This summer marks the 60th anniversary of the beginning of the post-World War II German “economic miracle.” When the war ended in Europe in 1945, Germany was in a shambles. Its major cities had been destroyed either from Allied bombing or urban combat. Millions of its citizens had died in the war, and millions more were turned into empty-handed refugees. Food was almost nonexistent, and starvation gripped most of the population.

The Nazis had imposed a comprehensive system of economic controls on prices, wages, and production. They had turned to the printing press to finance a good part of the costs of war, resulting in a “repressed inflation” under the stranglehold of the price regulations. The increasingly scarce goods were rationed or simply disappeared from the stores. By the time Germany surrendered in May 1945, the National Socialist version of the planned economy, and above all the war, had brought Germany to a state of social and economic collapse.

Now the country was under the joint occupation of the four Allied Great Powers: the United States, Soviet Union, Great Britain, and France.

In the Soviet zone, factories not destroyed in the war were dismantled and shipped back to the Soviet Union. Soviet soldiers terrorized the population, and Stalin proceeded to impose a communist political structure.

In the American and British zones Soviet-style brutality was rarely practiced, but the German population was viewed as “the enemy” to whom excessive sympathy and generosity were not to be shown. Moreover, the Nazi system of price and production controls was kept in place.

A small band of German free-market advocates had survived the war. A leading figure in this group was Walter Eucken, who was a professor at the University of Freiberg. While restricted in what they could say publicly under the Nazi regime, Eucken and his colleagues had maintained a network among themselves with the goal of sharing ideas for establishing a market-oriented economy in the post-Hitler era that they all impatiently awaited. While intellectually isolated from other free-market economists outside Germany, they remained inspired in their thinking by classical liberals like Ludwig von Mises and Wilhelm Röpke, whose writings they read and clandestinely shared.

One of Eucken’s protégés was an economist named Ludwig Erhard. He was appointed economics minister in the American zone in Bavaria in 1946. For two years he used this position as a platform to advocate market reforms. In radio broadcasts he frequently exhorted the German people to accept that they had brought their current tragic circumstances on themselves and only hard work, savings, and self-responsibility could restore their prosperity and gain them a new place among the civilized nations of the world.

In 1948 the British and American zones were combined into one administrative unit, with Erhard as director of economics. In June he instituted a major currency reform to restore monetary stability and to end the inflationary after-effects from the Nazi period. Not only was a new currency put in place, but it was done through a process of reducing the money supply. In June 1948 Germans in the Western zone could exchange ten of the old marks for one new mark.

Shortly after this, Erhard introduced the other essential element of any successful economic-reform project: abolition of the price and production controls. On a Sunday, while all the Allied occupation authorities were out of their offices, Erhard announced on the radio that the next morning virtually all price controls would be abolished. General Lucius Clay, commander of American forces in Germany, called Erhard into his office and said, “Herr Erhard, my advisers tell me you’re making a terrible mistake.” Erhard replied, “Don’t listen to them, General. My advisers tell me the same thing.”

Recovery Begins

Hoarded goods in short supply suddenly came out of their hiding places now that they could be sold at market-based prices. In the second half of 1948 industrial production increased 46 percent from its June level. And a year later, at the end of 1949, that production was 81 percent above what it had been when the reforms had been implemented in the middle of 1948. After an initial spike in prices when the controls were abolished, by the end of 1950 the greater industrial and agricultural output that was offered on a more open market significantly reduced the cost of living. Germany’s economic-recovery path assured that well into the 1960s its rate of growth in output and productivity would place it far ahead of virtually all the other countries of western Europe, including those, like Great Britain, that had been victors in the war.

The reforms brought about this economic miracle because they eliminated the worst institutional features of what had been Nazi central planning. But West Germany was not transformed into a real free-market society. Its intellectual architects, including Walter Eucken, Wilhelm Röpke, and Ludwig Erhard were advocates of a “middle way” between a truly free market and socialist planning. They believed that a large welfare state, the “social market economy,” was necessary and desirable to assure social harmony. They supported government regulation of the size and composition of large enterprises. They supported urban and rural planning. And they introduced the system of “co-determination,” under which all large enterprises and corporations were legally required to have trade-union representatives included in the decision-making bodies of businesses.

Thus from the start the institutional order in postwar Germany was one that opened the door to special-interest-group politics, compulsory income redistribution, union-power blackmail over business, and a general culture of political paternalism.

