Volume 50, Issue 1

During the First World War Wilhelm Röpke, a German Soldier, 18 years of age, made the vow - should he survive - to try everything he could „to prevent a recurrence of this catastrophe“, the recurrence of war. The student of economics and social sciences endeavoured to discover the causes of that kind of crisis and to lay the foundation for policies that could eliminate it once and for all. His conjecture was that the overgrowing power of the modern state was the main factor threatening the freedom and the dignity of human beings. And he realized that other centers of power might evolve in societies with an equal potential to hurt the integrity of the individual. This was the basic insight from which the arguments of his „theory of political economy“ were derived, culminating in his concept of a „Third Way“ between capitalism and socialism, - or better: of a „Civitas Humana“, a Human Civil Society. The article explains that Röpke’s ideas centre on the message of an indissoluble interdependence of state, economy and society and of the international and the national order. „Order“ is seen here as a structure of institutions that secure peace and create people’s welfare. - Referring to several examples the autor shows that problems and failures of post-war economic and social policy in Germany basic political recommendations of Röpke’s Theory of Political Economy. That might encourage politicians, economists and sociologists to take notice again of Röpke’s struggling for freedom, security and justice all over the world - and of the necessity to revive the „Lost Art of Economics“: Political Economics.

Germany is no longer an example of sound economic policy. This becomes obvious in a slow growth rate, mass unemployment, excessive public indebtedness and a large welfare state. Wilhelm Röpke did predict this development but in vain he frequently warned against violations of the fundamental principles of a liberal economic policy. Taking Röpke’s analysis as a point of reference this article shows where political mistakes have been made - despite politicians paying lip-service to a Social Market Economy - and how these mistakes could be corrected. An undue limitation of individual liberty, dwindling self-responsibility of the individual, political power-sharing with interest groups, paralysing high taxation, strict regulations of labour markets and the crowding out of private investors by high public borrowing requirements are some of the undesirable political developments which Röpke convincingly criticised.

