Hayek II’s Emergence: Ordoliberal Germs in the 1930s

“The years of high theory,” as George L. S. Shackle called the period from 1926 to 1939, were the formative period in Hayek’s vita. Barely aged thirty-two, in 1931 he joined LSE’s faculty and initiated several controversies, most famously against Keynes and Cambridge, but also against the market socialists on calculation as well as against Frank Knight on capital theory (Caldwell Reference Caldwell2004). In these years he experienced several disappointments after the high hopes around the move to London, not least the implosion of “his” Central Europe in the course of the 1930s (Caldwell and Klausinger Reference Caldwell and Klausinger2022). And while Hayek I the technical economist successively gave place to Hayek II the political economist, I endorse the position that Hayek did not turn his back on economics (Boettke Reference Boettke2018). In the terminology of ordoliberal political economy, he rather shifted his focus from the economic process (business-cycle and capital theories) to the economic order and the other societal orders (political economy of markets and the frameworks of their orders).Footnote ¹² After all, it was the destructive dynamics of the economic process that had triggered the politico-economic disaster of Central Europe, and the potentially stabilizing rules of the frameworks of the economic, political, and legal orders in place had failed to stop these dynamics. Laissez-faire for the dynamics of the economic process, as prescribed by the non-interventionism of Austrian Business Cycle theory, was now supplanted with a plea for “laissez-faire within rules,” where identifying the necessary rules became the central quest for the years to come.

Hayek’s interests in political economy emerged during the Depression. Already in his LSE inaugural address on March 1, 1933, a month after Hitler’s seizure of power, Hayek formulated publicly what he wrote to Mises in the letter of March 10, 1933, reproduced at the beginning of this paper: a diagnosis of the contemporaneous economist being perceived by society as “hopelessly out of tune with his time, giving unpractical advice to which the public is not disposed to listen” (Hayek Reference Hayek1933, p. 121), and a critique of classical political economy regarding laissez-faire as a maxim for liberal economic policy:

This pronouncement was the first in a chain of similar statements during the next two decades on the necessity to critically revisit the legacy of nineteenth-century liberalism in its nexus to political economy. From his publications during the 1930s, his two essays in the edited volume Collectivist Economic Planning (Hayek Reference Hayek1935a, Reference Hayek1935b) as well as his brochure Freedom and the Economic System (Hayek [1939] Reference Hayek and Caldwell1997) stand out.

Collectivist Economic Planning was called by Maurice Dobb, one of Hayek’s adversaries in the Socialist Calculation Debates, “a formidable counter-attack by laissez-faire on all forms of planning, and in particular on Socialism” (Dobb Reference Dobb1935, p. 532). While the attack was formidable and led to (at least) ten more years of Socialist Calculation Debates until “The Use of Knowledge in Society” (Hayek Reference Hayek1945), the sentence contains two incorrect claims: first, that Hayek wrote as a proponent of laissez-faire; and, second, that his two essays in the volume were an attack on all forms of planning: “To say that partial planning of the kind we are alluding to is irrational is, however, not equivalent to saying that the only form of capitalism which can be rationally advocated is that of complete laissez faire in the old sense. There is no reason to assume that the historically given legal institutions are necessarily the most ‘natural’ in any sense” (Hayek Reference Hayek1935a, pp. 21–22). And furthermore: “The question as to which is the most appropriate permanent framework which will secure the smoothest and most efficient working of competition is of the greatest importance and one which, it must be admitted, has been sadly neglected by economists” (Hayek Reference Hayek1935a, p. 22).

