Walter Eucken

Walter Eucken is another economicst completely unknown in english speaking country and there is no need to know him. From a theoretical point of view it is Adam Smith with a special emphasis on the governmental duty to keep the intensity of competition high enough. For biographical data about Walter Eucken see Walter Eucken.

The intensity of competition is the crucial aspect of the theory of Walter Eucken, although it is unclear, why he put so much emphasis on it, because since Adam Smith the role of competition has never been questioned, see homo oeconomicus. The only thing we can possible say is that the concept of the homo oeconomicus is very often misunderstood. Some people interpret the concepto of the homo oeconomicus as something like "survival of the fittest", but actually there is no relationship. The winner of the 'struggle for survival' serves only his own interests, but in a situation of competition in a market economy the winner can only pursue his own interests by pursuing the general interest, the consumers or his employees if he needs qualified and committed people. In the 'struggle for survival' the competitors try to eliminate each other, in a market economy the government ensures or should ensure that there are always enough competitors to keep competition alive.

Already Adam Smith complained that entrepreneurs and companies will try by any means to avoid competition: by agreements on prices, by trying to keep new competitors out of the market, by forming trusts and monopolies, however Adam Smith believed that it is not possible to restrict that without a strong infringement on personal freedom and there is some evidence that most measures undertaken to keep competition alive have actually very different scopes. Competition authorities are interested to impose fines because they can earn a lot of money with that. Beside that it can be doubted that in a global economy something like a monopoloy or other restrictions on competition actually exist. In general the monopoly or the restriction on competition is created by the government itself.

The basis of neoliberalism, austrian school, ordoliberalism and social market economy are some very simple concept we can already find in Wealth of Nations by Adam Smith.

- Prices signal scarcity and controls therefore production and consumption. If people want yellow socks and the producers produce more blue socks than yellow socks the prices for the yellow socks will rise and the prices for the blue socks will fall. This will induce the producers of blue socks to produce more yellow socks until the situation is balanced. At the other hand socks can be produced with different tissues cotton, wool, synthetic fibres, etc.. If people prefer synthetic fibres for a lower price or if they prefer synthetic fibres in general more socks with synthetic fibres will be produced. If the harvest of cotton is good it is possible that they will be able to produce cotton socks at the same price as socks made from synthetic fibres. Hundred of millions of decisions are made every day and this is only possible because the price contains already all the information necessary to take the right decisions and to allocate the resources in a way that best fits the demand of the people. This equally means, see natural price / market price, that the (monetary) marginal outpout of any productive factor and any unit of raw material is the same in any use. The producer of yellow socks will produce yellow socks until the benefit of the last unit of yellow socks equals the benefit of the last unit of blue socks. At the other side he will produce socks until the benefit of the last unit of socks equals the benefit of a trouser and he will produce trousers... and so on.

Milton Friedman focuses more on the fact that the resources are allocated by free cooperation between all the market players involved in the production and consumption, see Milton Friedman - Lesson of the Pencil. Cooperation induced by the market mechanisms are not free at all. The market players has to obey to the market otherwise they risk to get bankrupt.

- At the other side, this is second pillar of a market economy, there must be an incentive to produce what people want in the optimal way. If the government fixes the prices of socks the blue socks cost as much as the yellow socks and there is no incentive to produce what people want, because the benefits are always the same. A system like that would depend completely on the committement of a public employee to change the production if it doesn't fit to the preferences of consumers and those who believe that a public employee will move his ass if he sees that something goes wrong don't live on this earth.

These two basic ideas, very easy to understand, are the two pillars of a market economy and are rarely questioned and especially they are not questioned by Keynes, although we can read the opposite every day.

It is therefore very easy to know which concepts are shared by Friedrich Hayek, Milton Friedman, Walter Eucken and Alfred Müller-Armack, but is in unclear to make clear in what consist the differences.

At first glance the ideas of Friedrich Hayek and Milton Friedman seems very similar. A market economy is not only the guarantor of efficiency, as in Wealth of Nations by Adam Smith, but the guarantor of personal freedom. Due to the importance they give to personal freedom and due to the assumption that 'socialism' they are more critical towards the idea that the government should intervene to keep competition alive as Eucken assumes and still more critical towards the idea that the gouvernment should provide for social balance, as Müller-Armack assumed.

However there is a difference in the argumentation. Hayek argues that the way to serfdom is due to 'socialist' ideas, while Friedman argues more with the self interest of bureaucracies. A bureaucracy is publicly financed, therefore the (very often compulsory) consumer of the good and service offered by the bureaucracy has no direct influence and that allows the bureaucracy to pursue it's own interests, see Milton Friedman Milton Friedman: The Problem of Bureaucracy. (The example with schooling is perhaps not the best one, but the general thesis is correct. We will return on this issue in the chapter about Milton Friedman.)

This is very different from the argumentation of Hayek. Hayek argues that a 'socialist' ideology is the road to serfdom. That means that people with 'good' intentions make a policy that is a road to serfdom. He makes the content of an ideology responsible for this tendency.

For Milton Friedman it is the self interest of the bureaucracy that is responsible for this tendency.

Self interest on itself is not the problem. Self interest becomes a problem, when it is not controlled by competition and this is the case of bureaucracies. There is no contro and in most cases there is not even a controlling systems, that makes costs transparent or comparable to the costs of pivate companies offering the same or similar products and severices. The problem is not the content of an ideology, but wrong economic incentives.

Or to put is less abstract: Milton Friedman discusses concrete issues, while Hayek, Müller-Armack and Eucken have a more 'philosopical' approach that leads to very abstract and meaningless discussions about 'socialism' and 'capitalism', which are completely useless when it comes to discuss about concrete issues. Concerning this issue there is no need to rediscuss over and over again the whole history of economic thinking of the last 300 years. The question is how to implement a system of cost control in bureaucracies and to get more transparency.

It is crystal clear that the American Federation of Teachers, to stick with the example of Milton Friedman, as well as the german Deutsche Philologenverband serves the interest of teachers and not the interest of the students or their parents, with all the well known problems. However an open debate about their didactical skills, qualification, committment etc.. would soon lead to a change in their behaviour. Democracy is nothing that works like a machine, but that is not true for the market economy either. Both require

As a rule of thumb Milton Friedman is right, however if we look at things more in detail, it is less clear. It is true, as he mentions in the video, that private companies in the garbage collection sector a less expensive than the ones run by the government. This is true as well for Berlin. However the public run company is obliged to offer this service to any household, fare away or not, while the private company only serves the houselholds that can be served efficiently. If is allowed for a private company to collect the garbage of companies, the problem becomes still more evident, because the garbage of some companies is a valuable raw material. If this business is taken away from the public companies, cross-subsidizing is not possible any more.

In other fields, for instance telecommunication, the results are obvious. If telecommunications services are run by a public company, as it was the case in Germany 30 years ago, the result is a complete desaster. Concerning water supply the situation is different. Most municipalities are worse off since water supply has been privatized. As a rule of thumb we can say perhaps that the less complicated a service or product, the bigger the chance that a public run company can be as efficient as a private company.

That is what Adam Smith already said almost 250 year ago. Canals become impassible if they were not maintained carefully. The income of private company would therefore be zero if they don't do their job. A public employee wouldn't care, because he gets his money anyway. (In other words it woult take some time, until he gets a problem fixed.) The case of roads is different. Even badly maintained, they are still passable and a private investor would only maintain them carefully, if that rises the profits. But if people have no alternative, they will use the road anyway and therefore it has no impact on the profits if the roads are well maintained or not. In this case even a public company can do the job.

Milton Friedman, Friedrich Hayek, Walter Eucken and Müller Armack put an emphasis on certain principles, freedom, efficiency, social stability and they assume that these principles are in some way connected to each other, what is only true, if the underlying economic assumptions are true, but these assumptions are never discussed in detail, see Müller-Armack for an illustration of the problem, based on a concrete example.

[Actually the argumentation of Milton Friedman sometimes is much more complicated than what he presents in public speeches. This sounds like pure and simple Adam Smith, see Milton Friedman Teaches Monetary Policy and the quantity theory of money, but actually he is arguing with keynesian monetary transfer mechanisms, see monetarism, getting to the same results as the primitive quantity theory of money, because he assumes special circumstances. From an empirical point of view his theory is not true. Since 30 years the ammount of money increases much faster than the GPD without any inflation, or more precise, an inflation beyond what is needed for a market economy to work.]

