Eucken 1950, p. 316).

Eucken’s insights about law and economics especially overlap those of Rutledge Vining, ‘the Founding Uncle of Public Choice’ (so called by Forman 1987; to my knowledge, however, neither Eucken nor Vining ever cited the other’s work). Vining’s central concern is economists’ role as policy advisors, whether official or informal. They try to evaluate the performance of an economic system and suggest ways of improving it. They realize, however - or should - that the government has no direct handle on the outcomes of the system’s operation, such as patterns of production and resource allocation and levels and distributions of income, consumption, and investment. What policymakers can do is tinker with the rules and institutions that constitute the system. Vining distinguishes among the economic system itself, the out­come of its workings as a largely random process, and statistical measures of that outcome. He thinks of economic and social life as a game whose rules are subject to piecemeal modification in hopes of making the game more rewarding or fairer or otherwise more satisfying.

It is not enough, in the view of Eucken and his colleagues, for economists to explain how the price mechanism works. ‘In addition they should win the public over to the cause of realizing conditions under which this functioning proves satisfactory’ (Grossekettler 1989, p. 71). Academics should not shy away from taking stands on policy. If science neglects issues of economic order, power groups and literary types press in to fill the vacuum (Eucken 1952, p. 346). (In saying so, Eucken might almost have been anticipating and countering the scorn for ‘policy’ or ‘journalistic’ efforts voiced nowadays by academic economists who congratulate themselves on working at the sup­posed ‘frontiers’ of their discipline, as well as anticipating how socialist thinking would persist in academic departments of humanities.) Still, Ordoliberals do not expect much from today’s politicians. They put more hope in influencing the ideas that tomorrow’s politicians, civil servants, and journalists will be working with (Grossekettler 1989, p. 69).

Eucken believed in the power of ideas. He warned against three bad preju­dices, as he saw them, of contemporary social science: positivism, historicism, and pointillism. These traits impede understanding of how the economic, political, and social orders intertwine. Positivism is too well-worn a topic to need rehashing here. The ‘relativistic hypothesis of historicism’ denies any enduring truth and seems to disparage resisting the supposed tides of history. Pointillism (or punctualism [Punktualismus]) in policy means applying ex­pertise separately in different narrow fields.

Eucken distinguished between two basic types of economic order: the system of decentralized plans and decisions linked by market processes - ‘the exchange economy’ - and the centrally administered economy. He fur­ther divided the latter type into a small, primitive, and nearly self-sufficient economy such as a medieval manor or monastery or a pioneer farm and a ‘planned’ national economy of the Soviet or Nazi type (1950, esp. pp. 117­33).⁴ He classified systems according to who writes the plans and how fine-grained the division of labour is. A market economy constrasts with both the simple and the complex forms of centrally administered economy in having many partial plans, which gives rise to the problem of coordinating them (Grossekettler 1989, p. 44). Eucken championed coordination through a competitive price system, which he took as the criterion of specific policies (Eucken 1982a, p. 116).

As Eucken knew, the character of an economic system does not hinge simply on whether or not property is private. Although fundamental to pre­serving individual freedom, a free state, and a free social order, private ownership is not enough. It prevailed among the Romans and in early medi­eval Europe, yet many small centrally directed economic units existed. Germany has had one law of property, the Civil Code, since 1900, but large elements of economic centralization appeared during the First World War and under the Nazis. The legalization of cartel agreements towards the end of the nineteenth century had a large effect.

Although ‘ordo’ in Latin refers to a ‘natural’ order in contrast to ‘ordinatio’, an order imposed from outside, Ordoliberals do not believe that a natural order would emerge if the state merely refrained from positive action. The spontaneity they valued was of operation, process, and coherent results; they did not expect it of the system or framework itself.⁵ For that, the state has active responsibility (Grossekettler 1989, p. 43). Eucken rejected the old faith of classical economists in a ‘natural’ order under laissez faire. The notion of an economy developing as it is fated to do despite the legal system has an affinity with historicism and Marxian determinism (Eucken 1948/1989, p. 38; 1982b, p. 270; 1950, p. 315; Bohm et al., 1936). Ordoliberals also faulted classical laissez-faire liberalism for ignoring the power of private citizens over other private citizens and the possible private capture of state power. Ordoliberals favour giving private citizens every economic freedom except freedom to make up the rules of play and to shape the form of the market and the monetary system. These are the functions of a constitutional state (Grossekettler 1989, p. 58).