The real nature of this system was insightfully explained by Mises:

[T]he supporters of the most recent variety of interventionism, the German “soziale Marktwirtschaft” [social market economy], stress that they consider the market economy to be the best possible and most desirable system of society’s economic organization. . . . [But] it is necessary, they say, that the state interfere with the market phenomena whenever and wherever the “free play of the economic forces” results in conditions that appear as “socially” undesirable. . . . If it is in the jurisdiction of the government to decide whether or not definite conditions of the economy justify its intervention, no sphere of operation is left to the market. . . .That means the market is free as long as it does precisely what the government wants it to do.

Sixty years after these German reformers introduced the “social market economy,” it is clear that they were only planting the seeds of new forms of government control and corruption. The market is either free or it is under the regulation of the government. Either individuals are free persons who may peacefully go about their lives and associate with others through voluntary exchange, or they are pawns on a political chessboard, open to manipulation and control whenever their actions do not follow what those in power demand.

There is no third way.

by Goetz Aly

Metropolitan Books • 2007 • 431 pages • $32.50

Reviewed by Richard M. Ebeling

In Hitler’s Beneficiaries, German historian Goetz Aly “focus[es] on the socialist aspect of National Socialism” so as to better understand “the Nazi regime as a kind of racist-totalitarian welfare state.”

Since the 1930s many historians on the left have tried to portray Nazism as an extreme right-wing system meant to preserve and serve the German capitalist order. The use of the word “socialist” in the full name of the Nazi movement—the National Socialist German Workers Party—has been interpreted as a ruse meant to manipulate and deceive the people of Germany.

Aly emphasizes that the ideology and practice of the Nazi regime were in fact deeply socialist. Within Germany, among the German people of “pure Aryan blood,” the ideal was an egalitarian social order in which every German would be freed from traditional class barriers so that he might have the opportunity to rise to any level of success in serving the fatherland. The welfare-state policies begun by Bismarck in late nineteenth-century imperial Germany were viewed by the Nazis as a prelude to a complete guarantee of a quality standard of living for all “real” Germans that would be paternalistically provided by the National Socialist state.

The problem was that the promises of the welfare state could not be fulfilled within Germany’s 1933 borders. If the German people were to have this material paradise on earth, someone would have to supply the manpower and the resources to provide the means for this massive redistribution of wealth.

Aly points out that before and during World War II, the German “capitalist class” was made to pay its “fair share” for the benefit of the rest of the German people. Taxes were proportionally far higher on the “rich” in Germany than the rest of the population. During the war the government established mandatory overtime pay in all industries and imposed wage increases to keep “the masses” loyal to the regime—all at the expense of German business. At the same time, German industry worked under government-commanded four-year plans from 1936 until the end of the war in 1945.

But it was only after the war started that the machine of redistributive plunder was really set into motion. Every country overrun by the German army not only had to pay the costs of the occupation, but also was systematically looted for the benefit of the German population as a whole.

Aly’s book is remarkable because, rare among histories of the period, it explains how the Germans used inflation to loot the occupied countries. After most of France was occupied in June 1940, German soldiers were issued scrip that by mandate had to be accepted by French businesses. Retailers willingly accepted the scrip because the Nazis also mandated French banks to redeem it in francs; the banks in turn could redeem it for francs it at the Bank of France. The only way for the French central bank to meet this obligation was to print more money. With some variation Germany did this in every country it conquered.

German servicemen stationed in occupied Europe were regularly given scrip bonuses at holiday times so they could buy up virtually anything and ship it to family and friends. Thus along with the soldiers, tens of millions of Germans back home benefited from the inflationary plunder of Europe.

On top of this the German government imposed taxes and surcharges on the governments in the occupied countries—their contribution to Germany’s establishment of the “new order” for the “benefit” of all the people of Europe. In many cases the redistributive tax burden was larger than the nation’s annual prewar budget.

Both within Germany and around the rest of Europe, the great “enemy” that the Nazis were determined to eliminate was the Jews. Before the war the regime had attempted to pressure German Jews to leave the country. After the war began the government was determined to expel all Jews in western and central Europe to “the East.” Finally, the “solution” to the “Jewish problem” was found in the concentration and death camps.

But beginning in 1941 and 1942 the expelling of Jews from Germany and the rest of occupied Europe was accelerated as part of the Nazi welfare state. When Britain began to bomb German cities, first thousands and then tens of thousands of Germans found themselves homeless, with all their belongings destroyed. Municipal governments, with the approval of the Nazi leadership in Berlin, began to confiscate the Jews’ houses and apartments, including the contents, to make room for racially pure Germans needing new places to live.

