I. INTRODUCTION
Interest in the history of economic thought may come from many sources. One of them is the desire to understand the origin of current ideas and policies. A striking example of this is the reception of German ordoliberalism. Long neglected, this particular variant of neoliberalismFootnote 1 has received renewed attention because of Germany’s controversial role in the Eurozone crisis that started in 2009.Footnote 2 During the crisis, the positions taken by Angela Merkel’s government on key issues such as public spending, structural reforms, and monetary policy were questioned on both economic and political grounds (e.g., very prominently by Paul Krugman and Martin Wolf in their respective newspaper columns).
Observers were quick to attribute Germany’s approach to handling the crisis to an unwillingness to accept the basic paradigms of John Maynard Keynes (e.g., Bibow Reference Bibow2018; Blyth Reference Blyth2013; Dullien and Guérot Reference Dullien and Guérot2012; Wren-Lewis Reference Wren-Lewis2012). As the Financial Times put it succinctly: “German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes” (Münchau Reference Münchau2014).
How did this rejection of Keynesian ideas come about? The authors quoted above all argue that it originated from the Freiburg School of the 1930s and 1940s, a group of economists and lawyers who developed their theoretical and policy stance in opposition to National Socialism. The group’s main representative was the economist Walter Eucken (1891–1950).Footnote 3 The ideas of the Freiburg School, better known today as “ordoliberalism,” provided the basis for Germany’s social market economy that was implemented after World War II. It has long been maintained that they also hindered the development of Keynesian thinking in Germany (Allen Reference Allen and Hall1989).
As described by Peter Bofinger (Reference Bofinger, Bratsiotis and Cobham2016, p. 8), German economic discourse and policy adhere to a “specific paradigm of macroeconomics which was developed by Walter Eucken and which is diametrically opposed to Keynesian economics.” He identifies three main components of this paradigm, namely “an almost religious fixation on balanced fiscal budgets,” “a very strong preference for price stability,” and the “conviction that flexible prices are the most important contribution to the solution of unemployment problems” (Bofinger Reference Bofinger, Bratsiotis and Cobham2016, pp. 8–9). While the interpretation that Eucken developed a competing macroeconomic paradigm is not shared by everyone (e.g., Landmann Reference Landmann, Beck and Kotz2017), the notion of an antagonism between Eucken and Keynes persists in the literature about Germany’s role in the Eurozone crisis.Footnote 4
Should Eucken be regarded as a kind of German Anti-Keynes? When investigating this question, a clear limitation is that Eucken engages very little with the arguments of his more famous contemporary.Footnote 5 Most importantly, he seems largely unaware of the profound impact of The General Theory of Employment, Interest and Money (Keynes Reference Keynes1936). In Eucken’s two main works—published in 1940 and 1952, respectively—the General Theory and its German translation are cited a total of five times (Eucken [1940] Reference Eucken1950, pp. 339, 343; [1952] Reference Eucken2004, pp. 236, 350, 361). All five instances are extraordinarily brief. Perhaps Eucken wanted to more thoroughly consider the General Theory in later publications that he could not finish due to his early death. This is, however, speculative as there is no evidence in the Eucken papers regarding this possibility.
In the following, we challenge the notion of an antagonism between Eucken and Keynes by making two arguments. First, we recall the little-known fact that Eucken supported a fiscal stimulus program at the height of the Great Depression; and second, we analyze his critique of full employment policy, which shows that Eucken’s approach to solving macroeconomic problems is fundamentally different from, if not necessarily contrary to, that of Keynes.