These passages were written very much in an ordoliberal spirit, both in substance and rhetoric, and even preceded similar formulations by the ordoliberals. Thus, I call this phase of Hayek’s political economy “proto-ordoliberal,” similar to the characterization of Röpke’s position during the Great Depression as being “proto-Keynesian” (Klausinger Reference Klausinger1999). As discussed in section II, the notion of the framework is the fundamental building block of the ordoliberal research program. Hayek underscores that the framework must be “permanent,” in line with Eucken’s plea for stable rules. Furthermore, the main purpose of Hayek’s framework is to institutionalize competition, again in line with the ordoliberals, even though their notions of competition differ. For Hayek, his type of planning is not only no illiberal compromise, but rather a systemically required component of the competitive order, the vision of a well-ordered economy he shares with the ordoliberals. Noteworthy for the later distinction between Hayek II and Hayek III, he explicitly expresses his skepticism about “the historically given legal institutions,” and just like the ordoliberals he depicts “his” planning of the economic order as “the construction of a rational legal framework for capitalism” (Hayek Reference Hayek1935b, p. 218). He positions this type of planning beyond the dichotomy of socialist planning, understood as planning of the economic process, versus laissez-faire, understood as no planning at all.

In those very years of the Socialist Calculation Debates, Hayek published “Economics and Knowledge” (Hayek Reference Hayek1937), which many have assessed as the beginning of his methodological emancipation from Mises’s apriorism (Caldwell Reference Caldwell1988, pp. 525–530). In this vein, the contemporaneous emergence of Hayek’s ordoliberalism can be interpreted as his politico-economic emancipation from Mises’s context-free emphasis on laissez-faire.Footnote ¹³ Hayek’s knowledge topos, the center of gravity for all his future work, took shape precisely in the period between “Economics and Knowledge” and “The Use of Knowledge in Society,” and thus emerged simultaneously with the ordoliberal Hayek II. His ordoliberal plea for the framework emphasizes how individuals learn to coordinate not only via prices, but also via the framework and its rules. Hereby the dynamics of coordination requires the statics of the framework. For this Hayekian combination of dynamics and statics, the notion of “learning liberalism” has been coined (Wegner Reference Wegner2008; Boettke Reference Boettke2018). And it poses two connected but distinct questions: what we need to know at a moment of time, and how we learn in the course of time.

The full-fledged version of Hayek’s ordoliberalism would only emerge in The Road to Serfdom and The Constitution of Liberty. Yet the brochure Freedom and the Economic System (Hayek [1939] Reference Hayek and Caldwell1997) was an important precursor to both books (Caldwell Reference Caldwell2020, pp. 730–731). Another adversary in the Socialist Calculation Debates, Henry D. Dickinson, was right to challenge the manifesto-like critique of socialism in the brochure for lacking “a positive programme”:

Freedom and the Economic System, whose first version appeared in April 1938 and thus a few months ahead of the Colloque Walter Lippmann, was published in a second, definitive version in 1939 in the Public Policy Pamphlet series of the University of Chicago, and it was in this second edition where Hayek introduced for the first time his notion of “men of science” (Caldwell and Klausinger Reference Caldwell and Klausinger2022, pp. 462–463).Footnote ¹⁴ The brochure contains Hayek’s critique of National Socialism and fascism with their “close kinship” to socialism as well as his warning against the compatibility of central planning and democracy. Above all, Hayek expands on his Collectivist Economic Planning essays regarding the desirability and the properties of a freedom-enhancing, learning-enabling framework.

After criticizing socialism, Hayek endeavors what Dickinson called for, namely an outline of a positive program for twentieth-century liberalism. For “the application of reason to social problems in general,” Hayek proposes “planning for freedom” as the alternative to socialist or interventionist “planning for constant interference” (Hayek [1939] Reference Hayek and Caldwell1997, pp. 194–195). And this planning puts again the spotlight on an ordoliberal permanent framework of general rules:

He interweaves this type of planning with his incipient knowledge topos by praising “the free combination of the knowledge of participants” enabled by “the construction of a rational framework of general and permanent rules” (Hayek [1939] Reference Hayek and Caldwell1997, pp. 194–195). The necessity of such a construction and the scholar’s capacity to help construct it seem to be clearly given, even though he struggles with the realization that it is “very difficult to apply it [the rational system of law] to a concrete case” (Hayek [1939] Reference Hayek and Caldwell1997, p. 194). The rules of the framework “aim mainly at the elimination of avoidable uncertainty by establishing principles” (Hayek [1939] Reference Hayek and Caldwell1997, p. 195).