In every occupied country the Nazis initiated similar confiscatory policies with local accomplices with whom they shared looted Jewish property. (Only in Belgium and Denmark did large segments of the population and the bureaucracy resist participating in this plunder of the Jews.) The Nazis first nationalized Jewish property and then distributed it to those deemed worthy among the German or occupied populations.

Hundreds of trainloads of stolen Jewish property were either given away or sold at discounted prices in German cities, large and small, throughout the war. Aly estimates that because of this looted property and the goods sent back to Germany by soldiers, many, if not most, Germans enjoyed a more comfortable standard of living throughout most of the war than the civilian population in Great Britain.

What also fed a large part of this Nazi plunderland was the invasion of the Soviet Union in June 1941. In the East, Hitler wished to show none of the minimal “niceties” with which the people of western Europe were treated. The vast and rich lands of Russia and Ukraine were to become the economic Promised Land in the Nazi dreams of the future. Under the plan at least 20 million Russian peasants would be worked and starved to death in the countryside after a German victory to make room for a huge German resettlement that would provide the living room for the Aryan race. The cities of Moscow and Leningrad were to be razed, their populations left to die.

Besides the official plundering of the Soviet cities and countryside, there was a vast black market at work in the East that left those under German occupation with almost nothing.

The vast majority of German families continued to feast, even under the allied bombings, thanks to the locust-like seizure of anything and everything across occupied Europe. Aly estimates that during the five-and-a-half years of war, the Nazis plundered $2 trillion worth of property, goods, and wealth from the peoples of Europe—a large sum by any standard, but truly huge considering the much lower levels of output and income in Europe 70 years ago.

Of course, the German people finally paid dearly for their adventure into international welfare redistribution through war. When Germany finally surrendered in May 1945, millions of Germans had been killed in the conflict, all the major cities of the country were in ruins, capital accumulated over decades was destroyed, and Germany was occupied and divided by the victorious Allies for more than half a century. It was high price for pursuing the ideal of National Socialism.

* * *

The Big Ripoff: How Big Business and Big Government Steal Your Money

by Timothy P. Carney

Wiley • 2006 • 241 pages • $24.95

Reviewed by Sheldon Richman

Timothy Carney has written a refreshing book. There is no shortage of books critical of big business, but almost without exception their authors are hostile to free markets. Carney is an avowed fan of free markets and a critic of big business’s collusion with government—collusion that enables businessmen to gain profits they could never obtain under free, open, and unprivileged competition.

The Big Ripoff is a myth smasher. Leftists and rightists alike tend to think that business people favor laissez faire, which is well defined as the political-economic system that lacks any government-sponsored privilege. But it is a rare business person who wants the government out of the picture. Free competition is nerve-wracking. It respects no vested interests or historical market share. As Frank Sinatra sang, “You’re ridin’ high in April, shot down in May.” Those darn consumers are fickle. So business people (including agribusiness people) have lobbied for regulations, licensing, price floors, price ceilings, codes, inspection, tariffs, import quotas, subsidies, loan guarantees, taxes, tax exemptions, eminent domain, and more. It is easy to assume that no big company would want new taxes and regulations, until one realizes that those things burden smaller and yet-to-be-started companies more heavily. Government impositions are de facto subsidies and barriers to entry.

Big companies have had no trouble getting such things from Congress and the various state legislatures—because another myth is that government tends to be hostile to business. In a mercantile society such as the United States, business people are highly influential. Politicians see them as indispensable to economic stability, jobs for constituents, even labor peace, and hence want to keep them happy. Business has always had political clout in America, both nationally and locally. The period usually regarded as the most hostile to business, the Progressive Era, was nothing of the sort, as historian Gabriel Kolko documented in The Triumph of Conservatism. To his credit, Carney appreciates Kolko’s research and helps to dispose of the fairy tale that statism in the early twentieth century was the product of Marxism and other foreign left-wing imports. While “progressive” intellectuals saw opportunities for power and prestige in the rise of American-style corporatism, they were riding the coattails of the Morgans, Rockefellers, Carnegies, and others who turned to the state to tame unruly (read: competitive) markets. (This is not to overlook the relatively few true entrepreneurs described by Burton Folsom in The Myth of the Robber Barons.)