As a teenaged soldier in World War I, Wilhelm Röpke was a horrified witness to the barbarity of that fratricidal European conflict. The experience moved him to commit his life thenceforward to the discovery and proclamation of the economic, social, and moral truths that might serve to prevent a recurrence of the catastrophe. The galloping inflation of the 1920s left an indelible impression on the young economist and provoked him to a battle against inflation which was to continue for the rest of his life. Still, exhibiting even then unusual realism and balance, Röpke opposed the deflationary policies of the Brüning government to which he attributed the rapidly rising unemployment in Germany. He was thus a Keynesian five years before Keynes published his General Theory in 1936. In the end, Röpke’s advice was disregarded, a fateful decision which may have facilitated the seizure of power by Hitler. Anti-totalitarian to the core, Röpke was bound to come into conflict with the tribunes of the Third Reich. Following a series of speeches and articles in which he attacked the Nazis he was forced to flee, first to Istanbul and subsequently to Geneva, where he remained until his death in 1966. In his years in Geneva, Röpke continued his crusade against totalitarianism, whether of the right or the left. In numerous articles and books, he set forth his recipes for a free society and economy based on the market mechanism. The market economy for which Röpke pleaded, however, differed fundamentally from the “capitalism” of the 19th and early 20th centuries which he believed had perished of its own inadequacies and degeneracies. As early as the 1930s, he advocated a “third way” between the extremes of a paleo-capitalism based on laissez-faire on the one hand, and a socialist planned economy on the other. While Röpke was an unbending opponent of the omnipotent state, and of the bloated modern welfare state in particular, he was equally opposed to reducing the role of government in the economy to that of a mere nightwatchman. He contended that, on the contrary, a viable market economy requires an effective and energetic government committed to providing essential infrastructures and to establishing and maintaining a stable monetary and fiscal system as well as securing competition and restraining monopoly, whether of capital or labor. The “social market economy” that was installed in West Germany after the war under the aegis of Röpke’s friend, Ludwig Erhard, and to which Röpke had made decisive contributions, represented a deliberate attempt to divorce the market idea from historical capitalism. Germany’s so-called “economic miracle” of the postwar years provided dramatic proof that the market can yield a quite different result within a different institutional framework. In his seminal works Röpke carried this concept further, pointing out that the wellbeing of any society rests upon much more than its purely economic arrangements.Indeed, it extends far beyond the merely economic, the merely sociological, the merely political, to the very bedrock of the human condition, to the moral and spiritual, and, indeed, to the religious foundations of human existence. Zusammenfassung Als junger Soldat erlebte Wilhelm Röpke die sinnlose Grausamkeit des Ersten Weltkrieges. Diese Erfahrung brachte ihn dazu, in seinen wissenschaftlichen Arbeiten nach den wirtschaftlichen, gesellschaftlichen und moralischen Faktoren zu fragen, die eine solche Katastrophe in Zukunft verhindern könnten. Die deutsche Inflation der zwanziger Jahre veranlaßte Röpke zu einem lebenslangen Kampf gegen die Inflation. Gleichwohl kritisierte er die Deflationspolitik der Regierung Brüning, der er das schnelle Ansteigen der Arbeitslosigkeit in Deutschland zuschrieb. Er wurde so zu einem Keynesianer, längst bevor Keynes seine General Theory (1936) veröffentlichte. Als ein Gegner des Totalitarismus jeglicher Spielart kam Röpke sogleich in Konflikt mit dem Nationalsozialismus. Er war gezwungen, zunächst nach Istanbul, dann nach Genf zu emigrieren. In Genf, wo er bis zu seinem Tode blieb, setzte Röpke seinen Kampf gegen den rechten und linken Totalitarismus fort. In zahlreichen Publikationen setzte er sich für eine freie Wirtschaft und Gesellschaft ein. Die Marktwirtschaft, für die Röpke plädierte, sollte jedoch nicht der „Kapitalismus“ des 19. und frühen 20. Jahrhunderts sein. Die „Soziale Marktwirtschaft“, die Ludwig Erhard, von Röpke beraten, in Westdeutschland einführte, unterschied sich durch eine neue institutionelle Rahmenordnung vom historischen Kapitalismus. Röpke war ein Pionier in der Entwicklung und Verbreitung dieser neuen Ideen. In den dreißiger Jahren hatte er die von ihm konzipierte Wirtschaftsordnung als „dritten Weg“ zwischen Laissez-faire und sozialistischer Planwirtschaft bezeichnet. Röpke war ein Gegner des allmächtigen Staates und auch des ausufernden modernen Wohlfahrtsstaates. Er betonte aber, daß eine Marktwirtschaft einen effizienten und unparteiischen Staat voraussetze, der nicht nur Infrastruktur bereitstellen, sondern auch für Geldwertstabilität, Haushaltsstabilität und die Aufrechterhaltung von Wettbewerb sorgen müsse. Über die wirtschaftliche Rahmenordnung hinaus setze eine menschenwürdige Gesellschaftsordnung aber letztlich bestimmte geistige, moralische und religiöse Grundlagen voraus.

The article commemorates a lecture with the same title presented by Hayek as a contribution to a lecture series offered by his Freiburg faculty during the winter-term 1966/67. By drawing on Hayek’s contribution some basic research themes of institutional economics are presented, i.e., the emergence, the incidence and the change of institutions. First, the relationship between human cognition and the emergence of institutions are analysed. Thereafter the author considers the hypothesis that the economic order, particularly the spontaneous order of the market, is based on corresponding institutions. This allows to deal with Hayek’s understanding of order which contains elements of criticism of the neoclassical theory of allocation and of welfare. Finally, institutional change and, related to it, institutional competition or competition among institutional systems as a factor of institutional change are discussed.

This article analyses prospective economical developments in Germany and discusses economic policy reforms needed to achieve sustainable economic growth in the context of the globalization of markets. The economic recovery will continue in 1999, but this will not provide a significant relief for the labour market. Without labour market reform and a further moderate wage policy no lasting decrease of unemployment can be expected. For the increase of employment the conditions on the supply side for business investment must be strengthened in Germany. Altogether the economic policy must accept the conditions of globalization. This affects employment policy, monetary policy, distribution policy, education policy and environmental policy. The state cannot regulate the economy at pleasure, as excess intervention will endanger the targets of an appropriate economic growth with high employment and will run against the objective of keeping appropriate social standards and environmental protection. The globalization puts the competitiveness of the social security systems including statutory health insurance at a severe test. The financing problems and disincentive effects must be overcome. Individual responsibility, the equivalence between contribution and provisions, and competition are crucial for health insurance. The health structure law of 1992 was a step in the right direction. But the competition between statutory health insurance agencies must be further intensified, the hospital financing must be arranged to meet business criteria, and the rewards must be adjusted in order to correspond to medical performances precisely. Altogether the health market must be freed from unnecessary regulations.