The economic order and a stable and effective state are parts of an overall order that must be constructed. Contrary to what may have been true in the Middle Ages, a state with unified and consistent will and enough power, under the rule of law, to carry out definite and exactly circumscribed tasks is indispensable to the immense division-of-labour process of the industrialized economy (Eucken 1952, pp. 329, 331-2, 338). Eucken’s reason, presumably, is that a fine-grained division of labour and great interdependence among economic subsectors make coordination by properly working market forces all the more necessary.

Eucken distinguished, as already implied, not only among types of eco­nomic order but also between economic order and economic process, the ongoing transactions of economic agents. Under total laissez faire the state neither shapes the economic order nor intervenes in the economic process; in a centrally planned economy the state dominates both. Eucken wanted the state, while guaranteeing a market order, to abstain from direct intervention in the economic process. This distinction accords with the principle of the division of power, which aims at protecting the individual from state domina­tion (Eucken 1948/1989, p. 45n; Eucken 1952, pp. 334, 336-7; Molsberger 1987).

Ordoliberals are skeptical of ‘piecemeal engineering’ in policy, knowing that amid the complexities of economic interdependence, separate measures are likely to work at cross-purposes. Implicitly referring to what later became known as the ‘law of unintended consequences’, Eucken warned that ‘Every single measure of economic policy affects the whole economy and the whole economic process’ (1950, p. 314). Like wise doctors, they seek remedies with the least damaging effect on the self-regulation of nature (Willgerodt and Peacock 1989, p. 9). All specific policies should be framed in view of the overall economic order aimed at (Bohm et al., 1936, p. 23; Eucken 1948/ 1989).⁶

Even such specifics as patent law and liability provisions should be framed for consistency with a competitive order (Eucken 1982a, pp. 120-21; Eucken 1950, p. 316). The purpose of liability for debts (and presumably for torts also) is to facilitate a natural selection of enterprises and managers and also to ensure that capital is handled with due care (Eucken 1982a, p. 126). Limited liability must not allow blunderers to escape punishment and shift their losses onto others (Eucken 1982a, p. 127). More broadly, authority to issue orders must not be separated from liability for the results, as often happens when, for example, government agencies issue orders to private business firms (Eucken 1982a, p. 127). Business concentration should not be fought by antitrust law while inadvertently promoted by company or tax law (Grossekettler 1989, pp. 47, 50).

Hitherto, policy has been made largely piecemeal and ad hoc partly be­cause government officials (and business executives) tend to be experts in their own particular sectors, without adequate concern about other sectors and without adequate understanding of interdependence. Eucken likened a government practicing ad hoc policy to a man trying to assemble a machine by arbitrarily sticking together various castings, wheels, pipes, and other metal parts. Similarly, policies in Europe in the early years after the Second World War tried to curb imports and encourage exports while often regarding public finance, credit policy, and wage and price policy as unrelated to the balance of payments (Eucken 1948/1989, p. 39). Similarly again, labour can be fully employed without the economy’s working well, as in early postwar Germany when Eucken was writing. This type of malcoordination was dis­tinct from ordinary business depression (due to deficiency of aggregate demand). Macroeconomic policy is not enough (Eucken 1948/1989).⁷

Whatever interventions the state does undertake should be ‘conformable’ - in conformity with a market economy. They should work through or along­side the price mechanism (unlike, say, price ceilings and floors and exchange control, which subvert the market process). (The distinction between con­formable and nonconformable interventions comes from Ropke 1942, pp. 258-64; cf. Grossekettler. Of course, ‘conformable’ does not mean ‘desir­able’; even a conformable intervention may be unwise.)