Things haven’t changed much since the Progressive Era. In our time business people are as influential as ever, perhaps more so. And the influence is rarely in the direction of more economic freedom. Carney documents the quest for corporate welfare (which, curiously, gets much less attention from the right wing than that other kind of welfare), regulation, taxes, and environmental—yes, environmental—controls.

Do you want to know why Phillip Morris joined the “war on tobacco,” why General Motors pushed for clean-air legislation, why Boeing supports the Export-Import Bank, why Archer Daniels Midland likes ethanol, and why the Chamber of Commerce often supports higher taxes? Do you think Enron was a creation of the market and supported general deregulation? Read Carney’s book to find out.

The Enron story is valuable because misunderstanding about that company has provided an abundance of ammunition against the deregulation of energy markets. “Most analysts use the term deregulation to describe the setting in which Enron thrived, deceived, and then collapsed. But in nearly every corner of the Enron tale, we can find the fingerprints of big government,” Carney writes. If Enron’s CEO, the late Ken Lay, was what a New York Times reporter called him—“an evangelical believ[er] in free markets”—then Britney Spears is up for Mother of the Year.

Would a free-marketeer have called for a government bailout when his company began to collapse? (Fortunately, Lay didn’t get it.) While running the company, would he have supported export subsidies, energy regulations and price controls that favored Enron’s interests, and the Kyoto Protocol limiting carbon emissions? Obviously not. So why did Lay do it? Because he had no principled objection to using government power—physical force—to advance his company’s fortunes (not to mention his own).

Carney’s reporting clarifies our understanding of political economy. Regulation and taxation are anti-competitive. Incumbent firms don’t like competition, so they like intervention. But competition is good for worker-consumers because their welfare is enhanced by unhampered bidding for their business and services. Thus they constitute the real natural constituency for the free-market movement.

* * *

Income and Wealth

by Alan Reynolds

Greenwood Press • 2006 • 223 pages • $55.00

Reviewed by George C. Leef

Writing in the Wall Street Journal shortly after the 2006 election, Jim Webb, the victorious U.S. Senate candidate in Virginia, argued that the American economy has become a rigid class system. The rich are getting richer while the poor are getting poorer. Top business executives used to earn about 20 times as much as average workers, but now they’re raking in more than 400 times as much, Webb complained. The United States, he said, was “literally a different country” from the one in which he grew up. Webb viewed his election and the Democratic takeover of Congress as proof that people want the government to do something about this horribly unfair situation.

Many other politicians and writers have repeated this economic indictment, which has political “traction” both with the envious poor and the guilt-ridden wealthy. As Alan Reynolds shows in Income and Wealth, however, the indictment should be summarily dismissed since it is based on misleading statistics and tendentious rhetoric. H. L. Mencken once wrote that politics is just about frightening people with “an endless series of hobgoblins” to keep them clamoring for politicians to protect them. After reading Income and Wealth, it’s clear that the campaign to convince Americans that we face disaster unless the government does something about “the income gap” is another of those hobgoblins.

The first point Reynolds, a senior fellow at the Cato Institute, makes is that the current frenzy over inequality has nothing to do with poverty. Back in the 1960s and 1970s, “liberals” worried about the poor and there was a national debate on how best to improve the lives of people at the bottom of the income scale. That changed in the early 1990s. “Starting around 1992,” Reynolds writes, “inequality began to be redefined in such a way that nearly all the attention shifted away from the troubles of the bottom quintile to the high incomes of the increasingly tiny number of people at the top.” (He doesn’t speculate on the reasons for that shift. My surmise is that the leftists knew they had gotten all the mileage they could out of the plight of the really poor—after all, the government had been running all sorts of antipoverty programs for decades without much success—so they decided to fashion a new “issue” out of the enormous wealth of a few.)

Creating this new issue called for resourcefulness to make people think that dark, momentous changes were occurring in the economy. There have always been some super-rich; the trick was to get people up in arms by suggesting that those people were profiting unconscionably at the expense of the disappearing middle class. Reynolds easily refutes that idea. The middle class isn’t disappearing, although quite a few people who used to earn “middle class” incomes now earn significantly more—scarcely a problem.

Furthermore, it’s not true that the earnings of middle-income workers have been “stagnant” since the 1970s. That illusion, Reynolds shows, is based largely on the fact that due to tax-law changes in 1986, increasing amounts of investment income common to middle-class people no longer show up in income-tax data—401(k) and college savings plans, for example. Other changes in tax law tend to have the opposite effect on the reported income of the wealthy. If instead of looking at income-tax data, you look at data on consumption spending, the whole “crisis” vanishes.

