The Freiburg School Of Economics

Jessica asked in the comments to my recent Hobbes post for a description of the Freiburg school.  Fortunately, Viktor Vanberg has written in detail about the history of the school, so I can stay at the summary level.  I should give a shout out to Professor Vanberg as well for dealing with me through a Master’s thesis and letting me have some of his previous work to read just because I couldn’t find a copy of the papers elsewhere…

The Freiburg school combined law and economics to get a unique perspective on economics.  They were most famous for publishing a journal entitled Ordo and defined what was called Ordoliberalismus (Ordered Liberalism).  The defining notion of Ordoliberalismus was that liberty and competition are great things, but only within a certain context.  Professor Vanberg’s favorite example is a footrace:  a footrace without competition is boring and nobody wants to watch it, but there are certain kinds of competition that we would prefer not to see.  We want to see people practice hard, develop better equipment, and train their bodies to withstand the rigor of physical exertion better than the average person—this results in exciting races.  We do not, however, want to see competitors hamstringing their opponents, as this results in a less exciting race and leaves us worse off.  So competition in and of itself is not necessarily good; rather, certain kinds of competition are.

This means that there have to be arbiters available to enforce competition which we determine to be inappropriate, and that is the appropriate role for the government.  People come up with general rules which should be equally applicable to all, and it is up to the government to enforce these rules and ensure that we don’t break them.  In addition, the Freiburg school tended to believe that most “constitutional” rules, as selected in a free society, are ethically legitimate so long as they are general and applicable to all.  Thus, a welfare state is not in and of itself unethical or illegitimate (as some of Rothbard’s group would argue), but only so long as the government is following particular rules and does not discriminate in the collection of funding or redistribution.  As Vanberg puts it, “Freiburg ordo-liberals recognized that the competitive market order can be, and should be, combined with a system of minimal income guarantees for those who are, temporarily or permanently, unable to earn a living by providing saleable services in the market. They insisted, though, that such social insurance provisions must be of a nondiscriminating, privilege-free nature, and must not be provided in ways – e.g. in the form of subsidies or other privileges granted to particular industries – that corrupt the fundamental ethical principle of the market order, namely its privilege-free nature.”

This sounds like a bit of a copout to stronger libertarians, but to put the issue in perspective, its heyday was between the late 1920s and mid-1940s and grew out of the arguments of those days.  The main economic movement in Germany was the New Historical School of Schmoller, which believed that theory was irrelevant and simply wrong because it would never account for the differences in circumstance.  Logical positivists, meanwhile, and taken a complete hold of most social sciences and Liberalism had almost entirely collapsed in continental Europe as a respectable philosophy.  In addition to that, Germany’s economy had just recently come out of hyperinflation and as the school was really gearing up, the Nazis took over the country.  So in other words, the Freiburg school was playing against a stacked deck intellectually, so they had to focus much more on the “Sozial” part of the Sozialmarktwirtschaft.  Vanberg argued that had circumstances been a bit more favorable, Eucken would have sounded much more like Buchanan and the two would have been practically the same person, but Buchanan had the advantage of a nascent post-war rebuilding of both the American right in general and right-libertarians in particular (of which he played an important role), so he could focus on somewhat-happier topics.

To explain where it fit in the realm of schools of economics, Vanberg argues that the Freiburg school meshed with (or possibly encompassed) the Hayek wing of the Austrian school, as Hayek wrote several articles for Ordo and kept fairly close with Walter Eucken in Freiburg until World War II and then picked things back up again after the war until Eucken’s untimely death.  The Freiburg school did not have much of a direct influence on the English-speaking schools, although you can make a very good argument that their ideas were a precursor for James Buchanan’s concept of constitutional economics as well as Hayek’s further writings on constitutionalism (The Constitution of Liberty and the Law, Legislation, and Liberty series).  But at the same time, Eucken and Ludwig von Mises had fairly strong disagreements.  Unfortunately, we probably will never know the exacts of what happened, but Wilhelm Röpke (who, in my opinion, straddled the Freiburg line, but Vanberg considered him a bit out of the Freiburg sphere) did leave a remark that they had major arguments regarding monopolies, with Eucken (presumably) arguing that anti-monopolist rules were necessary and good so long as they were not used as cudgels against successful companies, and with Mises (presumably) arguing that if the market outcome is a monopoly, that monopoly is the most efficient available outcome and any government interference is bound to leave us worse off.

Politically, the Germany of the late 1940s and early 1950s, with Ludwig Erhard (himself a Freiburg schoolman and a bit of a scholar) as Finanzminister, is the best example of Ordoliberalismus.  Erhard was famous for removing price controls (against the orders of US and British authorities), killing post-war inflation and stabilizing the economy with a new Deutschmark, and a government which focused more on rules than subsidies.  Unfortunately, by the late 1950s and into the 1960s (even with Erhard as Chancellor), the German shift to its modern welfare state eroded the difference between vigorous government action in the order of rules (by preventing or regulating monopolies, preventing certain negative forms of competition like false advertising, etc.) and the order of actions, so it got to the point where the government was picking winners and losers, handing out subsidies to favored industries and companies, and turning the labor market inflexible with its attempts at forcing particular paths of union arbitration.  This abandonment of the constitutional order was not a logical conclusion of the Freiburg school, though, as they were an influential minority only for a relatively short period of time.  Eucken had become well-known as an anti-Nazi dissident, which gave the school fame and respect until his death in 1950, but after his passing, there was no great second generation of Freiburg scholars and even with Erhard’s massive political success with the Wirtschaftswunder, the cultural and intellectual institutions were missing to keep that vision going in any major respect.

That’s the Freiburg school in a nutshell.  A very big nutshell…  But I highly recommend the Vanberg article, as it goes into more historical depth and explains things better than I could.