Equally noteworthy in Freedom and the Economic System is Hayek’s critique of classical liberalism regarding its neglect of the framework:

This emphasis on the necessity of a framework that can be—and in this very context, must be—designed by scholars reads as ordoliberalism at its best, both in the critique of dogmatic laissez-faire in nineteenth-century political economy and in the emerging positive program for a twentieth-century liberalism.

Hayek II’s Evolution: Ordoliberal Zenith in the 1940s

While the 1930s were Hayek’s most intense period in terms of multiple intellectual controversies, the 1940s were seminal for his popularization of liberalism on both sides of the Atlantic, as well as for creating a transatlantic scholarly debating platform about what twentieth-century liberalism could mean. This section focuses on The Road to Serfdom and the intellectual debates about the competitive order at the founding meeting of the Mont Pèlerin Society in 1947. It was the phase in Hayek’s life when the urgency to redesign the postwar world was most clearly expressed: while learning remained the key process of liberal society, in this particular context of reconstructing Western democracies, political economists had to take the knowledge at hand as sufficient and help rebuild the civilization that had been almost extinguished.

Hayek spent the war years evacuated at Cambridge where he worked on the “Abuse and Decline of Reason” project (Caldwell Reference Caldwell and Caldwell2010). In the last pre-war letter to Freiburg of June 13, 1939, he consulted Eucken in the hope of profiting from his Auguste Comte and Henri de Saint-Simon expertise, figures who were foundational for Hayek’s project. The Road to Serfdom was finalized at Cambridge in 1943 as a piece of the project, and was first published in March 1944 in the UK and in September 1944 in the US (Caldwell and Klausinger Reference Caldwell and Klausinger2022, pp. 563–584). Regarding Hayek’s transition from technical economics to political economy during these Cambridge years, a 1976 preface to The Road to Serfdom is illuminating: “But though I tried hard to get back to economics proper, I could not free myself of the feeling that the problems on which I had undesignedly embarked were more challenging and important than those of economic theory, and that much that I had said in my first sketch needed clarification and elaboration” (Hayek [1976] Reference Hayek and Caldwell2007, pp. 53–54); as well as: “I had not freed myself from all the current interventionist superstitions, and in consequence still made various concessions which I now think unwarranted” (Hayek [1976] Reference Hayek and Caldwell2007, p. 55; emphasis added). So while he found his “first sketch” in Freedom and the Economic Systems so powerful that he could not return to “economics proper” after the publication of The Pure Theory of Capital in 1941, the benefit of hindsight made him somewhat dissatisfied with parts of The Road to Serfdom. What could he mean by “the current interventionist superstitions”? Perhaps his own ordoliberalism of the 1930s and 1940s? Certainly his Viennese mentor Mises, who had just passed away in 1973, would have found such a categorization appealing: Mises used to call the ordoliberals pejoratively “ordo-interventionists” (Kolev Reference Kolev, Commun and Kolev2018). And it is true that Hayek’s attitude to the ordoliberals had changed. While he retained his lifelong high esteem of Eucken, whom he mentioned in The Constitution of Liberty among the seminal personalities for his own development (Hayek [1960] Reference Hayek and Hamowy2011, p. 41), his attitude to the later Freiburg School, which he called “the Ordo circle,” became more ambiguous. Looking back at the group’s development with the hindsight of the 1980s, he spoke with skepticism of its “restrained liberalism,” which “never matured into a major movement. It lacked the inspired leader that Eucken would have been” (Hayek [1983] Reference Hayek and Klein1992, pp. 189–190).

The Road to Serfdom is imbued with the same ordoliberal spirit as Freedom and the Economic System. The interdependence of the economic, legal, and political orders, which, as outlined at the outset of section III, he had not yet endorsed during the dire years of the Depression, became foundational for the main thesis of The Road to Serfdom. The tendency towards economic illiberty is initially caused by central planning in the economic order, but subsequently becomes an excessive burden for the democratic process, which is not capable to conduct central planning and to simultaneously preserve pluralism of valuations. In other words, illiberty cannot remain contained within one order, but spills over to the other interdependent orders.