Another major component of the “income gap” mania is supposedly excessive compensation paid to business executives. Is it really the case that the average CEO now makes more than 400 times as much as the average worker? No. Reynolds handily demolishes the notion that greedy CEOs are robbing workers (or, more plausibly, stockholders) of money that should be theirs.

What’s really going on here is an elaborate cover for a host of interventionist policies desired by various special-interest groups. “Nobody who uses income distribution figures as an argument for adopting their pet government policies would advocate different policies even if they could be persuaded their statistics are wrong,” Reynolds observes. Those who are against free trade, for example, cite the “shrinking middle class” as an excuse for protectionism. For union advocates, the same myth serves to justify their desire for new pro-union laws.

Not only is there no “income gap” problem, but the remedies offered would be economically harmful. In his concluding chapter, Reynolds makes the case that laissez-faire policies to reduce the size and meddlesomeness of the government will continue the real trend in our economy: the rich get richer and the poor get richer, too. If, however, we adopt the policies of the egalitarians and interest groups, we actually will “improve” the income gap. Everyone would be poorer, but the wealthy would lose proportionally more.

Reynolds has given us an important and timely book, a refutation of the economic equivalent of the global-warming scare.

* * *

The Sarbanes-Oxley Debacle What We’ve Learned; How to Fix It

AEI Press • 2006 • 135 pages •
$25.00 paperback

The Joy of SOX: Why Sarbanes-Oxley and Service-Oriented Architecture May Be the Best Thing That Ever Happened to You

by Hugh Taylor

Wiley • 2006 • 283 pages • $50.00

Reviewed by Barbara Hunter

These two books cannot really be considered two analyses of the Sarbanes-Oxley Act, which was signed into law in 2002 following several high-profile corporate scandals. The first book examines the law, its effects on the conduct of publicly traded businesses, and its failure to accomplish its purported purposes of preventing fraud and restoring investor confidence. The second simply adopts the thesis that Sarbanes-Oxley is a beneficent and effective law and that all that is required is to learn the best methods for compliance.

The Sarbanes-Oxley Debacle raises an issue rarely so much as mentioned in the voluminous literature on this law: the return on investment resulting from time, money, and talent expended on behalf of the law’s many requirements. This is no small matter when considering a law whose annual direct compliance costs on business run into the billions.

The cost figures bandied about in the popular financial press ignore the manner in which the law now influences the minutiae of individual corporate decision-making when the shadow of bureaucratic enforcement hangs over every decision, from internal production methods to mergers and acquisitions. This must inevitably produce a significant opportunity cost that will, to some extent, deter risk-taking in business. Professors Butler and Ribstein make that point very clearly.

Another unique point in this book, and one that has been virtually ignored by other writers, is that no combination of laws and penalties can produce total protection from fraud at every possible level within a company. Thus shareholders may understandably accept the possibility of some level of fraud if, on the one hand, its influence on the company’s bottom line is considered insignificant and, on the other hand, the cost (in time and money) of ferreting out every such conceivable instance is exorbitant.

The book further notes that Sarbanes-Oxley circumvents and in effect nullifies existing state laws that may have been more effective than the new law, and federalizes yet another field that historically has been within the purview of the states.

For such a slim volume, The Sarbanes-Oxley Debacle manages to include a startling number of significant arguments relating to the deleterious effects of this ill-considered law.

A review of The Joy of SOX needs to be tempered by the fact that its author is an officer of one of the ever-growing number of companies dealing in computer programs devoted largely to compliance with the Sarbanes-Oxley Act. In light of this, it may not surprise the reader that Sarbanes-Oxley’s negatives, especially its compliance costs, are never mentioned. Even within this perspective, however, its exuberant embrace of the law occasionally borders on the absurd. The author goes so far as to dismiss those who contend that the costs of the law exceed its benefits as “whiners.”

Taylor assumes that Sarbanes-Oxley places everyone on the same compliance basis and thus is not a problem. Sadly, experience has demonstrated that the cost of compliance is far from equal; in fact, its burden on small companies, as a percent of sales, is far higher than on large companies. Regulation tilts the playing field.

On occasion, the author’s acceptance of the near-axiom that government regulation is beneficial and therefore desirable leads him to use examples that are badly at variance with the truth. In his introduction Taylor writes, “In the last century, American businesses resisted labor organizations and workplace entitlements, only to discover that modern labor practices and diversity programs created long-term loyalty among employees and helped build strong brands.” Many businesses, of course, have found just the opposite—that the effects of dictatorial federal labor regulation have been very harmful—and in any event it does not follow that Sarbanes-Oxley is beneficial just because some other federal laws allegedly are.