Not only do laws affect the economy, the economy - whether monopolized or competitive, concentrated or dispersed - affects power relations and the political and legal system. An economy of deliberate (as opposed to price- guided) allocations of resources tends to be centralized and therefore to undercut a supposed federal system of decentralizing government power. If policy were to curtail mobility and economic freedom, it is difficult, said Eucken, to see what basic rights could be guaranteed (1948/1989, p. 32 and passim; Eucken might have mentioned Hayek’s Road to Serfdom, but hap­pened not to).

While according the state an essential role in a healthy economic order, Eucken warned against an outmoded tendency to idealize it as Hegel and Schmoller⁸ did. He skewered the commonplace notion that failure of the free economy requires state guidance of the economic process. People saying this overlook how difficult running an economy is and what the state is actually like. Responsibility for state action is so split nowadays, he observed, that nobody - certainly not the collective - is expected to bear moral responsi­bility. Concrete injustice is no longer felt as such. Eucken saw the dangerous idea widely accepted that the state is bound by no moral laws (Eucken 1982b, p. 270). Paradoxically, the more willing people are to acquiesce in the state’s amorality, the more prepared they are to dump unlimited tasks onto it, as if it were the benevolent father of its citizens. People often answer worries about socialization and nationalization by saying that the state is controlled by parliament and ultimately by the people. But such extensive activity alters the character of the state and prevents effective control over the bureaucracy (Eucken 1982b, p. 272). (Invoking Eucken’s view of the ‘interdependence of systems’, Bohm argued the impossibility of combining a democratic consti­tution with socialist planning; Streit 1994, p. 513.) Furthermore, the growing scope of the state’s activity in the twentieth century has promoted yet ob­scured its loss of authority. The state has become dependent on particular power and interest groups scrambling for its favours, while the business community protects vested interests against competition with something like self-created law, crowding state law aside (Streit 1994, p. 511). Eucken saw all this as further signs of the pointillism (Punktualitdt) of today’s thinking (Eucken 1952, pp. 327-32).

Ordoliberals urged the state to be wary of superfluous tasks. Heeding the principle of subsidiarity, a higher level of government should not take on a problem that a lower level or private arrangements could handle (Grossekettler 1989, pp. 48, 51). The constitution should force politicians to pursue limited policies in conformity with the economic order even despite contrary incentives. Ordoliberals value independent organizations, like central banks, whose tasks are clearly defined (Grossekettler 1989, pp. 56-57). Still, as Eucken warned, proposals for self-administering bod­ies or local administrations often fail to recognize that the economic life of one nation and many nations is one coherent whole. A steering mechanism is necessary (1982b, p. 274).

The Ordoliberals aimed at full or free competition (vollstdndige Konkurrenz). By this they did not mean perfect competition in the technical sense. They employed the more dynamic conception of unhindered market processes, with no one having power persistently to charge prices exceed­ing marginal costs (Grossekettler 1989, p. 45; Grossekettler prefers the term ‘free competition’).

But who should achieve this competitive order? Occupational and interest groups are scarcely competent or inclined to support it. Indeed, they have all too often made the state an instrument of their sectional designs (Eucken 1952, pp. 325-6). Neither syndicalism nor nationalization nor socialization is any solution to the monopoly problem (Eucken 1952, pp. 334-5; Eucken 1982b, p. 272).

The state must not merely refrain from itself erecting barriers to competi­tion; it must also ensure that private pressure groups and ‘law’ created by business itself do not restrict the market (Grossekettler 1989, p. 41). ‘All kinds of preventive competition should be ruled out: embargos of every kind, loyalty discounts, exclusive contracts and aggressive pricing to scare off outsiders - all of them intended to deter or destroy’ (Eucken 1982a, p. 119). Whether price-undercutting should be permitted should not be decided by notions of ‘fairness’ or ‘unfairness’; such judgements should be made in conformity with the economic constitution (Eucken 1950, p. 316). ‘Unavoid­able monopolies should be obliged to do business with willing customers and be publicly regulated’ (Grossekettler 1989, p. 49).