Regarding the first argument, Eucken was in favor of the Lautenbach plan, a fiscal stimulus package designed to overcome the Great Depression in Germany. The plan was discussed at a secret meeting of the Friedrich List Society in September 1931 but never implemented. It was named after its architect, Wilhelm Lautenbach (1891–1948), a senior official at the Reich Ministry of Economic Affairs. In retrospect, the expansionary fiscal measures proposed by Lautenbach and others to counteract the crisis have been described as “proto-Keynesianism” (Klausinger Reference Klausinger1999). This similarity did not escape Eucken, who referred to Lautenbach as “the German Keynes” (Eucken Reference Eucken1951, p. 59).Footnote 6 Eucken’s approval of the Lautenbach plan has been noted before (Feld et al. Reference Feld, Köhler, Nientiedt, Beck and Kotz2017; Hutchison Reference Hutchison1979), but his position has never been analyzed in detail.
The term “proto-Keynesianism” requires an explanation. Hansjörg Klausinger defines it as “the advocacy—before the publication of the ‘General Theory’—of expansionist policy, and in particular of public works, as a remedy for depression and unemployment” (Klausinger Reference Klausinger1999, pp. 378–379). While the Lautenbach plan is an example of Keynesian economic policy before Keynes, it does not follow that its proponents—including Eucken—anticipated the theoretical arguments of the General Theory. This distinguishes German proto-Keynesianism from true anticipations of Keynes in the sense of Don Patinkin (Reference Patinkin1982).Footnote 7
As for the second argument, Keynesian economics is usually understood to refer to the theoretical concepts put forward in the General Theory. One of its central ideas is that the level of employment does not depend only on the level of real wages, as was previously believed, but additionally on the effective demand faced by producers (Keynes Reference Keynes1936, pp. 23–34). As a policy implication, government intervention may be required to induce investment and move the economy towards full employment. Even though the General Theory changed economics profoundly within a short time, at least in the English-speaking world, Eucken barely discussed the book. He did, however, discuss a strategy of economic policy he calls “full employment policy” (Vollbeschäftigungspolitik).Footnote 8 Bofinger claims that “[Eucken] uses this term for a Keynesian style expansionary fiscal policy but without mentioning Keynes” (Bofinger Reference Bofinger, Bratsiotis and Cobham2016, p. 13). Thus, we will look at full employment policy and its connection to Keynes’s arguments.
As we shall argue, the opposition between Eucken and Keynes is not as clear-cut as commentators during the Eurozone crisis have suggested. First, Eucken’s support for the Lautenbach plan reveals that he recognized the need for expansionary fiscal policy in a time of deep recession. Second, we show that “full employment policy” refers to a broad variety of measures, including but not limited to Keynesian demand management. More importantly, Eucken’s discussion of full employment policy illustrates his particular rule-based approach to solving macroeconomic problems. We argue that this approach is generally compatible with Keynes’s macroeconomic approach.
The paper is organized as follows. Section II summarizes the initial reception of Keynesian ideas in German academic economics and their impact on economic policy. Section III describes Eucken’s assessment of the Lautenbach plan and his critique of full employment policy. Section IV analyzes the relationship between the ideas of Eucken and Keynes. Section V concludes with a summary and additional remarks.
II. THE INITAL RECEPTION OF KEYNES IN GERMAN ACADEMIA AND ECONOMIC POLICY
In this section, we briefly provide the historical context for Eucken’s reception of Keynes (or lack thereof). When talking about the initial influence of Keynesian ideas in Germany, it is helpful to distinguish between the influence of these ideas on professional economists—i.e., in academia—and the influence on economic policy-makers.