The structure of the book is a theoretical discussion by the department heads of an imaginary company that, on the one hand, must comply with Sarbanes-Oxley and, on the other hand, must be able to make quick decisions in order to meet customer needs and competitive pressures. The book’s pervasive themes are two: “agile compliance” and “compliant agility.” It soon becomes evident, however, that compliance comes first and the firm’s well-being comes second, as is the case with every regulatory compliance regime.

Those who expect any insight into the effects of Sarbanes-Oxley will find this volume a disappointment, and those who have read The Sarbanes-Oxley Debacle will laugh at the idea that this law could be “the best thing that ever happened”—unless you’re in the business of selling compliance software.

During World War II the United States took on the role of the “Arsenal of Democracy,” supplying its allies the wherewithal to battle Nazi Germany and Imperial Japan, as well as assuming global leadership in opposing those aggressive fascist regimes that threatened world peace. It is often forgotten, however, that in the 1930s many American and European commentators focused on the many similarities between Franklin Roosevelt’s New Deal and the planned economies in fascist Italy and Nazi Germany.

Historian Wolfgang Schivelbusch takes a fresh look at these similarities in Three New Deals. He is quick to point out that he is not saying that FDR’s New Deal was the same as the Nazi regime. Hitler rapidly established an absolute dictatorship that suppressed all political opposition. In America civil liberties and freedom of the press were never abridged by the Roosevelt administration, however much political and economic power was increasingly concentrated in Washington during the 1930s.

But nonetheless the methods of controlling the economy and influencing public opinion were closely parallel, as Schivelbusch shows. World War I had ushered in a new politicization of society and captured the spirit of many intellectuals and policy advocates in the 1920s and 1930s. Government architecture in Soviet Russia, Nazi Germany, fascist Italy, and FDR’s America were all bigger than life, creating an imagery of power and awe transcending the mundane efforts and achievements of private individuals.

What Schivelbusch brings out is the change in the role and conception of political leadership. Gone was the notion that those in political office were executors of constitutionally limited responsibilities. Now the “leader” spoke and led outside the ordinary restraints of the political process. Both Hitler and Roosevelt appealed to “the people” directly, with the claim that unusual circumstances required extraordinary authority. With his fireside chats FDR took advantage of a popular new technology, radio, to create the impression that he was addressing every American’s hopes and fears; the President thus became a member of every family.

In Germany radios were far less widely used. So Hitler took advantage of that other means of mass communication—giant rallies and ceremonies at which thousands could directly see and hear their Fuehrer. But even in the United States rallies and parades were used to arouse support for the New Deal recovery programs, especially the National Recovery Administration, which tried to impose the same type of fascist planning on business that Mussolini and soon Hitler established in their countries.

Grand government projects were all part of the projection of state power and authority. In Italy Mussolini cleared the Pontine Marshes outside Rome and designed model communities for resettlement of the unemployed. In Germany Hitler oversaw the construction of the autobahn system even though the number of privately owned cars was a fraction of that in the United States. In America the power of government was symbolized by the Tennessee Valley Authority, through which Washington changed the course of rivers, built massive dams, and electrified an entire region of the country. Of course in every one of those projects, the people whose lives were disrupted or uprooted counted for little compared to the task of remaking society according to the central plans of the “leaders.”

Military power was an essential imagery in the rhetoric. Hitler glorified uniformed legions in torch-lit parades. Roosevelt emphasized military imagery in his speeches, such as his 1933 inaugural address, in which he spoke of the Depression as if it were a foreign foe. If Americans did not voluntarily comply with his proposed recovery programs, he would not hesitate to use the full coercive powers of the state to win the “war” against unemployment. He spoke of the Blue Eagle, the symbol of the NRA, as a badge that all patriotic businesses should proudly display to prove they were doing their part and to distinguish them from “enemies” of recovery who refused to go along with the government’s plans.

American and European commentators in the 1930s also pointed out Hitler’s and Roosevelt’s centralization of power. Dictatorship was never imposed in the United States in the same way it was in Nazi Germany, but thoughtful writers wondered if such centralization did not run the risk of undermining the constitutional separation of powers. Unchecked power could easily extinguish freedom in the United States.