Regarding the role of the state, Hayek is in perfect harmony with the ordoliberals: designing the rules-based framework is the seminal function for the state in a liberal society, as opposed to socialist planners who also aim at planning the economic process. “According to the modern planners, and for their purposes, it is not sufficient to design the most rational permanent framework within which the various activities would be conducted by different persons according to their individual plans” (Hayek [1944] Reference Hayek and Caldwell2007, p. 85). Just as the ordoliberals, he pleads for “effective competition,” which should be “created” through the framework: “It [the liberal argument] does not deny, but even emphasizes, that, in order that competition should work beneficially, a carefully thought-out legal framework is required and that neither the existing nor the past legal rules are free from grave defects” (Hayek [1944] Reference Hayek and Caldwell2007, p. 86). This must be designed by the combination of economic and legal expertise:

To sum up the ordoliberal core of The Road to Serfdom, Hayek’s correspondence with Eucken and Keynes right after the publication of the book is helpful. Both Eucken and Keynes are generally laudatory about the book, but their suggestions go in rather different directions. They share a critique: both wish Hayek’s proposals were more concrete. But whereas Eucken presses him to elaborate the framework, “outline the most fundamental elements” of the competitive order, and “mark this difference [between the competitive order and laissez-faire] more strongly” (Eucken [1946] Reference Eucken and Leeson2013, p. 139), Keynes sees in such deliberations no effective possibility to delineate the role of the state because Hayek provides “no guidance whatever as to where to draw it [the line]” in an operational way to keep it distinct from Keynes’s own plea for “the practicality of the middle course” (Keynes [1944] Reference Keynes, Moggridge and Johnson2012, pp. 385–386).

Shortly after this correspondence, the Mont Pèlerin Society was founded in April 1947 as the outcome of joint efforts by Hayek and Röpke to enable economists, lawyers, philosophers, and historians to continue the debates about the renewal of liberalism.Footnote ¹⁵ And while the history of the society featured several controversies, the first of them already at the 1949 meeting in Seelisberg (Kolev, Goldschmidt, and Hesse Reference Kolev, Goldschmidt and Hesse2020, pp. 452–459), the founding meeting’s first session, “‘Free’ Enterprise and Competitive Order,” is of special interest for this narrative (Caldwell Reference Caldwell2022, pp. 69–98). In this session, Hayek pleaded for the competitive order together with Eucken and Aaron Director:

The papers of Hayek, Eucken, and Director (the latter stepping in for the recently deceased Chicagoan Henry Simons; see Kolev and Köhler Reference Kolev and Köhler2022, pp. 768–772) read as perfectly complementary contributions to the same research program. In 1947, Hayek was as close to Chicago and Freiburg as he would ever get—despite his forthcoming tenures at Chicago and Freiburg (Van Horn Reference Van Horn, Mirowski and Plehwe2009; Kolev and Köhler Reference Kolev and Köhler2022).

A few months later at the International University Weeks in Alpbach, Hayek explicitly applauded the research program of the ordoliberals:

In a 1948 postscript to The Road to Serfdom that was never published, Hayek called the book “an advance sketch” to the “whole system of ideas” that was on his mind at the time, and that required “a more complete exposition” (Hayek Reference Hayek1948, p. 10). Hayek embarked on The Constitution of Liberty in 1953, and the specific formulation in a letter to Fritz Machlup of November 19, 1953, is noteworthy: he was now “beginning to have definite plans for that positive complement to The Road to Serfdom which people have so long [been] asking me to do” (Hayek [1960] Reference Hayek and Hamowy2011, p. 6). “The positive part of the task” for political economists he had envisioned already in 1933 during his LSE inaugural lecture—called by Simons “a positive program” (Simons Reference Simons1934), demanded by Dickinson after Freedom and the Economic System, requested by Eucken in his The Road to Serfdom letter, and missed by Schumpeter when reviewing The Road to Serfdom (Schumpeter Reference Schumpeter1946)—finally took shape at Chicago in the 1950s.