There are another bunch of goals believed to be incompatible, this one more famous, because we can find it in any textbook: Growth, low inflation, full employment and balanced balance of payment, but in this case as well there is only an incompatiblity if we assume a certain economic theory. It is for instance assumed that an increase in economic growth will lead to 'bottlenecks' and these bottlenecks will trigger inflation or that a higher employment rate would lead to inflation, because the workers union would demand higher wages. However the assumed incompatibility only exists if the underlying theory is correct and this underlying theory is highly questionable.

Sticking to principles leads nowhwere when it comes to discuss about real issues. A tax on luxury cars in Mexico, Denmark (where it actually exists) or the USA would affect the german car industry, because it produces this kind of cars and would restrict the freedom of rich people in these countries. If we put the value freedom as something absolute, something that should not be restricted in favour of another goal, for instance social balance, the answer is clear. If we say that the rich of these countries should invest their money in something useful, the answer is less clear and if we assume that the balance of payment of these countries is negative what will lead to a devaluation of their money the answer is still more unclear and Germany and the rest of the world would be better off if Germany reduces its exceed in the balance of payment and redirects its consumption to the national market.

Efficiency, freedom and social balance are criteria to be taken into account when it comes to analyse a certain issue, but fundamentalists will have no impact on the public discussion. Insisting on these principles resemble the rhetoric of the last century, before world war II in Europe or to the debates in South America of the eighties.

The basic idea of Walter Eucken and the ordoliberalism is easy, straigthforward and already mentioned by Adam Smith. Market economies only works if the intensity of competition is high enough, however the market players have a strong incentive to reduce competition. Competitors are better off, if they reach an agreement on prices. That allows both of them to put higher prices. The government must therefore intervene and impede price agreement and other measures aiming to lower the intensity of competition.

To put in a more abstract way. The government have to set up an economic order the same way he establish an order in the traffic. People can go wherever they want, there are no restrictions concerning the goal, destination or purpose of the trip or about the way to get their, but there are rules everybody has to respect and it should not be allowed to the government to intervene sporadically, changing the rule incidentally for some travellers.

However this is nothing new. It is problem already exhaustively discussed by Adam Smith, although Adam Smith didn't see any possibility to establish these kind of rules, especially to interdict price agreements.

One obvious difference between Adam Smith and Walter Eucken is the obvious fact that the role of competition is one issue in Wealth of Nations, the 'theory' of Walter Eucken is nothing but that. We can't therefore really say that Walter Eucken emphasizes on competition and the maintenance of competition, because it is his unique topic.

However it is very hard to see what are the fundamental differences between the economic order of Germany and the economic order of France, Spain, Great Britain, USA etc.. All of these countries has anti trust laws and in all of these countries economic interactions are regulated by similar rules. Differences in the economic order can't explain the diferences in the political and social system. Regulation of economic activities started lang before and were and are not the result of theoretically figured out order on a piece of paper, but the result of an historic development.

The dearest topic to Walter Eucken are anti trust laws. He wants the government to provide for a workable competition. He uses the term workable competition, because the kind of competition that underlies the neoclassical theory is not realistic. However this is as well are very disputed issue for several reasons. Monopolies are a very seldom species at a global level. Normally they only exist because the government imposes customer duties, for instance on cars. (That was the case in Europe in the 1980s, where are tax was imposed on japanese cars.) It is hard to see how the government can made responsable for maintaining a sufficiently intense competition if the government itself is responsable for the lack of competition.

Second there is a strong evidence for an abuse of antitrust laws. A very critical case was the procedures taken by the european antitrust authorities agains google. It was argued that google benefits from listing newspaper articles in its search engine without paying for it, with the result that a law was passed obliging google to pay for that. The outcome was predictable. As google don't need these articles, but the newspapers depend from being listed, google obliged them to waive from being paid voluntarily and the story was finished. Actually the newspapers wanted google to pay for a service delivered to them for free and that is obviously something that is not going to work. In other words, the newspapers claimed that google uses its monopol position, but the truth is, that the newspapers wanted to squeeze out money from google. (This in only one example, but it is not complicated to find others.)

The next problem ist that the antitrust authorities, as the rest of the human beings, strive to get more power and more resources. They have an own interest to impose fines. This became evident in the case of Microsoft. It was actually never a problem that Microsoft delivered windows with the Explorer an board. Everybody could and can download another browser without problem, but it would be difficult to do that, if Microsoft would have delivered windows without any browser as the european antitrust authorities preferred. The fine imposed on Microsoft can only be explained by the self interest of the european antitrust authorities. (The real problem is, that the explorer is an awful software, but this is another story.)

Antitrust laws exist since 1890 (Sherman Antitrust Act). This is nothing new and the ordoliberalism contains no new idea. Ordoliberalism and the social market economy are a myth, created to suggest that Germany after world war II entered in a new phase of economic thinking that broke with a tradition considered sinister.

(There is no doubt that the tradition was sinister, but that had nothing to do with the economic order.)

The three authors considered in different ways as the founders of these lines of thinking, Friedrich Hayek, Walter Eucken and Alfred Müller-Armack emphasizes that the economic order before 1933, in other words the economic order of the Republic of Weimar, was the cause of the following desaster. This is actually nonsense, see a variation of a totalitarism theory. The basic error is the strange assumption that the Nazis got to power by attracting more and more economic resources. Actually it was the other way round. First the got to power due to a failures in the constitution of Weimar and then they attracted the economic resources.

The insinuated causal relationships are so absurde, that one can wonder why these lines of thinking insisted on this point. It is to assume that marketing played a role. The only way to become famous with a trivial theory it to present it as a bulwark against any kind of totalitarism, otherwise nobody would had cared about it.

Another reason that could explain how these lines of thinking, especially the social market economy, became famous is the role they played in political campaigns. With a mere neoliberal, 'capitalist', free market agenda it wouldn't have been possible to win any elections. An agenda was needed that suggests that the 'third' way, the social market economy, has resolved all the problems, especially the conflict between 'labour' and 'capital'. Actually it was pure propaganda. The german "economic miracle" had nothing to do with the 'social market economy'. All industrialised countries reached very soon the living standard and productivity they had before world war II, for the very simple fact, that it is quiete easy to copy somenting or to do just the same thing that has done before. Economic growth decreases if it depends on new technologies that first has to be invented.

This is still the case today, at least in Germany. 'Think tanks' and other lobby groups who advocates in favour of 'ordoliberalism' or 'social market economy' concepts are normally sponsored by the industry. They try to sell their interests as identical with the interests of the society as a whole otherwise they wouldn't reach a broader public.

[It is not impausible that their interests and the interests of the society as a whole are compatible, that's not the problem. The problem is that a certain rhetoric suggests that the have to hide someting and in this case it would be simple propaganda and not a rational debate.]

The differences between neoliberalism, austrian school, ordoliberalism and social market economy are not very clear and there are a lot of interferences. To put it very short we can say that neoliberalism and the austrian school changed a bit the focus in comparison to Adam Smith. For Adam Smith it's all about efficiency, for neoliberalism and the austrian school it's more about freedom. The market economy is not only a guarantor for the best allocation of resources as in Wealth of Nations, but the guarantor of freedom. The ordoliberalism advocates for the maintenance of competition, because markets left alone have a tendency to avoid competition, a problem already mentioned in Wealth of Nations. Müller-Armack put an emphasis on social stability.

However we can't say that there are differences in the underlying economic theories, that's always Adam Smith and we can't say either that efficiency, social stability, maintenance of competition and personal freedom are completely disregarded in one line of thinking or another. There is only a difference in the importance given to these aspects.

If we go more into details we can find differences between Milton Friedman at one side and Friedrich Hayek / Walter Eucken / Alfred Müller Armack. Milton Friedman as Friedrich Hayek etc. is an opponent of socialism, but actually he critices bureaucracy and that is something very different. Bureaucracy is not an ideology it is a system steered by wrong incentives, that can exist and actually exists in any economic order.