Let us first consider the impact in academia. The General Theory was published in 1936 and was almost immediately translated into German. Keynes was already popular in Germany because of his opposition to the Treaty of Versailles.Footnote 9 His newest work was widely discussed among German-speaking economists, both at home and abroad (Hagemann Reference Hagemann, Hagemann, Horn and Krupp2009). There was, however, no Keynesian revolution in German academia during the 1930s. One reason can be found in the drastic change in academic life in Germany after 1933. The rise of the National Socialists led to a forced political conformity (Gleichschaltung) of academics and an intellectual isolation from the outside world. The Neue Wirtschaftslehre of the Nazis was detached from international developments and geared towards providing the basis for economic planning and rearmament (Janssen Reference Janssen2012). Opponents of the regime, such as the members of the Freiburg School, were just as secluded—especially after war began in 1939.Footnote 10
In the English-speaking world, Keynesian economics radically changed the discipline in a time span of roughly ten years (Blaug Reference Blaug1997, p. 642). In Germany, this occurred with a marked delay. The end of World War II brought the end of isolation. In the following years, German academic economics underwent a transformation that “included wide acceptance of Keynes’s General Theory as well as other aspects of Anglo-American economics” (Dillard Reference Dillard and Wattel1986, p. 120). A particularly influential person to enable this transition was Erich Schneider, whose 1952 textbook Einführung in die Wirtschaftstheorie III (Introduction to economic theory III) introduced young economists to Keynesian arguments in the form of Paul Samuelson’s neoclassical synthesis. When Keynesian ideas began to dominate German academia in the early 1950s, the influence of ordoliberalism had already faded (Hesse Reference Hesse2010, pp. 48–50). Due to Eucken’s untimely death in 1950, he was never able to react to these developments.Footnote 11
German economists did adopt Keynesian thinking, although relatively late. If there were a lack of impact of Keynesian economics during the postwar years, it was because of economic policy-making. After Allied controls ended, Germany adopted the economic model of the social market economy, based largely upon the work of the Freiburg School (Goldschmidt and Wohlgemuth Reference Goldschmidt and Wohlgemuth2008). The implementation of ordoliberal ideas can be attributed in particular to Ludwig Erhard, minister of economic affairs between 1949 and 1963. One of Erhard’s closest advisors was Eucken’s student Leonhard Miksch, who drafted the 1948 Leitsätzegesetz to abolish price controls (Goldschmidt Reference Goldschmidt, Feld and Köhler2015, pp. 39–42). Together with the introduction of the Deutsche Mark, this law triggered the German economic miracle.Footnote 12 Germany’s new economic system proved highly successful, obviating the need for further policy debate for some time. Keynesian policies became popular in Germany only when the political tide turned against Erhard’s Christian Democratic Party in the 1960s.
III. EUCKEN AND KEYNESIAN IDEAS
How did Eucken view Keynesian ideas? In order to address this question, we will first describe Eucken’s reaction to the proto-Keynesian Lautenbach plan of 1931, which is one of the rare instances where Eucken deals with fiscal policy issues at all.Footnote 13 In a second step, we will discuss his critique of full employment policy.
Before the Keynesian Revolution: The Secret Meeting of the Friedrich List Society and the Lautenbach Plan
The Lautenbach plan must be viewed against the background of the deflationary policy of the Brüning government between March 1930 and June 1932. In Germany, the early 1930s were characterized by a deep economic recession, illustrated by a rise in unemployment to around 4.5 million people in October 1931 (Spoerer and Streb Reference Spoerer and Streb2013, p. 85).Footnote 14 Given the severity of the crisis, economists such as Gerhard Colm, Lautenbach, Hans Neisser, and Wilhelm Röpke argued in favor of expansionary measures including public works programs, although the ability of the government to conduct such measures was severely limited by financial and political considerations.Footnote 15
Lautenbach proposed a plan that was supposed to “break the deadlock” of the crisis and serve as an “initial spark” to ignite economic activity (Lautenbach Reference Lautenbach, Borchardt and Schötz1991a, p. 307). The plan was the subject of the secret meeting of the Friedrich List Society that took place on September 16 and 17, 1931. Among the attendees were academic economists such as Eucken, Neisser, and Röpke, but also Hans Luther, the president of the Reichsbank. Detailed minutes of the conference were kept and eventually published (Borchardt and Schötz, Reference Borchardt and Schötz1991).