Describing the Transition: Two Anamneses

The first, epistemological, anamnesis puts the spotlight on Hayek’s warning against “pretense of knowledge,” most prominently featured in his Nobel lecture (Hayek [1974] Reference Hayek1989). This plea for humility and against the conceit of omniscience has become a trademark in the reception of his thought, constantly used—and often abused—by today’s Hayekians. Abuse is possible once “pretense of knowledge” is swung around like a club against any designing of a certain institution, its nature and qualities. Above all, the warning against the possibility of knowing everything should not be easily turned into the opposite proposition. Hans Willgerodt, a second-generation ordoliberal, coined an elegant formulation for this risk of abuse: “pretense of knowledge” (Anmaßung von Wissen) should not and does not automatically imply “pretense of not knowing anything” (Anmaßung von Unwissen) (Willgerodt Reference Hans2004). Of all places, Hayek’s struggle with this tension can be found in the foreword to the German edition of The Constitution of Liberty, published by the Walter Eucken Institute in 1971: the scholar must plug one’s imperfect and incomplete knowledge into the discourse “at least for problems on which others work intensely” despite the imperfection and incompleteness, and despite the “diminishing return” that may follow in the efforts to improve one’s knowledge (Hayek [1960] Reference Hayek1971, p. v).

So Hayek III focused on what we do not know, while Hayek II emphasized how, in certain contexts like the 1930s and 1940s, what we have already learned must suffice to design the frameworks of the orders around us, imperfect as this knowledge must be at any point of time. Hayek III can be accused of having left behind a blind spot, which the simplifications of later Hayekians have abused into a mysticism that is difficult to reconcile with the scientific quest for knowledge. In contrast, Hayek II expressed a higher level of trust: the “database” of historical economic and legal institutions can—and in some contexts must—be used for Popperian, reformist “piecemeal engineering,” as opposed to revolutionary attempts to replace an entire order. One cannot take entire institutional systems from history and replace others (Servant Reference Servant2018), but instead only incrementally improve single institutions: “In all our endeavor at improvement we must always work inside this given whole, aim at piecemeal, rather than total, construction, and use at each stage the historical material at hand and improve details step by step rather than attempt to redesign the whole” (Hayek [1960] Reference Hayek and Hamowy2011, pp. 131–132; emphasis added).

And yet the tension remains. When precisely is “the whole” at stake, apart from clear-cut situations like 1917 in Russia or 1933 in Germany? What about the “Thatcher–Reagan revolution,” assessed by its adversaries as the radical change of the postwar politico-economic order? If so, can this institutional revolution be legitimized along Hayek III’s lines? And in contexts like the 1930s and 1940s, even “to redesign the whole” is required by the context. Here one cannot focus on we do not know; instead, what we have already learned must suffice. Hayek’s illness at the end of his life did not allow him to experience consciously the fall of socialism, so we cannot know how far Hayek III would have transitioned towards a Hayek IV, one with a higher trust in the indispensable redesign of post-communist frameworks, matching Hayek II’s trust after the end of National Socialism and fascism.

The second, categorical, anamnesis contrasts the key categories primacy of order and primacy of liberty. Hayek II’s attitude to the urgent necessity of the stable framework can be interpreted as a primacy of order over liberty, while Hayek III swapped these categories. The ordoliberals were primacy-of-order proponents: in their view, an adequate order is needed first; only then can liberty thrive within this order (Goldschmidt and Rauchenschwandtner Reference Goldschmidt and Rauchenschwandtner2018). This is congruent with Hayek II’s emphasis on designable frameworks as the main intellectual challenge during the 1930s and 1940s: Hayek II asked how society (re-)constructs the framework at a point of time. This fit perfectly into Michel Foucault’s diagnosis of postwar Germany as a “radically economic state,” where the state could gain legitimacy because it created liberal orders that subsequently enabled economic liberty that produced prosperity (Foucault [1979] Reference Foucault2008, pp. 78–88). In contrast, Hayek III’s emphasis on evolving frameworks implies a primacy of liberty: here, liberty is needed first, and subsequently it leads to the emergence of liberal orders. Hayek III asked how society learns about frameworks across time, while Hayek II asked how an economist can help society to design frameworks at a point of time.