For economic and social reasons some kind of basic income guarantees have to be provided in industrialized countries. In Germany a system called Sozialhilfe has been established in order to guarantee people a minimum revenue, if no others sources of income are given. The rising cost of the social security system however has revealed the need for a fundamental reform in order to reduce social payments. A simple reduction of the legal basic income is not the appropriate strategy because it would put to risk the key objectives of the Sozialhilfe system. The author proposes, instead, a reform that would oblige recipients of Sozialhilfe to participate in local community work schemes which, in turn, the municipalities would have to provide. In addition, a low compensation and the legal entitlement to receive job training should promote the reintegration of these persons into the regular labour market.

The main causes of unemployment in Germany are the legal conditions affecting the negotiation of pay agreements, the behaviour of the negotiating partners, and the politico-economic environment. Positive approaches to achieving pay agreements that do not put at risk the jobs of the workers currently employed can be seen in the opening clauses of the national agreement for the chemical industry, and in the agreement- guidelines „Phönix“ between the Eastern German employers confederation Ostmetall and the christian metal union. On the other hand, the cases Burda and Viessmann have shown that pay agreements which are negotiated between the board and union representatives within a firm and aim at securing jobs for the employees, are impeded by labour legislation, precedent cases, and the behaviour of the unions. A precondition for flexible local agreements that secure the jobs of the current employees, is that local union representatives are given the autonomy to negotiate working conditions within their company. At present it is not permitted by law (Works Council Constitution Act) to negotiate those conditions locally that are included in the national agreements. Local agreements which differ from national agreements are only permitted if each and every issue in the local agreement is advantageous for the employee. This should be changed to allow a compromise or trade-off between the issues involved. In addition, securing or generating employment should be considered an advantage. In conclusion, national agreements can only be saved - especially when the current unemployment rate is higher than that considered as unavoidable - if the negotiating partners agree on pay increases that are smaller than the productivity increase, taking account of inflation.

Different factors favor the influence of interest groups to get non competitive gains. Both, deficits in the political order and little competition between different interest groups can be considered as the decisive causes. To restrict the influence of interest groups a vast array of measures has been discussed. The author of this paper suggests to combine the sunset legislation approach with measures to increase the transparency on distributional effects of the legislation. This solution would reduce the period of time during which non competitive gains can be realized and would lead to more competition between the interest groups. It would also reduce the negative economic consequences that result from interest groups' influence on the political process.

John Rawls’ and James Buchanan’s social contract theories maintain that rational actors, under a thick veil of ignorance/uncertainty, will always take unanimous and fair decisions. In sharp contrast to this received opinion the author shows, by means of a simple model, that - if the social contract is threatened by a prisoner’s dilemma incentive structure - players under uncertainty will not necessarily consent on a „fair“ rather than a discriminatory rule and that they may even fail to agree at all. On the other hand, absent a veil of ignorance/uncertainty a fair consensus will always be the iterated dominance equilibrium in the game of rule choice. The question is raised why, nevertheless, in reality we often have so much trouble to come to a consensus and why we intuitively feel that we need a veil of ignorance/uncertainty for making decisions on rules.

The positive impact of human capital on economic growth has become an almost iron law of economics. The basic argument is that economies with more human capital grow faster and allow people to reach a higher per capita income. The transfer of this theoretically well developed argument into politics leads to a strong influence of public action in the human capital accumulation process. Most of the theoretically identified growth factors lose their empirical power if tougher econometric tests are applied. The direct link between human capital and growth does not really survive hard robustness tests. The assumption gains ground that the impact of human capital on growth is rather indirect and goes over longer life expectancy (due to a better knowledge of every day risks) over improved physical shape of children (due to the food provided by schools) and over the lowered fertility rate (due to the increase of economic power of women). The picture becomes definitely blurred once the international mobility of human capital is taken into account. The (international) mobility of human capital splits off the place of production of human capital and the place where human capital provides a value added. People work in the internet, do electronic commerce, consume in a third place and invest globally, and - probably most important - choose their place of living according to soft factors of local attractiveness (like security in the neighbourhood, clean water and air). A hard (worldwide) competition for the brightest brains emerges. Consequently, good human capital politics means attractiveness of locations. Immobile factors are forced to attract mobile high qualified people, to offer them complementary services and to produce together a high value added. Obviously, for such a brain gain strategy, an attractive local supply of complementary (public) goods is more important than direct (public) subsidies of human capitel accumulation processes.