It is crystal clear that a system that awards doing the wrong things or not doing nothing at all will end up on the wrong path. A good example for that is the publicly financed discussion paper industry. Millions of economists get paid to write never discussed and never read discussion papers. They need that for an academic career, but there is no benefit for the tax payer. If the incentives would be different, if resolving concrete problems would have an impact on the academic career, they would spent their time resolving concrete problems.

It is obvious a system that doesn't have clear steering mechanisms, where incentives to do the right things are absent and everything depends on the moral integrity of the individuals involved will end up on the wrong path. In a publicly owned company of the socialist type nobody will try to do more than expected by the plan, because that would only lead to a situation where the overfullfillment of the outcome fixed by the plan will be considered as normal in the next years, with the effect that they will face consequences if they won't achieve the new goal.

This is a very different perspective than the one taken by Friedrich Hayek, Walter Eucken, Alfred Müller Armack or Karl Popper. For them, especially for Karl Popper, 'socialists' are people who have an ideal idea how the world should be. The critique is directed against the ideological content. However the content doesn't play any role in totalitarian regimes. Just anything, especially religion, because religion covers all spheres of social live, can serve as an ideology. A totalitarian regime can stay in power if the incentives given to the people guarantees that nobody has an incentive to protest. Totalitarian regimes are actually a systemic problem and not an ideological problem. In this sense Milton Friedman is nearer to reality than the others.

To put it short and simple: To say that the nazis needed an ideology to strive for power is like saying that a bank robber needs an ideology to robb a bank. What the nazis, for Hayek a version of 'socialism' needed was a system with incentives that bound the people. It is naive to believe, as Karl Popper did, that an ideology could be changed by arguments, by proving that it is not logic from a rational point of view. Ideologies want to mask reality and not explain it. Popper has 'idealists' in mind, people like perhaps Che Guevara, but this kind of people are rare. It make sense to discuss with an idealistic person, who is wrong about the economic causal chaines, but a totalitarian system is never kept together by an ideology. The apparatus a totalitarian regimes relies on is kept together by the corresponding incentives.

[This theory is questioned by some historians, for instance Daniel Goldhagen. Daniel Goldhagen assumes that the antisemitism was something deeply entrenched in the german society and therefore more than a simple element of an arbitrary ideology. For this element that is perhaps true, but we know that in general the nazi ideology was very "flexible" and adapted to the always changing needs. ]

There is another problem with the more 'philosphical' approach of Hayek and Eucken. If they critices the 'socialists' they don't bother the bureaucrats, because very few bureaucrats considers themselves 'socialists'. If they don't want to bother the bureaucrats, than they believe that bureaucracies only exists in 'socialists' countries, what would be a strange assumption.

Concerning Milton Friedman, there is little doubt what he is talking about and this approach has a better chance to get to the addresse, see Power of the Market - Big Government 1.

All of this lines of thinking concede big importance to liberty, although they never define it. The author would say, that the most intelligent answer was given by John Stuart Mill, see On Liberty.

If we take the different definitions given by wikipedia in different languages, we see without any problem, that the term is not very precisely defined in no language, but there are anyway big differences.

All three definitions, the english, german and spanisch one focus on the political system. The state is considered as the main menace to freedom and not the society or public opinion. This is a difference in comparison to John Stuart Mill. For John Stuart Mill the society is a menace to freedom as well.

Furthermore the defintions focus more an a passive role of the government. The government shouldn't do anything that infringes personal freedom. If we define freedom as a consciousness selection between different options, the government can play a more active role as well by offering alternatives in thinking, feeling and behaving. This sounds a little bit abstract, however this goal is mentioned in the school curricula of most industrialised countries.

El liberalismo es un sistema filosófico, económico y político que promueve las libertades civiles y se opone a cualquier forma de despotismo, apelando a los principios republicanos. Constituye la corriente en la que se fundamentan, tanto el estado de derecho, como la democracia representativa y la división de poderes.


Liberalism is a philosophical, economique and political system that promotes civil liberties and is opposed to any kind of despotism opposed to republique principles. Liberalism is the basis on which relies the constitutional state, the representative democracy and the division of power.

Der Liberalismus (lat. liber: „frei“; liberalis, „die Freiheit betreffend, freiheitlich“) ist eine politische Ideologie und Bewegung, die eine freiheitliche politische, ökonomische und soziale Ordnung anstrebt. Hervorgegangen ist der liberalismo aus den englischen Revolutionen des 17. Jahrhunderts. Leitziel des Liberalismus ist die Freiheit des Individuums vornehmlich gegenüber staatlicher Gewalt. Neben dem Konservatismus und dem Sozialismus stellt er eine der drei großen politischen Ideologien bzw. Weltanschauungen, die sich im 18. und 19. Jahrhundert in Europa herausgebildet haben, dar.


Liberalism (lat. liber:"free", liberalis, "concerning freedom, liberal") is a political ideology and mouvement, that strives for a liberal political, economic and social order. Liberalism issued from the english revolutions of 17s century. The aim of Liberalism is the freedom of the individuum especially from governmental infringements. Beside conservatism and socialism it is the third big political ideology that was formed in Europe in the 18st and 19st century.

Liberalism (from the Latin liberalis) is a political philosophy or worldview founded on the ideas of liberty and equality. Liberals espouse a wide array of views depending on their understanding of these principles, but generally they support ideas such as free and fair elections, civil rights, freedom of the press, freedom of religion, free trade, and a right to life, liberty, and property.


The definitions are not very different, however the author would say that in practise nowadays liberalism tends to be 'conservative'. The liberalism of John Stuart Smith is more 'philosophical'. Liberal in this sense addresses more general issues, religion, sexual preferences, way of live, openness towards other cultures and things like that. Anyone can live as he likes as long as he don't bother other people.

The economic liberalism focuses more on 'conservative' values, assumption, ideas and concepts like everybody is responsable for himself, everybody can succed if he just works hard, frugalness and things like that. They believe that success depends on the effort of the individuum and less on collective actions.

That's why Friedrich Hayek didn't consider Johns Stuart Mill as the founder of liberalism, as most people do, or better said, he considered John Stuart Mill as a perverted form of liberalism, far away from Adam Smith.

The author would say, there is no relationship between these two conceptions of liberalism, although Hayek assumes the opposite. Economic freedom is for Hayek the guarantor of personal freedom and any infringement of the government to economic freedom will lead automatically to an infringement of personal freedom.

The basic problem of Hayek is, that he didn't understand what totalitarism, a term he uses very often but never defined it, is about.

The author would say that even a planned economy, without any doubt economically completely inefficient, is compatible, at least in theory, with personal freedom.

Neoliberals emphasizes on the difference between liberalism and neoliberalism. Liberalism has a much broader meaning, neoliberalism is only about economic freedom. If the neoliberals feels such a strong desire to distinguish themselves from liberalism, it is to assume that the don't share the concepts of liberalism. Neoliberals for instance called Barack Obama a liberal, a term they that has for them disrespectfully connotations.

While his political opponents insist he is liberal (which to them is something bad), the truth is that whether as a senator or as the president, Mr. Obama has generally been a moderate or a centrist, leaning somewhat to the left on social issues and somewhat to the right on certain foreign policy issues.

The book 'Principles of Political Economy' was first published in 1952, in other words two years after the death of Walter Eucken, it was therfore written two years after world war II.

In contrary to Road to Serfdom, where the nationalsocialism and and any kind of socialism are more or less the same thing, all of them are collectivism, the nationalsocialism is not mentioned in this book, but naturally the socialism. We can assume that this is a tactical manoeuver. There was a widespread agreement that on all strata of society, any social groups and political parties that 'socialism' is evil. Concerning nationalsocialism the thing was less clear and obviously a large percentage of the academic staff had been members of the NSDAP and from them depended the academic career and the reception of the book. It was therefore convenient not to talk about this issue. (The same is true, by the way for Alfred Müller-Armack.)

Compared to Hayek, who suffered from a kind of paranoia and was obsessed by collectivisim, a term he never defined, see a variation of a totalitarism theory, he distinguished between simonism, marxism, social democrates etc..