Finally, Schivelbusch reminds his readers of a book by John T. Flynn, As We Go Marching, that was published in 1944. Flynn had been a long-time critic of the New Deal. In the book he pointed out the many similarities among the three fascisms. Italian and German fascism were the “bad” kind. But the American brand was dangerously seen as the “good fascism,” Flynn warned. Wrapped in the stars and stripes and presented as a new dawn of American economic vitality and global leadership, complete with unrestrained presidential power, the American brand of fascism threatened to destroy all that the Founding Fathers had built for a country of liberty.

Regulation and planning at home, political and military adventures abroad, and greater power in the hands of the head of state meant a different type of America from what had existed in the past, Flynn feared. Six decades later those dangers seem in many ways even more real than in 1944. Wolfgang Schivelbusch has reminded us that the danger of concentrated political power was understood back in the 1930s. We should pay attention today.

Today many clamor to place an additional value above life itself. “Without your health, who are you?” is a popular question. “Without your health, you really have nothing,” Internet sites tell us. “Without your health, the rest is pointless. . . . Nothing else matters.” 

Surely something so important as health should be a right, especially in such an affluent nation, shouldn’t it? 

American medicine is often criticized for placing too much emphasis on curing disease and not enough on maintaining health. All we need to do is to prevent people from getting sick, or treat them when they are only slightly ill, to prevent costly hospitalizations later—or so it is claimed. “Health care” supposedly heads off “sickness care,” saving enormous “resources” and making all of society better and happier. Presumably it also increases life expectancy—overall. (There is little evidence for these assertions, and substantial evidence to contradict them, but that’s the subject of another article.) 

Still more important, health is the very “cornerstone of a democratic society,” according to the crusading reformer John Kitzhaber, M.D., the former governor of Oregon who once practiced emergency medicine. In what he dubs the Archimedes Movement, he plans to use health as the lever to move the earth and “reboot democracy.” The overarching (stated) goal is to “maximize the health of the population.” 

What could be wrong with the popular, noble-sounding goals of maximum health or universal health? 

There’s ample evidence that Americans don’t care very much about their health. They grouse about copayments at the doctor’s office or pharmacy and may leave an office in high dudgeon if expected to pay a reasonable bill not “covered” by their insurance. They often refuse to buy medical insurance even if they can afford it. Aside from a subpopulation of health fanatics, many Americans constantly defy the grandmotherly advice that is the proven basis for effective health maintenance. They smoke, drink, take drugs, engage in casual sex, and/or overeat. They do not exercise, eat their vegetables, or conscientiously wash their hands. They may be willing to take lots of pills, but appear to be allergic to anything that interferes with instant gratification or requires self-discipline. 

Fortunately, Americans still have the right to practice good health habits—according to their own views, not necessarily the American Medical Association’s. They also have the right to liberty or to refuse to take care of their health, and many exercise it. Kitzhaber and his fellow reformers plan to do something about that. Being healthy is not just a right but a duty! 

However recalcitrant they may be about unhealthy lifestyles, Americans do care about life when facing a real and present danger of death as opposed to a hypothetical future health problem. At that point they usually want to spare no expense—especially if it is somebody else’s expense. And here’s where human instincts will collide head on with health reformers’ abstractions. People naturally tend to place life above health; after all, without life, health is meaningless. As long as there’s life, there’s hope for improvement. For reformers like Kitzhaber, however, the priority is reversed. Collective health is more important than individual lives. The implications are profound. 

It ought to be obvious that there is an unbridgeable chasm between life and death. Nevertheless, the discontinuity apparently escapes those who set up relative value scales based on “quality-adjusted life-years” (QALYs). The unstated assumption is that at some point on the QALY scale, visible to experts, the value of a life becomes negative—even less than the value of death. While the old-fashioned meaning of “a fate worse than death” has been mostly forgotten, the concept has taken on a whole new and very broad definition. 

How can this be? 

We don’t like to use the term lebensunwertes Leben (life unworthy of life) because of its historical association with the embodiment of evil (National Socialism). Instead, the emphasis is placed on optimizing the use of resources. As the Vision Statement of the Archimedes Movement explains, the goal of maximal population health is to be achieved by “creating a sustainable system which reallocates the public resources spent on health care that ensures universal access to a defined set of effective health services”; that is, “care that is effective in producing health.” Care that simply relieves pain, reduces disability, or postpones death might not qualify (and, unlike “health care,” is certainly not a right, as is operationally demonstrated wherever nationalized medicine has been tried). 