It is frequently argued that charging fees for higher education would cause a conflict between efficiency and social equity. The author discusses the allocative and distributive effects that an introduction of fees for higher education would entail. First, the necessity of state intervention in higher education is questioned. The hypothesis of market failure cannot be justified either on allocative, or distributive, or meritoric grounds. Higher education has predominantly the characteristics of a private good, which would support a financing by fees. Positive allocative effects are to be expected if higher education is financed by fees rather than by taxes. The analysis of the distributive effects has produced surprising results: The effects of fees on personal income distribution will be negligible. An appropriate institutional design of fees would not jeopardize the principle of equal opportunities and would thus avoid a potential deterrent effect on disadvantaged groups. There is no trade-off between efficiency and distribution in this case. The efficiency gains that can be expected from the introduction of fees for higher education - although difficult to quantify - suggest a change in the system.

Costs play a considerable role in the eastward enlargement of NATO particularly since initial studies estimated costs in the hundreds of billions of dollars. These studies, together with more recent ones which, by contrast, conclude that there will be hardly any additional costs, provide a good opportunity to clarify the fundamental problems of cost (and benefit) analyses for measures of Ordnungspolitik. These problems include a delimitation of costs appropriate to resource consumption, which presupposes a conscientious with-and-without comparison. In this respect analysts sometimes make the mistake of ascribing both the costs for the increases in the mobility of the old NATO members and those for the modernisation of the weapons systems of the new members to the NATO enlargement process. An appropriate cost and benefit delimitation with regard to period is also problematic if the time span under analysis is too restricted. In the case of measures of Ordnungspolitik such as the enlargement of NATO, in which significant benefits are immediately apparent, whereas costs can occur later, the temporal limitation of the cost-benefit analysis tends to act in favour of the measure - in contrast to the usual areas of application of cost-benefit analyses, where costs occur immediately and benefits may only be apparent later. Whereas benefits such as income and employment effects often play an important role in cost-benefit analyses of other measures, they are almost insignificant here. Rather, primary importance here is attached to indirect effects such as increased security, political stability and accelerated integration, effects for which the techniques of the cost-benefit analysis have yet to produce sufficiently convincing evaluation methods. One solution in such cases may be to compare the relation of the evaluable benefits and costs with the usual efficiency criteria and then calculate the minimum value of the intangible benefits in order to achieve efficiency. Calculations based on data from the CBO of the USA and the Rand Corporation show that the enlargement of NATO is efficient for the USA on the basis of the high proportion of its armaments exports even if the intangible effects are ignored. For the rest of the old members of NATO intangible effects do not have to be particularly high for enlargement to be efficient.

In the last few years national competition authorities in many industrial, developing, and transformation economies have gained more independence. There is a strong probability that politically independent competition authorities persue a more competition- based approach in applying anti-trust laws than governments do. The article discusses various aspects of independence and shows how some forms of independence have been realized in several countries. The degree of independence is not only determined by the institutional design of the authority, but is also influenced by many other factors, inter alia the scope of competition law, the number of goals the authority has to persue, and the role of sectoral authorities. Independent authorities may be more inclined to cooperate in international competition cases. Furthermore, a system of independent national competition authorities may facilitate a decentralized application of EC competition rules.

Market failure due to widespread asymmetric information is the economic justification for state regulation of banks, the main objective of which is to prevent systemwide banking crises. The author argues, however, that government regulations themselves have a highly destabilizing effect on the banking industry. First, they give rise to significant moral hazard problems. Second, by restricting competition among rules, they stunt the search for more efficient and effective alternative institutional arrangements, especially market-based ones. Finally, government supervision of banks is an inappropriate measure against the very causes of the banking sector’s occasional instability.