Explaining the Transition: Two Diagnoses

If the two anamneses are correct, a diagnostic attempt at explaining what happened is required. I propose two diagnoses: first, Hayek’s ideational reality changed, and second, the material reality of economy and society changed as well.

At least two aspects transformed in his ideational reality. To begin with, Hayek’s circle of friends had altered significantly around 1950. Eucken passed away in London in March 1950 while Hayek was on his way to Chicago. However, one central reason for this move had vanished a few years earlier: Henry Simons, one of the angles in the Freiburg-London-Chicago triangle, had committed suicide in Chicago in 1946. Moreover, the relationship with Röpke increasingly deteriorated during the 1950s. Thus, the ordoliberal archipelago to which Hayek contributed his ordoliberalism during the 1930s and 1940s was no more. In addition to his contemporaneous friends, his historical friends changed as well. The immediate postwar years constituted the beginning of Hayek’s fascination with the Scottish Enlightenment, its “true individualism” and emphasis on spontaneous order and cultural evolution (Hayek [1945] Reference Hayek1948).

What is more, already in the 1940s his market-process view of competition was more dynamic than the rather static, Stackelberg-inspired market-forms view of competition shared by the ordoliberals (Hayek [1946] Reference Hayek1948). This emphasis on the dynamics of the process and the influx of evolutionary thought from the Scottish Enlightenment might have pushed him to also “dynamize” his theory of order along with his dynamic theory of the process. The Sensory Order (Hayek [1952] Reference Hayek and Vanberg2017) and his increasing interest in complexity theory turned his attention to the limits to human cognition in explaining and designing complex systems (Lewis Reference Lewis2016). Thus in this first diagnosis, the changes in Hayek’s ideational reality shifted his position about the scholar’s capacities in designing frameworks: from an active designer who is attentive to the limits to one’s knowledge (Hayek II) to a passive observer who is restrained by emphasizing the limits to one’s knowledge (Hayek III).

In the second diagnosis, the material reality of economy and society changed fundamentally, especially the urgency to stabilize the framework of the interwar decades and the possibility to design frameworks. The 1940s witnessed the most intensive cooperation in the ordoliberal archipelago, but very soon the Pax Americana stabilized international relations in the Western world, while the Bretton Woods institutions ordered international economic relations. The remainder of Hayek’s life took place in this relatively stable postwar world where an economics focusing on the study of frameworks and their stability like the one of the 1930s and 1940s—an approach that has recently been called “contextual economics”—lost its topicality. Instead, “isolating economics,” on the micro- and the macroeconomic levels, became opportune because when it studied the economic process, it assumed stable frameworks—in line with those in the socio-economic reality (Goldschmidt, Grimmer-Solem, and Zweynert Reference Goldschmidt, Grimmer-Solem and Zweynert2016). And while Hayek did not engage in postwar isolating economics, his focus within contextual economics altered. In Hayek III’s distinction of the “three layers of rules” of frameworks—the genetically inherited, the culturally transmitted, and the consciously designable—his focus shifted primarily to the first two layers (Hayek [1973–1979] Reference Hayek and Lewis2021, pp. 518–520), given the diminishing possibility to design third-layer rules.

There was one notable exception: the crisis of the postwar consensus during the 1970s. Here, his public pronouncements like letters to the editor of Frankfurter Allgemeine Zeitung or The Times intensified significantly (Hayek [1931–1981] Reference Hayek and Lewis2021, pp. 477–518; Farrant and McPhail Reference Farrant, McPhail and Leeson2017). In line with the narrative of this paper that it is specifically the context of crisis and instability that requires the economists to offer framework proposals to society, it was exactly in this more fragile context that Hayek launched his two most prominent postwar politico-economic proposals regarding third-layer rules: Denationalisation of Money (Hayek [1976] Reference Hayek1990) for redesigning the monetary framework, and his model constitution for redesigning the framework of democracy (Hayek [1973–1979] Reference Hayek and Lewis2021, pp. 462–483).