Concerning his analysis of Karl Marx he is obviously right. One can indeed question the practical relevance of marxism, because in the three very thick volumes full of trash we don't find any hint on how to organise the economy once the expropriators are expropriated.

Wer mit Marx an die Zwangsläufigkeit der geschichtlichen Entwicklung glaubt, für den ist die Wirtschaftsrechnung der Zentralverwaltungswirtschaft kein Problem, das im voraus denkend zu bewältigen wäre. Der notwendige Geschichtsprozess wird die Frage selbst lösen - so musste Marx denken.

Walter Eucken, Grundsätze der Wirtschaftspolitik, Tübingen, 2004, page 211

Those who believe as Marx did in a determinant economic development don't pay a lot of attention to figure out previously the steering mechanisms of a planned economy. The historical process will resolve this problem alone - that's what Marx presumably believed.

[Actually, thinking a little bit about it, the author would say, that Marx was not even aware of the problem. He assumes that labour and capital mouves alone to the best possible use, there is no human decision making necessary. The three thick volumes of Karl Marx are called The Capital and not the The Capitalists. The capital moves the world, not the capitalists, human beings, see also methodological approach.]

The theory of the ordoliberalism is quite simple, actually it is nothing else than a simplified and reduced version of Adam Smith. Simplified and reduced because Adam Smith covers a broad range of issues, while Walter Eucken has only one topic on its agenda: the economic order and he needs 140 pages out of almost 400 to explain what can be explained in a few sentences.

The optimal use of resources is only possible, if all the information available are actually used and this is more successful by decentral information processing through prices than by central planning, because individuals are almost better informed about their personal alternatives, what the can do and what they can't do, about the concrete circumstances, about possible cooperation partners, about the time needed to adapt to a new production structure, their financial situation, the preferences of the market etc. etc. than a central planning commission and they will realise any change long before the central planning commision does and hundred of millions of people who make the necessary decisions on their own are much faster than hundred of millions of people who are waiting for new orders. It the prive of petrol increases, hundred of millions of people will react based on their personal situation and the circumstances. They will buy less consuming cars, the car industry will produce less consuming vehicles, plastic will be substituted by renewable raw materials, houses will get besser isolated, the farmers will grow more corn to convert it in bio fuel, more solar energy will be used, more people will use public transport or share the car on their way to work etc. etc.. No central planning commission can do that as fast and efficient as the hundred of millions of individuals who make decisions on their own driven by personal incentives: Increasing their profits or use the resources in a way they get the maximal benefit.

The market mechanisms exercise an effective, objective and very efficient control. In a market economy the personal interest and the general interest are compatibel. The case of bureaucracies is different. The costs of the products and services offered by a bureaucracy are normally unknown and normally a controlling system is not even implemented. University for instance always agree that they need more money, from an increase of academic fees or by an increase of governmen aid, but they never know what a university place actually costs and still less if it can be offered more efficiently, for instance by making more use of the possibilities of e-learning. They are not even interested in knowing it, because they wouldn't benefit from it. Their remuneration doesn't depend on efficiency.

More than Adam Smith, who already saw this problem, Walter Eucken emphasized on the tendency of market economies to abolish themselves. A pillar of the market economy is competition, but entrepreneur prefers price agreements that are higher than the price we would get under competition.

The writings of Walter Eucken are full of theoretical overhead and long discussions about things like the spontaneous order, not actually organised by anybody, and imposed order, something similar to the rules that steers the traffic, a large debate about the question that a certain order only allows to predict a certain pattern, but not a quantitatively measurable result and things like that. However that changes nothing to the fact that the basic ideas are older than the green hills of Africa.

There is no doubt, that decentral information processing through prices is a basic pillar of any economy, however this is not questioned by nobody, and especially not by Keynes, although Walter Eucken insinuates, see below, see opposite.

The basic problem with ordoliberalism and similiar line of thinking as the social market economy is that concerning capital, interest rates, money and savings he relies completely on the classical theory and concerning these issues the classic concepts are completely and obviously wrong, completely wrong, see the little book downloadable from the start site of this website.

The basic assumption of the classical theory about capital, interest rates, savings and money can be summarized in a few sentences, for a more detailed discussion see interest rates.

The classical theory assumes always full employment. In a situation of full employement it is not possible to increase the production of capital goods without reducing the production of consumer goods and the other way round. That's obvious and correct. The only way to increase the production of capital goods and increase therefore economic growth is by reducing the production of consumer goods. Saving is therefore needed, because it reduces consumption and therefore the resources needed to produce capital goods.

In order to induce people to save more and to waive consumption in the present in order to an increase of consumption in the future they have to get a recompensation for their sacrifice and that is the interest rate. The higher the interest rate, the more people will save and the more can therefore be invested. In this logic the interest raste is indeed a price in the meaning of a market economy, it has a useful steering function.

The situation changes completely in a situation of underemployment as it is addressed by Keynes. In a situation of underemployment the trade off between consumption goods and capital goods doesn't exist any more. If we have the necessary resources we can produce more capital goods keeping the production of consumer goods at the same level or even increasing it. Saving, in other words a reduction of consumption, would only deteriorate things. Less consumer products would be produced and unemployment would increase. In this situation it doesn't make any sense to increase the interest rate, the situation would deteriorate.

What would actually make sense is lowering the interest rates, what is the same thing as injecting money. Lower interest rate means that the hindrance for new investments is lower. Few houses are built, if the interest rate is 20 percent and the loan has to be paid back in 5 years and a lot of houses are built, if the interest rate is 0,5 percent and the loan has to be paid back in 150 years, to make this point clear with an extreme example. In a situation of unemployment interest rate are not a price in the sense of a market economy, the don't signal scarcitiy, because money can be produced at any amount and the only thing that has to be guaranteed in the long run is that the money produced at the moment of granting the loan is destroyed afterwards when the loan is paid back. Walter Eucken and all the similar lines of thinking didn't really understood the role played by money and they don't distinguish between 'capital' and money.

But even under the presumptions of the classical concepts, the theory is wrong. Walter Eucken and the other similar lines of thinking assumes that the interest rates have an impact on the allocation of resources. That would only be true, if 'capital' were a scarce productive factor, something like (qualified) labour, land or raw materials. But 'capital' is actually money and money can be printed at any amount and something that is not scarce, can be used in just any way and whatever the interest rate, the really scarce resources, qualified labour, land or raw materials, will be used efficiently, because the more profitable investment can pay a higher remuneration and therefore attract the needed resources, see natural price / market price. The interest rates play only a role in case of full employment. In a situation of underemployment it is just a hindrance for investments and nothing else.

Beside this fundamental problems of the classical theory Walter Eucken sticks to, there are some others.

  1. If an institutional investor, in general bank, grant a loan or not has nothing to do with the profitability of the investment or project. The loan is not given to the investor with the most profitable project, but to one who can offer the securities. Profitability is a criteria almost irrelevant. That means that 'capital' will not flow to the most profitable use, but to the most secure use.
  2. Investments in really innovative projects are risky, because very few information are available. Institutional investors will therefore always decide against innovation, except the investor can offer securities. This is not going to work in the long run and banks will play a lesser role in the future and will be substituted by venture capitalists.
  3. Most investments are not financed by loans or other type of external capital, but by allowances. In other words companies use the money they earned with the old machines to substitue them by new ones. The idea of David Ricardo and the classical theory is that capital flows to the best use, but this is not going to happen in the case of investments financed by allowances. A company in general is well informed and has the right people for a certain business. They can't invest in something else however profitabel this something else might be and even earnings will be invested in the same branch. Innovations will not be financed with not consumed income of the past, but with money.
  4. Eucken assumes, in total agreement with the classical theory that investments are only possible if consumption is reduced and consumption is reduced by higher interest rates is only true in a situation of full employment. (If we want be precise, see Schumpeter and the chapter about dynamic economies, it is not even true in a situation of full employment.) The correct version is Keynes: Higher investments LEADS to higher savings and not the other way round. That sounds astonishing, but that is what happens every day. An investor goes to a bank and the loan it grant him is generated money out of NOTHING. The saving is going to happen afterwards and in the future, when the loan is paid back. Part of the income generated by the investment has to be used to pay back the credit and can't be consumed.