The meeting was preceded by an exchange of letters between Eucken and Lautenbach. On September 1, 1931, Lautenbach sent a memorandum to Eucken entitled “Possibilities of an (active)Footnote 16 stimulation of business activity by means of investment and credit expansion.” This memorandum, which was later made available to the attendees of the meeting, is usually referred to as the “Lautenbach plan.” In a letter to Lautenbach dated September 4, Eucken comments on the plan, adding that he would like to discuss it further in person.Footnote 17 Eucken’s arguments in this letter anticipate his position at the meeting of the Friedrich List Society.
As explained in the memorandum (Lautenbach Reference Lautenbach, Borchardt and Schötz1991b), the Lautenbach plan has two elements: a public works program, combined with nominal wage and price cuts. The public works program includes the expansion of roads and railways as well as similar investments (Lautenbach Reference Lautenbach, Borchardt and Schötz1991b, p. 315). Lautenbach proposes that the government could spend 1.5 billion Reichsmark on such a program within six months, 580 millions of which would go to wages (Lautenbach Reference Lautenbach, Borchardt and Schötz1991b, pp. 322–323).Footnote 18 The program would be financed by promissory notes issued by the national railway company, i.e., a form of hidden money creation (Lautenbach Reference Lautenbach, Borchardt and Schötz1991b, p. 317). The second element of the plan is referred to as the “liberalization” (Auflockerung) of prices. It consists of an immediate lowering of cartel prices “by way of direct government intervention” and the subsequent increase in the flexibility of wages in order to increase German competitiveness (Lautenbach Reference Lautenbach, Borchardt and Schötz1991b, pp. 319–320). Lautenbach expects that a decrease in demand associated with the latter measure would be overcompensated by the public works program (Lautenbach Reference Lautenbach, Borchardt and Schötz1991b, p. 322).
During the two days of the meeting, Eucken contributes to the discussion twice. On Wednesday, September 16, he emphasizes the importance of the second element of the Lautenbach plan. In Eucken’s assessment, the liberalization of prices is necessary in order to “free the steering wheel of the economy [the price system], which is now tied down” (Borchardt and Schötz Reference Borchardt and Schötz1991, p. 146). This observation refers to both cartel prices and wages. Eucken adds that wages need to become more flexible in the sense that they need to indicate economic scarcity, which, depending on individual characteristics, could result in both higher or lower wages (Borchardt and Schötz Reference Borchardt and Schötz1991, p. 147). The conjecture that current wages do not reflect market conditions is based on the role of collective bargaining and (mandatory) public arbitration in Weimar Germany (see James Reference James1986, pp. 190–245).
When commenting on the general feasibility of the Lautenbach plan, Eucken differentiates between two scenarios. If Germany were an isolated economy, the plan would work as intended. However, in Germany’s situation, an increase in domestic demand could lead to a trade deficit, which in turn could cause a deterioration in currency reserves.Footnote 19 Despite this concern, Eucken ends his contribution with the words: “Nunquam periculum sine periculo vincitur. We are in danger … which we will not overcome without danger” (Borchardt and Schötz Reference Borchardt and Schötz1991, pp. 148–149). On Thursday, September 17, his resolve to support the Lautenbach plan appears even more pronounced: “I agree with this plan in this form, that is to say, if it is preceded by the liberalization [of prices]” (Borchardt and Schötz Reference Borchardt and Schötz1991, p. 243).
Eucken’s decision to support the Lautenbach plan surprised observers such as Miksch, who noted as much in his diary (Köhler Reference Köhler, Feld and Köhler2015, p. 71). In order to fully understand the decision, it seems necessary to consider a non-economic argument, namely, the political costs associated with the crisis. Looking back at the meeting of the Friedrich List Society many years later, Eucken emphasizes this line of reasoning:
My friends and I recommended [the Lautenbach plan] in view of the appalling situation at that time, when there were some five million unemployed. One of my friends declared[Footnote 20 ] that to continue the existing policy of contracting credit would not only entail the fall of the President of the Reichsbank, the Reich Chancellor and the government then in power, but also the end of the Republic. (Eucken Reference Eucken1951, p. 65)
In another instance, he puts it even more bluntly: “If the [Brüning government] had accepted [Lautenbach’s] proposals, there might perhaps never have been a National Socialist revolution” (Eucken Reference Eucken1951, p. 59). Eucken’s decision seems to have been motivated, at least in part, by the realization that continuing a policy of deflation was associated with political risks that may outweigh the economic risks of the Lautenbach plan.