The transition economies in Central and Eastern Europe have problems in establishing a new economic and social order. This article analyzes the question whether the transition countries are prone to currency and financial crises during the process of liberalisation. The author discusses alternative policy suggestions to avoid thes crises and gives recommendations for appropriate economic policies in transition countries. First, the author examines the explanatory content of the theory of speculative attacks, taking into consideration the refinements of the different generations of models. Due to increasingly complex assumptions the models give a better explanation of real phenomena. Various preconditions for the occurrence of speculative attacks are discussed: inconsistencies in politics, external shocks and inadequate institutional conditions for the newly developed markets. A comparative analysis of the results takes into account the special conditions in central and eastern European countries. The fast and complete privatisation of the banking sector is identified as the most urgently required change in the institutional framework. Fixed exchange rates are rejected, since they would not banish the danger of speculative attacks but at best postpone it to the future. A reliable institutional framework for private economic activities is seen as the best prerequisite to avoid misallocation and ineffective government interventions.

The processes that originate from the country of origin principle and lead to deregulation, can only in part be interpreted as specific elements of competition among states. A major part of the deregulative effects is produced via the international trade flows of goods: national firms that lose market shares to foreign competitors due to an unfavorable regulatory framework try to induce their government to deregulate. The inherent structure of this process is not a competitive one. Only deregulatory effects that are put into effect via foreign direct investments of multinational enterprises can be considered as an element of competition among states. Being an option of economic policy, the application of the country of origin principle has to meet the requirements that result from the principles of a liberal socioeconomic order. These principles consist of individual freedom, equality and democracy. The country of origin principle is compatible with these principles as far as it is applied to standards of production. It contradicts these principles if it is applied to product standards. This holds not only for regulations to protect other individuals, but also for regulations to protect the user of the product in question and for regulations for other purposes.

Normative approaches toward international trade policy continue to be based on the neoclassical equilibrium analysis of international trade which excludes not only transaction costs of markets from explicit consideration but also fails to consider the costs of establishing and maintaining institutions of trade. The paper proposes to amend these deficiencies by recurring to D.C. North’s definition of „production costs“ as the sum of „costs of transformation“ and „costs of transactions“; it also suggests a general concept of „trade resistances“ (the importance of which has been emphasised recently, among others, by researchers like Drysdale or Milner). Although formally they might be treated like the effects of an ad valorem tariff, institutionally determined trade resistances cannot be assessed ex ante in terms of their welfare consequences, because knowledge about their structure can only be attained after a realisation of transactions. Furthermore, changing trade resistances involves political transaction costs. Institutional change in international trade, therefore, cannot follow trajectories of global optimisation but is governed by the local optimisation strategies of political entrepreneurs; the entrepreneurs pursue individual goals when supplying institutions. Institutional change engendered by their actions can only be assessed by reference to the subjective perceptions and mental models of trade (policy) on the part of the economic agents affected. Thus, institutional change is path-dependent by necessity. In addition, political entrepreneurs need to set up an internal political market where the subjective preferences of economic agents within trade regimes may be revealed and where political exchange takes place on both the demand and supply sides of institutions. However, the results of that process of revelation are interdependent with similar processes in political markets of other countries. The hypothesis that unilateral liberalisation is desirable is generally accepted. Yet the paper argues that an optimised global state can only be approximated via local optimisation on national political markets if an international institutional regime is established that governs the exchange of opportunities for market access. The fact is well documented in 20th century history. By means of this exchange, information about trade resistances and their consequences for welfare is continuously being revealed. Since international political exchange may be defined as a market with a low degree of standardisation and a high degree of uncertainty, relational contracts have emerged as one institutional device to cope with the arising problems of coordination. The recent rise of regionalism in the world economy is one particular variant of relational contracting. Within such an analytical framework, the institutions of international trade should not be assessed according to criteria of allocative efficiency in order to determine whether a particular institutional regime produces as much knowledge as possible about trade resistances and informs one about the best way to lower the resulting transaction costs on both kinds of markets, economic as well as political. The design of the market for exchanging of opportunities for market access is of crucial importance. From an evolutionary perspective regimes allowing institutional competition seem to be preferable; these regimes are not focused on territorial jurisdictions any longer. Institutional competition in fact precludes harmonisation approaches. Trade policy should be the task of regional and sectoral clubs, not of national governments. International organisations like the WTO might adopt the role of arbiter in institutional competition between those clubs.