Müller-Armack died in 1950. If he had lived a few years more, he would have realised that something with his thesis doesn't work. If Germany would had relied on prior saving or the ERP (Marshall Plan) it would had taken ages to reach the living standard before world war II, because there were no savings left and injecting just money in the way the ERP program did, has almost no impact on economic growth, beside the fact that the sums involved where ridiculous compared to similar equally ineffectiv measures, like for instance the funds steered by European Community. Without the necessary know how money is useless and given the know how, money can be produced.

Sticking to classical concepts about 'capital', 'money' and interest rate, see interest rates, he got to completely erroneous conclusions. (The case is actually still more strange. His erroneous ideas about the interest rates impeded him completely to interpret correctly the historical fact or, more precisely, to take them into account.)

Ein anderes Beispiel: Die Politik des niedrigen Zinses, wie sie z.B. in Amerika im fünften Jahrzent unseres Jahrhunderts getrieben wurde, ermöglichte nicht nur die Preissteigerung, sondern löste damit auch die Tendenz zu Preiskontrollen und zu zentralverwaltungswirtschaftlicher Lenkung aus.

Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen, 2007, page 220

Another example: A policy of low interest rates as the one of the United States in the fifties of our century (he refers obviously to the 20th century) did not make only possible a inflation, but triggered as well a tendency to control the prices and central control.

What he means is obvious. In case of full employment lowering the interest rates can lead to a consumption and investment level that exceeds the productive potential. This is a nice theory, but it actually never happens. Low interest rates can lead to higher debt burden of private households, companies and government, but almost never to inflation. In modern economies this is only possible, if the government restricts at the time the import of goods, because the global economy can satisfy almost any demand.

It is not to be expected that a wrong theory fits with the data and obviously this is not the case. Inflation in the United States in the years fifties is due to a fixation of prices during world war to, see (US history 1950 - 1975). After world war two it was not possible to move immediately from war production to civil production and inflation allowed the companies to get the money they needed to invest.

(Short explanation of this mechanism: If the companies rise the prices and it takes some time for the labour union to adapt the wages, the companies earn mor money for a short period of time.)

Phenomenons of this kind could explain inflation, although this interpretation doesn't fit with the historical data either.

What actually happened was the opposite than what is affirmed by Walter Eucken. In the fifties the interes rates INCREASED, but inflation was exceptionally LOW. The interest rate in the USA were 5 percent in the fourties, 2 percent in the fifties and 3 percent in the sixties, see Average Annual Inflation Rates by Decade.

2 percent inflation rate is very low and almost incompatible with a market economy. If the prices should signal scarcity, then some prices has to increase and this increase of prices will be stopped when the underlying scarcity diminishes, because the production adapted itself. However in order to get an inflation of zero, some prices has to fall and that never happens in the long run.

From a historical point of view the affirmation of Walter Eucken is just nonsense.

The theory of Walter Eucken has a certain relevance for the year 1940 - 1949, but this has nothing to do with the interest rate. If a large amount of resources is used for the production of arms it is obvious that less resources are disposable for the production of consumer goods and their prices will rise and if the government injects more money, the inflation can actually happen, because there is enough money.

With Walter Eucken we have the same problem as with Friedrich Hayek or Alfred Müller Armack and similar lines of thinking. They never make clear on which basic assumptions relies their theories. We can therefore only assume what they assumed. Perhaps Walter Eucken was thinking in the concept of natural or normal interest of Knut Wicksell.

The logic is simple, although completely wrong. Wicksel distinguishes between the profit of an investment, a real variable, and the money interest rate, the price people have to pay for money, a monetarian variable.

If the interest rate is lower than the profit companies will obviously invest. Therefore the governmen or the monetarian autorities, whoever is responsible, can lower the interest rate and induce investments. However Wicksell assumes that something like a 'natural' interest rates exists. This is the interest rate that equals the profit. If for instance the overall profit is three percent than the natual interest rate is three percent as well. If the government injects money the interest rate can fall below the natural interest rates and investments will increase beyond a sustainable growth, because the consumption and investment exceeds the productive potential. This will lead to inflation. If the monetary authorities are not willing to feed this inflation, the money for transaction purposes will increase, less money will be disposable for investments, interest rates will rise and the investments made in times of low interest rates will not be profitable any more, companies will go bankrupt and the economy is in recession. The final cause it that savers are not willing to reduce their consumption to a level compatible with the intentions of the investors. Wicksell assumes full employement, but this is an unreal assumption.

This is a more sophisticated version of the quantitive theory of money, the result is almost the same, and is a more detailed description of the monetarian transfer mechanisms, missing completely in the simple quantitive theory of money.

The problem is that a 'natural' interst rate doesn't exist. If there are idle resources the profit can even be zero. It is enough if the entrepreneur gets some money for his commitment and the banks can cover the administration costs and the risks. The savers have nothing to do with that issue, because their savings are not needed. To put it in a more simple way: Any investment, that allows to pay back the loan, is usefull. There is no doubt that the money created at the moment where the loan was granted has to be destroyed afterwards, when the loan was paid back, but this is actually the only condition an investment has to comply to.

However the Wicksell mechanism is useful, because he distinguished at least between 'capital', in other words real capital used for productive purposes and money. The author would say that Schumpeter was nearer to reality, but Wicksell is a step forward. Walter Eucken and Alfred Müller-Armack were a step backwards. Clearer than Wicksel Schumpeter realized that an increase in investment is realized with money generated by the banking system and not with savings, defined as non consumed income of the past, although both assumed full employment.

The curious phenomenon is that Walter Eucken realized sometimes that money is not the same thing as capital, has little to do with prior 'savings' but he didn't draw from that insight the necessary conclusions. Concerning this point he resembles Adam Smith, see balance of payment.

Kreditexpansion bedeutet Geldvermehrung; Zurückhaltung in der Kreditgewährung - bei Rückzahlung früherer Kredite - Verminderung der Geldmenge. Tagtäglich entsteht in der Kreditgewährung der Banken Geld, und tagtäglich verschwindet Geld durch Rückzahlung von Krediten.

Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen, 2007, page 258

Expansion of credits means to increase the amount of money and a restriction of granting credits by paying back existing loans leads to a reduction of the amount of money. That way every day money is created by granting loans and everyday money disappears if the loans are paid back.

It is difficult to discuss the concepts of Walter Eucken, because he never defines clearly the terms used. The same problem we have with Friedrich Hayek.

The term savings can be defined in two different ways. The classical theory, the theory Walter Eucken sticks to, defines saving at non consumed income of the past. This definition leads to a whole bunch of errors about the interest rates and money, see interest rates.

The correct definition is this: Saving is the production of capital goods instead of consumer goods. This definition makes sens, because it is clear in this case that there is no need to waive consumption is there are still idle resources.

But even if we stick to the missleading classical theory, sentences like "...A policy of low interest rates as the one..." are meaningless. What exactly is a low interest rate? This problem can't resolved neither with the natural interest rate of Wicksel, because there is no change to figure out the natural interest rate.

The keynesian theory about this issue is logically coherent. In case of unemployment any investment that is productive and create jobs is useful and the interest rates should therefore be as low as possible. There is no need to have a price for money, because money is not scarce and something that is not scarce, can't have a price. It is therefore enough that the loan is paid back and the administration costs of bank as well as the risk is covered. If there are no bottlenecks, it is even enough that the loan is paid back during the period of use of the investment, see Müller-Armack and bottlenecks are not very plausible in a global economy.

If we want to understand why the classical theory is absurd, we can put it as well this way. The interest rates are just costs. If we stick therefore to the classical theory we can say as well that the construction of houses, to take an example, increases too much, if the costs of production in the housing sector decreases. There is no doubt that this would happen, but it is hard to see why this would be a problem.

There is no real need to discuss the classical concepts about interest rates, 'capital' and money, because this concepts are obviously missleading. But even if we stick to this theory, there are a lot of problems.

The interest rate in the classical theory depends actually completely on the preferences of the savers. In a situation of unemployment and a low living standard of the masses that can be fatal. If the rich need a very high interest rate in order to save money, very little investments would be realised, because very little investments would skip over this hindrance. This is the kind of situation we had in the 17th century, where the only group able to save money were the aristocrats and they consumed almost everything they had. Adam Smith was well aware of this problem, but the only solution he had to resolve it, was to appeal to the "moral" of the people, see productive and unproductive activities. It is therefore a big luck that no prior saving is needed to invest.