Eucken’s ‘constitutive principles’ went beyond those regarding private prop­erty, competition, and open markets.⁹ Observing the historical record of inflation and of ‘opportunistic, ephemeral interventionism’, Eucken added the principles of ‘monetary stability’ and ‘steadiness of policy’ (Streit 1994, p. 511). The crises and depressions of the nineteenth and early twentieth centuries were no evidence that the price system as such had failed, for they were often due to failure of monetary policy. Eucken traced inflations and deflations mainly to the linkage of money and bank credit - to the transfor­mation of banks into ‘mints’ (1982b, p. 273, pp. 117-18). Because ‘a certain stability in the value of money’ is so important for accurate economic calcu­lations and for avoiding distortions in productive structure and income distribution, monetary policy takes on a special status in economic policy. Furthermore, the monetary system should function as automatically as poss­ible, undominated by interest groups. Eucken was inclined to favour the Graham Plan for a commodity-reserve currency (Eucken 1982a, pp. 116-17; Grossekettler 1989, pp. 47, 49).

Eucken attributed a decline in the propensity to invest - still a topic of live worry when he was writing - not to shrinkage of opportunities in an eco­nomically satiated world but mainly to (i) distortions of input prices, particularly of capital goods and labour, relative to prices of output, and (ii) instability of policies regarding money, trade, taxation, and wages (Eucken 1982a, pp. 128-9). A sufficient volume of investment presupposes a certain consistency in economic policy (Eucken 1982a, p. 129; Johr, p. 275). Fur­thermore, uncertainty created by rapid policy changes gives impetus to mergers and concentration in industry (Eucken 1982a, p. 130).¹⁰

Eucken took a lively but critical interest in Keynes’s writings on money­macro policy. He thought that Keynes did not understand the rationale of laissez faire. He would have scorned a supposed blend of Freiburg microeconomic policy and Keynesian macroeconomic management. He warned against confusing market-oriented policy for stability with Keynesian full-employment policy (Tuchtfeldt, pp. 77-8; Eucken 1952, pp. 27n., 230ff., 236, 244, 350, 361).

Heinz Grossekettler points out a resemblance between Eucken’s Ordoliberalism and the Constitutional Choice approach of James M. Buchanan. The latter is more concerned with taming the power of poli­ticians and the state (‘leviathan’), however, while Ordoliberals emphasize taming private power (Grossekettler 1989, p. 66). In wanting to shape the economic order deliberately, Ordoliberals come close to what F. A. Hayek criticized as ‘constructivism’ (Grossekettler 1989, p. 59; Hayek 1989, pp. 22, 48, 50-51, 60, 66, passim, and earlier writings). Sharing key ideas with the ‘Old Chicago School’ of Henry Simons, they tried to work out ‘a positive programme for a free and socially aware market competition’ (Grossekettler 1989, p. 43, making reference to Henry Simons’s 1934/1948 ‘positive pro­gram for laissez faire’).¹¹ They worry about a self-destructive tendency inherent in competition. They are less optimistic than the (new) Chicago School about a tendency of competition to establish itself. The schools’ difference in attitude may trace to different experiences - the Americans’ with a large market, the Europeans’ with small and protected markets (Grossekettler 1989, p. 59).

Simons and Eucken also resembled each other in considering themselves champions of liberalism, in urging restraints on private power (Simons being especially worried about labour-union power), and in insisting on stable money. Both were sceptical about limitations on liability. Both favoured redistribution through a progressive tax system somehow arranged so as not to endanger the propensity to invest (Grossekettler 1989, p. 50).

Eucken’s work is also reminiscent of W.H. Hutt’s proposals (1944) for postwar reconstruction of the British economy: the state was to take truly drastic action in efforts to make the real world resemble the imaginary world described in textbook chapters on pure competition. Eucken’s views were less extreme. Even so, I conjecture that he would have modified his views, as Hutt apparently did, if he had lived to see further experiences with overambi- tious government and also to absorb the teachings of the Public Choice school.