The Lautenbach plan was never realized. Unemployment, however, continued to rise to a staggering six million people in the following winter (Spoerer and Streb Reference Spoerer and Streb2013, p. 85). Beginning in June of 1932, the Franz von Papen and Kurt von Schleicher governments engaged in expansionary fiscal policy, although on a smaller scale than Lautenbach had recommended (Spoerer and Streb Reference Spoerer and Streb2013, p. 106). It was too little too late: when the economic recovery began in the fall of 1932, a political collapse could not be prevented and Hitler’s government—which continued the policy of expansion and public works—eventually took credit for creating employment (Spoerer and Streb Reference Spoerer and Streb2013, pp. 101–109). Eucken did not only accept expansionary fiscal policy, but he also clearly foresaw what would happen without it.
After the Keynesian Revolution: Eucken’s Critique of Full Employment Policy
In the 1940s, Eucken started to refer to the expansionary policy of the previous decade as “full employment policy.” Consider this description of the German experience starting from the policies of von Papen and von Schleicher:
In 1932–3 the full-employment policy began with public works, expansion of credit, a cheap money policy, and a pegging of the exchange rate. As this policy threatened to bring a sharp rise in prices, a general price-freeze was ordered in 1936…. Prices ceased to give expression to the scarcity of goods and services on the markets. This state of affairs gave rise to the creation of a central administrative apparatus to direct the economy. (Eucken Reference Eucken1948, p. 79)
Thus, in Eucken’s opinion, the use of expansionary fiscal and monetary policy to combat unemployment contributed to Germany’s turn towards central economic planning under National Socialism. His description is historically accurate in the sense that the Nazis did decree a general price freeze in connection with the implementation of the Four Year Plan (Tooze Reference Tooze2007, p. 231). They also engaged in a form of central planning similar to that of the Soviet Union, with the exception that Germany did not abolish private property (Temin Reference Temin1991).
However, Eucken uses the term “full employment policy” not only to describe a particular historical episode. He also uses it to describe what he considers as a general strategy of economic policy. Eucken touches upon this strategy and its implications in the first issue of the ORDO journal (Eucken [1948] Reference Eucken, Peacock and Willgerodt1989), a series of talks entitled This Unsuccessful Age (Eucken Reference Eucken1951), and the posthumously published Grundsätze der Wirtschaftspolitik (Eucken [1952] Reference Eucken2004).Footnote 21
In the Grundsätze, “full employment policy” is defined as a mixture of monetary and fiscal policy measures aimed at stimulating investment,Footnote 22 namely, deficit financing, low interest rates, and credit expansionFootnote 23 (Eucken [1952] Reference Eucken2004, p. 140). Sometimes this definition is extended to include price and foreign exchange controls (pp. 142, 254). Keynes is mentioned as one of the intellectual sources of this type of policy, as is Weimar politician Walther Rathenau (pp. 57, 140). Interestingly, Eucken believes that full employment policy is currently pursued “in most countries” (p. 140). Specific examples include Germany between 1933 and 1936 as well as the US and England after 1945 (pp. 56, 165).Footnote 24 Full employment policy must be distinguished from Soviet-style central planning, which Eucken discusses under the heading of the “centrally administered economy” (Zentralverwaltungswirtschaft).
Eucken has two main objections against full employment policy. The first objection is that it endangers the information function of the price system. Eucken explains that the price system acts as a “calculating machine” or scarcity indicator that coordinates individual actions by providing information about the most effective use of resources. This ensures a rational organization of the production process, extensive division of labor, and, ultimately, an optimal provision of consumer goods. The latter goal is what Eucken refers to as the “real … purpose of economic policy” (Eucken [1948] Reference Eucken, Peacock and Willgerodt1989, p. 44).