If we stick to the neoclassical theory, something we have no intention to do, the wicksell effect can even interpreted inversely. If there is a demand for something and investments are required to satisfy this demand, high interest rates will lead to high prices, because only high prices allow to service the loan. As in the case before lucky enough there are no savings needed to invest and there is no need for inflation in order to make the needed adaptation possible.

The next problem with this theory is, that countries with low interest rates have an advantages. It two countries are competing, one with high interest rates and another with low interest rates, the company in the country with low interest rates is better off.

It is well possible that in countries with high interest rates the inflation rate is inferior. If there is no investment at all for instance and the economy is in eternal recession, there is no inflation, but inflation rate is not a useful goal. The goal is economic growth. The interesting question therefore is not if low interest rates lead to higher inflation rates, but the question whether low interest rates leads to higher economic groth in the long run and there is a strong evidence that this is the case. In developping countries interest rates are much higher than in developed countries. The monetarian authorities in these countries very often stick to the classical model. The higher the interest rates, the higher the saving, the higher the savings, the higher the investments and the production of capital goods and therefore economic growth.

Things get worse this way. Developing countries has a low productivity and therefore only investments are possible with a low profit rate. High interest rates are a hindrance. High interest rates may increase savings, but the highly profitable investments needed to absorbe these savings doesn't exist in these countries and with hight interest rates the less profitable are difficult to realize.

Economic theories and the thousands of never discussed discussion papers produced every day that appears in hundred of "scientific" journals abstracts from the concrete production structure. It is hard to imagine, that high interest rates can make sense, apart from a situation of full employment or bottlenecks. However there are a lot of arguments that suggests that interest rates has to be low.

High interest rates tend to leas as well to a strong currency. High interest rates will attract foreign capital, that means that investors will buy this currency and their value will increase. That makes it still more difficult for the national companies to compete.

Low means concretely near zero. The classical theory has to production factors, capital, land and labour. However in practice capital is money, money can be printed at any amount and is therefore not a scarce production factore and the price for money, the interest rate, is therefore not a price in the sense of a market economy. Land is almost irrelevant in developed country and therefore only qualified labour is a productive factor, IN OTHER WORDS KNOW HOW. It is crystal clear that nor an increase in demand nor lowering the interest rates will resolve any problem or reduce unemployment if a nation can't satisfy this demand and the interest rates can be zero, but this is of no help if nothing productive, allowing to pay back the loan, can be done with the idle resources. Low interest rate are a necessary condition for economic growth, but not a sufficient condition.

In the theory of Wicksell a low interest rate, low means in this case lower than 'natural' interest rates or the (monetary) marginal outcome of capital leads to inflation because the productive potential is exhausted. In the keynesian theory, more realistic, the interest rates can and have to decrease until we reach full employment.

The difference between Wicksell and Keynes is therefore not a mere economic question. The basic question is how much time does it take for the productive structure to react on an increase in demand. Wicksell assumes that this adaption is only possible through an improvement in the production structure, techonological advance, better qualification, more efficient organisation etc.. A decrease of the interest rates will lead to an exceed of demand. Keynes assumes that there are resources that can be used productively, but they are not productive enough to afford high interest rates and the author would say, that Keynes is right. For a more detailed discussion see Müller-Armack.

The author would say that it is impossible to discuss about economic problems if we abstract completely from the production structure, see also methodological approach.

A posible argument against low interest rates could have an impact on distribution.Low interest rates will lead to low savings in the classical meaning of the term. Consumption will be high and the productive potential more maxed. This can lead to a situation where the competition between the companies decreases or in other words, they can sell any amount they can produce and therefore rise the prices. In other words, they can finance their investments by higher earnings and doesn't depend, or depend less, on loans. That would have the effect that more and more means of production will be concentrated in a few hands. The problem with this is that it doesn't fit with the data. Even a dramatic and sudden increase of demand, as for instance after the fall of wall in 1989 in Germany, doesn't lead to inflation.

It is a curious phenomenon that in most articles, discussion papers, talks on TV etc. people complain about low interest rates, but never about high interest rates. It is chrystal clear that with very high interest rates reduces inflation, debt burden of the private sector and increases the value of a currency. In other words, with interest rates of let's say 30 percent there is no inflation at all, because investments will be near zero. Those who argues in favour of high interest rates overestimate inflation and underestimate unemployment.

The second reason for this phenomenon is that a certain group of people benefits from a restrictive money policy. In case of a restrictive money policy money is scarce and scarce things have a price. If the central banks increase the amount of money, they lose.

All that may appear to some readers as highly theoretical and without any relevance in real live. However that is not true. In a lot of countries, for instance in Germany, the pension system relies at least in part from the individual capital stock people built up during their working life. In other words, they save MONEY.

It is obvious that it is possible to save rice or noodle and to eat them thirty years later. People can therefore provide for their pension by saving rice. The rice they want to eat in thirty years has not to be produced when they need it. The case of money is very different. People can't consume money in the future, they can only change it for something they can consume and need. In other words it must be produced more or less at the same time it is consumed. (The only very important exception of that is housing.)

This second pillar of the pension system, the capital stock, was introduced when it became obvious that the "contract of generation", the generation who is working today pays for the pension of the todays generation of pensioners will not work in the future due to change in the demographic structure. That means that the generation in the future has to produce the products the future generation of pensioners needs and if the relationship between working people and pensioners become worse, it will become difficut to do that whatever amount of money is saved today.

A possible solution could be that the production structure becomes more efficient if more money is invested, however it is hard to see why a company should invest more today if the demand decreases due to an increased of saving. It is more plausible that they invest less.

If we want to induce the companies to invest more today and to become more profitable, interest rates has to decrease today. That reduces the costs and increase their benefits. This can be an incentive for higher investments. In other words: It is almost impossible that the pensions can be financed by a 'capital' stock.

Another strange phenomenon is the fact that we can read everywhere that unemployment is the result of wages that are to high. The idea behind is simple. Wages upon the (monetary) marginal output of labour will lead to unemployment, because no company will employ someone if the benefit they get is inferior to what they have to pay. Lowering the wages would therefore increase employment.

The same thing is assumed for capital. As long as the last unit of capital costs less than the profit it generates more capital will be employed. In this logic low interest rates will lead to the use of more capital. In a somehow theoretical scenario that would lead to an increased substitution of labour by 'capital', because capital becomes cheaper. However this is only going to happen if technically possible and it is much more plausible that labour with low productivity can be activated, if the interests rates are lower.

Beside that it is hard to see why so many people complain about high wages and so few about high interest rates. From the perspective of a company both are simply costs and it doesn't make any difference which of both is reduced.

The money paid in interest rates is to the detriment of labour. That would be efficient, if 'capital', actually money even in the classical theory, were a productive factor and the interest rate a price in the sense of the market economy, if it signals scarcity. However something that is not scarce, that is only kept scarce for macroeconomic reasons, can't have a price that signals scarcity.

The logic described in natural price / market price is true, but not valid for capital, because the underlying concept of 'capital' is wrong.

The exact sums paid for interest rates are unknown. What we know are the interest rates paid by the government, in Germany for instance 50 billions Euros. If we know that the national quota in industrialised countries is almost 50 percent, we can assume, that in total 100 billions euros are paid in Germany for interest rates. That would correspond to almost 4 percent of the german GDP.

The whole 'theory' of Walter Eucken is based on the concepts of the classical theory. In the classical theory, especially in the case of Adam Smith, 'capital' is the scarce factor and the constrain for employment, because capital is needed to employ people. In the neoclassical theory wages only have to be low enough in order to allow full employment. The (monetary) marginal output of labour decreases and only if wages decreases as well, full employment can be reached.

Therefore he has to explain why it is possible that we have capital in abundance, but investments are not high enough.