Eucken did not base his policy views on legal dogmas or on any particular philosophy - not, for example, on notions of natural law or natural rights. Replacing ‘random interventions and naive ad hoc experiments’, policy should rest on principles having a sound theoretical and empirical foundation (Grossekettler 1989, p. 46). Private property and other basic principles should be upheld because they have proved necessary for a competitive system (Eucken 1982a, p. 130). Presumably like most other economists, Eucken thus adopted a philosophical stance no more profound than a tacit and casual utilitarianism. For his purposes, this stance was appropriate.

Notes

1. Backhaus (1980, p. 3n) already noted that Eucken and his colleagues were harking back to an earlier tradition of close connection between legal and economic studies.

2. The founders of Ordoliberalism were committed Christians. Ludwig Erhard, who became German Economics Minister and later Chancellor, was a ‘political entrepreneur’ working with Ordoliberal ideas. The newspapers Firankfurter Allgemeine Zeitung and Neue Zurcher Zeitung were sympathetic to the school (Grossekettler 1989, pp. 57, 60, 67-8). As a member of the Federal parliament, Franz Bohm helped infuse Freiburg ideas into the postwar German economic order (Streit 1994, p. 513).

3. Although the idea of economic orders in recent writings traces to Eucken, Franz Bohm deserves credit for promoting the economic order as a test of law, especially economic law, in German-speaking territory (Backhaus 1987, p. 67).

4. Backhaus (1980, pp. 37-8) finds Eucken implying a further distinction - between a competitive exchange economy and a ‘corporative’ one dominated by cartels.

5. The Ordo school’s distinction between spontaneous and planned economic orders - be­tween catallaxy and planning - has a parallel in the distinction between spontaneous legal order [Recht] and legislation [Gesetz] (Backhaus 1987, p. 68).

6. Citing F. A. Hayek’s (1969) as well as Eucken’s insistence on the ‘Systemgerechtigkeit’ of individual policy measures, Backhaus (1987, p. 51n.) finds an interesting parallel with the German Constitutional Court’s insistence that laws concerning the economy must ensure the capacity of the affected institutions and organs to fulfill their purposes.

7. More recently in several European countries, policy against unemployment provides another apparent example. Various uncoordinated individual measures have neutralized one another, and heavy unemployment persists (Coe and Snower, 1996).

8. The 1936 manifesto of Bohm et al. further criticizes Gustav Schmoller. He allegedly rejected making decisions on principle and instead wanted each issue of state intervention to be decided on its own separate merits. His Historical School forgot how to ask funda­mental questions and became essentially incapable of transcending everyday experience. Schmoller did make several often-cited respectful remarks about theoretical research; but under his leadership, German political economists forgot how to apply and improve theory and carry out economic analysis. They were unable to help shape the economy because they did not understand economic interrelations (1936, pp. 20-22).

9. The Freiburg principles overlap, largely though not totally, with several put forth by Jurgen Backhaus. The legal order is an integral part of any economic order and conditions the latter’s efficiency. Legal policy must be an integral component of any economic policy. Law must be recognized as a public good if its supply in adequate quantity and quality is to be assured. Policy for economic law must straightforwardly recognize that value judge­ments cannot be avoided. Two approaches to the theory of economic policy, although different, do not exclude one another. The pragmatic approach works with principles that aim at separating questions of analysis and value. The contractarian approach seeks to bring into the analysis value judgements capable of commanding consensus (Backhaus 1987, p. 46).

10. Eucken’s insistence on steadiness of policy parallels F.A. Hayek’s insight that every social system rests on acceptance of certain fundamental and reliably durable values. If people are to form reliable expectations, it is important that the normative bases of economic policy coincide with generally accepted social values (Backhaus 1987, pp. 51­2).

11. When I first read Simons’s ‘positive program’, roughly ten years after it first appeared, my reaction was: ‘I can see the positive program, but where is the Iaisseiz faireT The program is activist indeed.

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