According to Eucken, full employment policy tends to compromise or disable the control mechanism represented by the price system.Footnote 25 This basically follows from the definition given above: the measures listed there manipulate the information content of prices either directly (price and foreign exchange controls) or indirectly through the possibility of inflation. Eucken warns that as a result of compromising the price system, labor will not be directed to its most efficient use and the economy will perform below its potential output (Eucken [1948] Reference Eucken, Peacock and Willgerodt1989, p. 44). He cites England as an example of a country where full employment policy currently prevents the price system from working.Footnote 26
Eucken’s second objection to full employment policy is even more fundamental. We have already seen that he attributes Germany’s turn towards central economic planning—at least in part—to the expansionary fiscal and monetary policy of the years 1933 to 1936. As John Jewkes notes in his introduction to This Unsuccessful Age, Eucken uses the German case to make a general argument concerning the dangers of full employment policy. In this volume, as well as in the Grundsätze, Eucken asserts the following: “Our review of German experience leads us to a grave and serious conclusion. Economic policy is faced with a dilemma: on the one hand, mass unemployment necessitates a full employment policy; on the other, the policy of full employment … forces economic policy in the direction of central planning” (Eucken Reference Eucken1951, p. 66).
Here, Eucken introduces a slippery-slope argument, saying that full employment policy has a tendency to lead to central planning—just as it did in Nazi Germany. The underlying idea is that in order to halt inflationary pressures, politicians will be forced to impose an increasing amount of restrictions on prices and the allocation of goods.Footnote 27 He goes so far as to claim that this tendency constitutes “perhaps the most crucial economic and social problem of our time” (Eucken Reference Eucken1951, p. 66). Clearly this is an overstatement. As pointed out by Jewkes, empirical evidence does not support Eucken’s argument, not even in the early 1950s (Jewkes Reference Jewkes and Eucken1951, pp. 19–25).
How can the (potential) problems of full employment policy be avoided? Eucken argues that the solution lies in a new style of economic policy that does not try to manage business cycle fluctuations but focuses on improving the overall framework in which economic activity takes place (Eucken Reference Eucken1951, pp. 94–96). He refers to this new style of economic policy as “ordoliberal policy” (Ordnungspolitik). It can be distinguished from interventionist policy-making (Prozesspolitik).Footnote 28 In the Grundsätze, Eucken proposes a specific framework of rules for a market economy that is both efficient and respectful of individual freedom. This “competitive order” is based on a number of constitutive principles, the most important of which is the functioning of the price system. Other principles include monetary stability, open markets, personal liability, and anti-monopoly legislation (for an overview, see Sally Reference Sally1996, pp. 238–240). Eucken seems confident that a market economy based on these principles will render business cycle policy largely obsolete.Footnote 29 Thus, the issue of unemployment should be dealt with indirectly by improving the coordination function of markets.
IV. TOWARD A MORE NUANCED VIEW OF THE RELATIONSHIP BETWEEN ORDOLIBERALISM AND KEYNESIAN ECONOMICS
The preceding discussion sheds some light on Eucken’s treatment of macroeconomic questions. The first topic addressed was his endorsement of the 1931 Lautenbach plan. Why did Eucken support this plan? The theoretical basis of Lautenbach’s proposal is Röpke’s distinction between two types of depression, one that is part of the regular movement of the business cycle, and a “secondary” type that serves no economic purpose while sending the economy into a tailspin. Only this secondary type should be counteracted by expansionary fiscal policy (Klausinger Reference Klausinger1999, pp. 382–385). Röpke’s assessment mirrors that of Joseph Schumpeter, who distinguishes normal from “pathological” depressions (Dal Pont Legrand and Hagemann Reference Dal Pont Legrand and Hagemann2017).Footnote 30
Eucken references the concept of “secondary depression” on the first day of the Friedrich List Society meeting. He suggests that the two types of depression may in reality overlap.Footnote 31 Eucken’s description of the current economic situation (“a great predicament … tremendously dangerous”) indicates that he, too, does not view this situation as being part of the regular business cycle (Borchardt and Schötz Reference Borchardt and Schötz1991, pp. 145–149). Eucken’s decision to support the Lautenbach plan must clearly be seen as a concession to the exceptional severity of the crisis. Another important factor in Eucken’s decision was that he was aware of the political risks associated with letting the recession run its course.