Daraus lässt sich schließen, dass Depressionen teilweise aus mangelnder Neigung zum Investieren hervorgehen, und wir wissen, dass die geringe Investitionsneigung mit der Unstabilität [sic!] der Wirtschaftspolitik und damit zusammenhängt, dass die Preisrelationen, vor allem die Preisrelationen zwischen Preisen der Produktionsmittel und Produkte, gestört wurden.

aus: Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen, 2007, page 310

From that we can deduce that depressions are in part the result of insufficient investments and we know that insufficient investments are related to the instability of the economic policy, that the relations between the prices, most of all the relation of the prices of the productive means and products, have been distorted.

The problem of all the texts of Walter Eucken and similar lines of thinking are kind of a riddle. They are so vague and unprecise, that before actually discussing the thesis, it is necessary to find out what is the thesis.

He assumes that depression has something to do with insufficient investments, however it is unclear why. Most depression are due to a sudden fall in consumption or in aggregated demand. Depression means, that given a certain productive potential, which was formerly fully employed, is now unemployed. It is hard to see why investments are needed in a situation of depression if the already existing productive potential is unemployed.

It is true that Keynes advocates as well for more investments in a situation of depression, but Keynes takes the production structure, know how, technology, organisation, intensity of competition etc. as given for the scope of his analysis.

To put it short. In a recession or depression the government should increase aggregate demand by investments, by building bridges, roads, flats and infrastructure of any kind, something that benefits the economy in the long run and is not just consumption like social transfers.

Next Walter Eucken tells us, that the insufficient investment is due to distorted price relations. There is no doubt that prices that doesn't reveal the actual scarcities lead to misallocation. If the government for instance subsidizes housing, private investors will invest in housing, although investing in computer chips is more profitable from a macroeconomic point of view.

However this is always true and has almost nothing to do with investments. If we want to find an example for this phenomenon, we can think of the housing sector, see Alfred Müller-Armack. If the government fixes a ceiling price for the rent, and he actually does in some countries, it is possible that the construction of houeses is not profitable any more, construction workers are unemployed and the economy in depression.

A similar phenomenon are licenses needed for some kind of business. Licenses for taxis, lawyers, certain craft occupations etc. prevent some people from getting into the market and increase prices. This can have a negative impact on economic growth. We will return on the topic in the chapter about Milton Friedman.

A general lack of efficiency can lead to an insufficient investment activity. In some countries that can play a role. Investments can become for instance unprofitable if the bureaucratic overhead is very high, but this has little to do with the distortion of prices.

The author assumes that the riddle what Walter Eucken actually means can be resolved by having a closer look on the last sentence:"...most of all the relation of the prices of the productive means and products, have been distorted...".

What he want to say is simple. The prices of the means of production, for instance wages, are so high, that profitable investments are no longer possible and therefore don't happen. The author assumes that by means of production he refers most of all to labour and that way we get back to the neoclassical theory: The reason of unemployment are the claims of the workers for unrealistic high wages or in other words, only highly profitable sectors of the economy can afford these wages.

The first problem with this thesis is obvious. Why the remuneration for labour can be to high, but the remuneration for 'capital', actually money, not. What is true for one 'means of production' should be true as well for the other. The logic behind that is the assumption that 'capital' is something scarce by nature. It can only be produced, if hight interest rates are high, because otherwise people wouldn't do that sacrifice and the 'capital' wouldn't exist, see interest rates. In this logic nothing can be done to lower the interest rates and therefore the interest rate is a data that has to be accepted. The truth is, that there is no means of production less scarce than capital. Capital for investive purposes is actually money and can be produced at any amount.

The question whether low wages leads to economic growth or full employment is the most controversial issue of economics. The neoclassical theory assumes that wages will fall until labour becomes scarce. If labour becomes scarce, its position in the bargaining process improves and wages will be stabilized. The problem with this theory is that it depends on the demand when it comes actually scarce. If four any reason people prefer to save money instead of spending it, the supply for labour would largely exceed the demand for labour, workers are in a very bad bargaining position and wages will remain on subsistence level. In order to increase the wages it is therefore needed to increase the demand.

Classical theory assumed, see Say's law, that a situation where the income is not spent either for consumption or investment is not rational and is not going to happen. With this theory there are two errors: First of all, even if all the income is consumed or invested, the level can be to low to reach full employment. Second: In a situation of insecurity it can be very rational to not spent the money at all or to spent it in liquid assets, that no impact on growth or employment. We will return on the issue in the chapter about Keynes.

If we compare the book Principles of Economic Order, published in 1952 with his writing before world war II we can say that he learned something. He doesn't say any more that social security systems are counterproductive because it prevents workers from adapting themselves to changes in the production structure and keeps wages at a level that is incompatible with full employment. Now he speaks of a distortion between "the prices of the productive means and products". That sounds better, but the meaning is the same.

Walter Eucken as well as Alfred Müller-Armack has to be interpreted in the context of the post world war II situation in Germany. A political party that would have said bluntly that wages are to high would had commit suicide. For propaganda purposes something like a "third" way was needed, something that suggests that this new theory resolved all the problems of the past 200 years.

Beside that we can assume that Walter Eucken was ambitious. If he had just said, that since 200 years all nations made an attempt to conciliate efficiency and social stability, what is actually the case, he wouldn't had become not even in Germany and people like Walter Eucken talk a lot about competition, but don't have any real working experience. Most of them would go bankrupt in two weeks.

It is a curious fact that Walter Eucken tells us over several hundred pages that the government has to intervene in order to maintain a sufficient intensity of competition to tell us at the end, that a change in the production structure led to an increase of competition because the relevant market is the world.

It the relevant market is the world, there is always enough competition even for companies like Microsoft or google.

Durch die außerordentliche Verbesserung und Verbilligung des Verkehrs wurden die vielen lokalen Märkte ineinandergeschoben und verloren ihre Selbsständigkeit. Anbieter traten miteinander in Konkurrenz, die früher lokal getrenne Oligopol- oder Monopolpositionen hatten.

Walter Eucken, Gründzüge der Wirtschaftspolitik, Tübingen, 2007, page 227

Due to an extraordinary improvement and due to the fact that the transport has become more and more cheaper the formerly local markets has been approached and lost their independence. Formerly oligopols and monopols in local markets are no competing with each other.

In this sense the unification of Europe had a greater impact on the maintenance and strenghtening of competition than all the monopoly authorities of all the europe countries together. Beside technical improvements in the logistic, trade barriers of all kind disappeared.

The author would say and already said it very often that it is useful to consider economics as a transversal science. He doubt that a pure quantitative approach can help, if the chances in the quantitative measurable parameters are due to qualitative chances.

However each thing on earth has its time and it is not a good idea to mix up everything with everything in vague gossip.

Von ganz verschiedenen pagen her liefen die Gedanken zusammen, aus denen sich schließlich der Glaube an die Zwangsläufigkeit der Geschichte entstand. - Man denkt in erster Linie an Hegel. "Das Werden ist der erste konkrete Gedanke, wohingegen Sein und Nichts leere Abstraktionen sind", sagt er selbst zur Bezeichnung seiner Grundposition. Alles Wirkliche erscheint ihm als Entwicklung des Geistes, die sich mit dialektischer Notwendigkeit vollzieht und die durch die Logik erfasst werden kann. Die Vernunft ist für Hegel nicht mehr eine stabile Größe; sie entwickelt sich in der Geschichte.

Walter Eucken, Gründzüge der Wirtschaftspolitik, Tübingen, 2007, page 200

From different sides lines of thinking emerged stating that the course of history is determined. Hegel is the most prominent of this line of thinking: "Becoming is the first concrete thought, whereas being and nothing are empty abstractions", Hegel himself describes his basic position. All what is true he believes to be the development of the spirit evolving with dialectical consequence and that can be described by logic. Reason is for Hegel not a stable entity, but evolves in history.

It is to assume that Walter Eucken copied this thesis from Karl Popper. The most popular work of Karl Popper, The Open Society and its Enemies appeared 1945 and in this book we find the same thesis. For Karl Popper the philosophy of Hegel is the most prominent example for what he called the ennemy of the open society, in other words the most prominent example for a kind of thinking that considers the course of history determined by economic / social laws as stable as natural laws, see Karl Marx. Karl Popper as well as Walter Eucken were members of the Mont Pèlerin society, founded in 1947.