One prerequisite for Eucken to accept the Lautenbach plan was its dual character, i.e., the combination of expansionist elements with measures to increase price and wage flexibility. Eucken’s emphasis on the liberalization of prices is consistent with his later argument that the most important element of a market economy is the functioning of the price system (Eucken [1952] Reference Eucken2004, pp. 254–255). While Eucken did not give up completely on the neoclassical approach to remedy unemployment, his support for the Lautenbach plan shows that he was not nearly as dogmatic as Bofinger (Reference Bofinger, Bratsiotis and Cobham2016) suggests. Eucken’s demand that price flexibility be restored has an institutional explanation. It stems from the observation of market power exercised by both employers and trade unions. Market power is one possible source of the price and wage rigidities described by Keynes.
Eucken’s insistence on the dual character of the Lautenbach plan foreshadows the way in which Karl Schiller, the German minister of economic affairs between 1966 and 1972, introduced Keynesian ideas into German economic policy. Schiller famously described his approach as combining Eucken’s “Freiburg imperative” of competition with the Keynesian message of effective demand management (see Hagemann Reference Hagemann, Backhouse, Bateman, Nishizawa and Plehwe2017, p. 70).
Eucken’s response to the crisis appears particularly reasonable when compared with other policy proposals based on the orthodox explanation of unemployment. Consider Friedrich Hayek’s stance on the (very similar) proposal of the Brauns commission earlier in the same year. He fundamentally opposes the idea of a government-funded stimulus, arguing: “No temporary emergency measures, but only the adjustment of price relations to the given data can get production off the ground again. No trick can help to avoid the inevitable reduction of wages and the constraint on per-capita consumption of the working population that is necessary to permanently eliminate the capital shortage” (Hayek [1931] Reference Hayek and Klausinger2015, p. 505).
The second topic addressed was Eucken’s discussion of full employment policy, which Bofinger says is “a Keynesian style expansionary fiscal policy” (Bofinger Reference Bofinger, Bratsiotis and Cobham2016, p. 13). As we have seen, Eucken’s usage of the term is much broader. It also includes monetary policy tools, as well as more radical policies such as price and foreign exchange controls. For Eucken, full employment policy seems to be defined not so much by its individual measures but by the overarching decision to pursue employment over all other economic policy goals.
While Eucken views Keynes as a proponent of full employment policy, he maintains that this type of policy has been pursued before, and independently of, the General Theory. The historical example that he cites most frequently are the expansionary policies of the von Papen, von Schleicher, and Hitler governments during the early 1930s.Footnote 32 Thus, Eucken’s concept of full employment policy is not simply the same as Keynes’s policy prescriptions. One notable difference is that Keynes never favored inflationary policies, as he regarded inflation as “fraud upon the public” (Keynes [1919] Reference Keynes2019, p. 182).Footnote 33
Eucken’s discussion of full employment policy culminates in his proposal for a rule-based approach to solving macroeconomic problems. As we have seen, Eucken supported a fiscal stimulus program during the Great Depression. In general, however, his approach to policy-making is very different from that program. Ordoliberal policy aims to improve the framework of rules in which economic transactions take place. It rejects measures that interfere with these transactions directly (Eucken [1952] Reference Eucken2004, p. 242). For example, price stability (one of the constitutive principles of the competitive order) is a policy rule, while government-set prices are not.
Keynesian economic policy starts from theoretical considerations, expounded in the General Theory, of how aggregate variables in the economy interact to generate output and employment. Keynes’s account of the mechanics of this model almost immediately points to the possibility of selecting “those variables which can be deliberately controlled or managed by central authority” (Keynes Reference Keynes1936, p. 247). This, in turn, allows for a certain level of control over economic outcomes. The policies of demand management discussed in this paper are just one application of this macroeconomic approach to policy-making.
Note the difference to Eucken, whose focus is to describe a rule framework that counteracts economic imbalances in an indirect manner. As pointed out by Oliver Landmann, it is remarkable that, despite the historical experience of the Great Depression, Eucken apparently “never accepted macroeconomic stabilization as an integral element of economic policy in a market economy” (Landmann Reference Landmann, Dold and Krieger2020, p. 153). Therefore, it is fair to argue that macroeconomic stability is the “blind spot” of early ordoliberalism (Landmann Reference Landmann, Beck and Kotz2017, p. 128).
While the approaches of Eucken and Keynes are fundamentally different, they are not necessarily opposed to each other. The ordoliberal rule framework provides an important prerequisite for the functioning of markets but won’t be able to quickly offset large or unusual shocks to the stability of the economy. Such shocks are better dealt with by the policy toolkit of macroeconomics. Thus, in the spirit of Samuelson’s neoclassical synthesis, the approaches of Eucken and Keynes should be seen as complementing each other.
V. CONCLUSION
The controversy about Germany’s approach to solving the Eurozone crisis has sparked interest in the intellectual origins of German economic policy, in particular the tradition of ordoliberalism founded by Eucken in the 1930s. One way in which ordoliberalism supposedly influenced German economic thought is by impairing the expansion of Keynesian ideas. In this paper, we argue that the opposition between Eucken and Keynes is not as clear-cut as has been suggested in the literature on the Eurozone crisis.
Both scholars have a similar historical starting point, namely, the experience of economic instability and recession in the interwar era. The particular situation in Germany was illustrated by our discussion of the 1931 Lautenbach plan. As we have shown, Eucken supported this proto-Keynesian stimulus program. His reasons were twofold. From a theoretical point of view, he apparently accepted the diagnosis of a secondary depression that can and should be mitigated by a government-funded stimulus (if only in combination with price liberalization). From a political point of view, he was aware that the continuation of the crisis may result in “the end of the Republic” (Eucken Reference Eucken1951, p. 65).
Eucken and Keynes drew very different lessons from the Great Depression. The General Theory provided a new and more sophisticated explanation of the crisis, inventing the analytical apparatus of modern-day macroeconomics in the process. In this sense, Keynes’s approach to understanding the crisis must be considered a truly macroeconomic approach. Eucken, on the other hand, wanted to address the problem of business cycle fluctuations indirectly by focusing on the rules of the game of economic activity. This approach may rather be described as a constitutional economics approach. In modern macroeconomic terms, Eucken is on the rules side of the rules-versus-discretion debate.
Contrary to what has been argued in the context of the Eurozone crisis, Eucken did not develop a competing macroeconomic paradigm to Keynes. Instead, he considers macroeconomic questions from the perspective of the rules of the economic system. This can be seen from his discussion of full employment policy, where every policy measure is evaluated by asking whether it supports the functioning of the price system. The latter is the most important constitutive principle of Eucken’s competitive order, his ideal rule framework. Even the principle of monetary stability—a macroeconomic principle—is subordinate to the goal of maintaining the functioning of the price system.
It is important to point out that the approaches to economic policy represented by Eucken and Keynes are not necessarily incompatible. While the General Theory draws our attention to the fact that governments can counteract short-term economic imbalances, Eucken proposes a kind of business cycle policy that does not address current conditions at all. Instead, it focuses on providing a framework of rules that is conducive to the coordination function of markets.