Concerning the quotation of Hegel the problem is well known. Non professional philosophers like Walter Eucken or Karl Popper have a certain tendency to put things out of context. The quote from Hegel is not really spectacular and even accessible with common sense. At the beginning, without development, being and nothing is actually the same. A baby, to put things more clearly, knows very little about her- or himself. It is only in the course of life that he learn who he is. If he really can learn who he or she is, depends on the circumstances. If we want to criticise Hegel, we have to do it on a more abstract level. 'The spirit of the world' unfold itself in the same way in any individual. That can be doubted.

The paragraph seems to be taken directly from Karl Popper. Popper already criticised that the terms reason and logic refers to something objectively true, but in the philosophy of Hegel one thing can be as true as the opposite. The next problem is, that Hegel assumes that nothing actually 'new' will happen in history. What is going to be the 'spirit of the world' in the course of history, already existed at the beginning. The 'spirit of the world' only 'unfolds' itself in history.

Beside the fact that all that is completely irrelevant in the context of economics it is indeed a point of view incompatible with the 'open society', where the end of history is open. However the same thing could be said about religion. All religions have very clear ideas about the development on this earth and beyond this earth. We will return on the issue in the chapter about Ernst Bloch.

To put is short: We understand that Walter Eucken wanted to show us that his father was a university professor of philosophy and that he obtained the nobel price for literature, but if someone wants to write a book about Hegel, than he can write a book about Hegel. Mention him out of context is ueseless.

Beside that he commits the same error as Karl Popper. Nor Marx nor Hegel were responsible of anything, because no politician has ever read them. Those who believe that Erich Honecker had ever read Marx or Hegel believe as well that cows can play guitar and dance flamenco or that the majority of christians had read the bible.

Still more surprising is the fact that Walter Eucken and similar lines of thinking criticises the general assumption that the course of history is determined by universally stable economic and social laws, as stable as the physical laws that keeps the planets in their orbit. Excluded from any critics is always the neoclassical theory, although the neoclassical theory has the same problem as the hegelian philosophy. Almost any situation in the realworld is compatible with this theory, because almost any situation can be interpreted as an equilibrium. In some cases the equilibrium on the labour market is reached with 10 cent an hour and in another situation with 10 dollars an hour or 50 or 100. The equilibrium can be find by abstracting completely from the real world on a piece of paper. We can completely abstract from any qualitative change in the production structure, equilibriums can be find easily on a piece of paper.

In the best of the worlds, in the world of the ordoliberalism where the competition governs, free from al kind of monopolies, trusts and government intervention, the entrepreneur moves along guided by prices as ants by pheromons from the beginning to the Final Judgement.

Actually there is only one difference between the ordoliberalims and the neoclassical theory. In the neoclassical theory full competition and transparency is assumed and in ordoliberalism not. Therefore the neoclassical theory shows us, what can be achieved if ordoliberalism is successful. The problem is, that even under the assumed ideal conditions of the neoclassical world, some basic concepts are wrong. If capital is actually money and not scarce, than the money market dominates the labour market and not the other way round.

In other words: The labour market doesn't depend on the preferences of the savers who make 'capital' only available, if they get a certain price for it. The money market provides the 'capital' needed and the interest rate is a politically determinant variable, see the little book downloadable from the startsite of this website.

We admit that ordoliberalism is not about equilibriums. The ordoliberalism is not about goals. Entrepreneurs can go from A to B whatever A or B is, but the have to respect certain rules. However it is unclear what A or B could possibly be except an equilibrium. The realy interesting questions, how to improve technological progress, how to improve the transfer of know how, how to improve the education system etc. etc. are not discussed. If there is no qualitative change, if we assume the ceteris paribus clause to be true, the only possible goal can be the equilibrium and there is little difference between the neoclassical theory and ordoliberalism.

For someone whose main problem is competition, the following paragraph is really stunning. Without customer duties and other barrieres there is almost no need for anti-trust laws. At a world wide level competition is always high enough. The few exceptions we discuss in the chapter about Alfred Müller-Armack.

Derartige Zölle [er meint Zölle, die nicht prohibitiv wirken, also die Einfuhr noch möglich ist] zerstören die Wettbewerbsordnung nicht unmittelbar. Sie wirken wie die Vergrößerung der Entfernung zwischen den Ländern. Sie verschieben die Preisrelationen. Aber sie machen es nicht unmöglich, dass das Preisniveau der vollständigen Konkurrenz die Wirtschaftslenkung vollzieht. Insoweit sind Zölle mit der Wettbewerbsordnung vereinbar.

Walter Eucken, Gründzüge der Wirtschaftspolitik, Tübingen, 2007, page 267

Customer duties of this kind [he means customer duties that are not so high that imports are made imposible] don't destroy competition completely. They have the same effect as a greater distance between one country and another. The relationships between prices are changed, but the price signals are still strong enough to allow competition to steer the economy. So far customer duties are compatible with competition.

This is obviously nonsense. Customer duties are never compatible with competition and the consumers see that always in a different way than Walter Eucken, because he pays the bill.

What we can say is that in the case of an expansive fiscal policy governments should have the right to defend themselves against a deficit in their balance of payment, because otherwise all or a part of the secondary effects would flow out to foreign countries. The government would keep the increase of the debt burden, but the positive secondary effects would happen in foreign countries.

This is obviously not Adam Smith, because Adam Smith, although he was a customs inspector and we have therefore a little difference between practice and reality, was against all kind of customer duties.

This problem exists until today. There is a little problem between theory and practice. Officially all governments of the industrialised countries are against customer duties, but in practice it is different. In most industrialised countries it is for example possible to import crude cacao beans, something they don't have, but on any import of higher elaborated products customer duties are imposed. This way it is guaranteed that all the value added is realised in the developed countries.

This is not even helpful for the importing countries. If countries like Gambia don't have a chance to earn money, they can't buy foreign products.

The next paragraph is equally stunning. It is true that the intensity of competition increases, if the production structure can adapt itself quickly to a changing demand. It is difficult to increase the prices if higher prices will attract immeditately new competitors. But that relativizes the role to be played by the government in maintaining competition.

We would say, that Milton Friedman is right. All the problems Walter Eucken wants to be resolved by the government are best resolved if the gouvernment just doesn't do anything, see Milton Friedman - Monopoly.

Durch die neuere Entwicklung des technischen Wissens hat der moderne Industrieapparat in hohem Maße an Fähigkeit zur Anpassung gewonnen. Die Fähigkeit der Fabriken der weiterverarbeitenden Industrie, rasch von einer Fertigung zur anderen überzugehen, also den Markt zu wechseln, ist stark gewachsen.

Walter Eucken, Gründzüge der Wirtschaftspolitik, Tübingen, 2007, page 228

Due to the recent development of the technical know how the industrial apparatus of today has increased its capacity to adapt itself. The capabilies of the companies to switch from one production to the other, in other words to change the market, has increased significantly.

From this perspective even the classical idea that 'capital' moves to the sectore where it can obtain the highest profits becomes some relevance. If 'capital' first has to become money in order to be reallocated, the thesis is not very plausible, because in this case there is no need to reconvert it in money to make new investments possible. It can just be printed, that's easier and less painful, see Joseph Schumpeter.

But if we understand by capital existing machines, building, tools, raw materials that can be used for other scopes without modify them, the thesis make some sense.

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ordoliberalism: some annotations to Wealt of Nations

Ordoliberalism as well as the social market economy is nothing more than some annotations to Wealth of Nations of Adam Smith. The fact that this lines of thinking are presented as "third way" between socialism and capitalims is due to the circumstances after world war II. Actually it is nothing else than neoclassical theory, but ordoliberalism or, even better, social market economy sells better.

Compared to Friedrich Hayek and Milton Friedman there is a difference. Hayek and Friedman considers the government as the biggest risk for freedom and therefore they are as well more cautious concerning antitrust laws or similar measures. For Walter Eucken and Alfred Müller-Armack the biggest meanace for a free market economy is the inherent tendency of this market order to eliminate competition.

The basic problem with ordoliberalism and similar lines of thinking is the fact that they rely on the same misleading concepts concerning capital, interest rates, money and saving than the classical theory. Keynes is completely disregarded.

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