Kitzhaber is the architect of the Oregon Health Plan, which prioritizes services and cuts off public funding for all those that fall below a line set by the legislature. It is probably not coincidental that Oregon is the first state to permit physician-assisted suicide. The health plan was supposed to increase access to “basic health care” without increasing costs. Although by 2003, costs were four times as high as at the plan’s inception, Kitzhaber’s enthusiasm is not dampened: Expenditures are not the only concern. 

Spending can always be ratcheted down once a program is entrenched and accepted. Thus while cost containment is important, it can wait. First there’s the Vision of how reformers can use the perceived health-care crisis to “heal [sic] the divisions within our society”—as it is “the great leveler.” The budget should be used not to “cheat death” but to put bioethics into practice and to “distribute shortfalls equitably.” There will, undoubtedly, be shortfalls. 

Clearly, in Kitzhaber’s view, “health” trumps life. And “health” is not mere physical health but the well-being of society—as manifested by social justice, egalitarian distribution of goods and services, and proper ethics. 

Choice Constrained 

Proponents of “universal health coverage” are generally dedicated to bioethics—which seems largely concerned with choosing death for oneself or others purportedly because an unhealthy life or severe disability is unendurable. But most other choices are to be constrained. 

A “living will is actually a dying will,” explains James Pendleton, M.D., a Pennsylvania psychiatrist and a past president of the Association of American Physicians and Surgeons. The British government holds the view that a living will may not insist that an incapacitated person be kept alive; this view was recently confirmed by the European Court of Appeals. In the United States hospitals are generally not required to continue care that they consider “futile.” Families who disagree with a hospital’s decision may be given ten days to try to find another source of care for a patient. “Futile” care is Newspeak for care that is actually effective at keeping the patient alive, although not at restoring mental capacity or health—otherwise, death of the patient would moot the questions. 

If the taxpayers are involved, then there is a question of whether it is justifiable to seize money from one person to pay for benefits to another, whatever the efficacy of the treatment. But what if private funds are to be used? 

The question of whether a Canadian has the right to use his own money to purchase medical care that is supposed to be covered under the national health plan, but is unavailable, was recently taken to the Canadian Supreme Court by Jacques Chaoulli, M.D. Chaoulli had been forced to abandon his emergency house-call practice because of the mounting government penalties for accepting private payment. The case was brought, at Chaoulli’s personal expense of around $600,000 (and risk of having to pay the government’s legal costs if he lost) on behalf of a patient who had to wait a year for a hip replacement. 

In a decision that some fear could destroy the government’s system, the Court ruled that “access to a waiting list is not access to health care.” The decision was stayed for a year to permit the system to adjust to the threat of competition. While it applies only to Quebec , the effects are expected to reverberate across Canada . 

“How can you imagine that Quebeckers may live,” asks Chaoulli, “and the English Canadian has to die?” 

Would Americans be allowed to buy private care if compulsory public insurance becomes law? Advocates of universal coverage usually don’t address this question. But Kitzhaber says he would permit people to purchase extra medical care, using “discretionary income”—that which is left after taxes. 

Taxes are also a great leveler. For the same miserable public “health insurance” Canadians pay from $305 to $27,000 in taxes each year, depending on income bracket. “The end game is that people with money no longer want to pay the taxes required to provide quality health care to everybody,” states Michael McBane, national coordinator of the Canadian Health Coalition, which opposes privatization. 

Assumed Right 

Americans tend to assume that they have the constitutional right to spend their own money to extend or enhance their own lives. How to get around that obstacle to universal rationing was addressed by the Clinton Task Force on Health Care Reform. The public-private partnership is a promising method, as the Constitution does not apply to private entities. In fact, most Americans have already lost the ability to buy private medical care in this way. 

Medicare patients who are enrolled in Part B may not use their money to buy “covered” services outside the system, unless they see one of the relatively few physicians who have opted out completely, because physicians are forbidden to accept the payment. Shockingly, patients enrolled in managed-care plans have also forfeited their rights, but are generally unaware of it because severe rationing is not yet in effect. 

The key is the “hold harmless” clause that forbids physicians contracted with a managed-care plan to charge subscribers privately or to “balance bill” (charge more than the plan allows, even if the payment is a dollar or less). The only thing subscribers have the right to purchase for themselves from a contracted provider is cosmetic or experimental treatments. The Lobb family discovered this when Sandra Lobb was refused admission to an alcohol-rehabilitation program, although her physician recommended it and her family was willing to pay. By contract the physician was not allowed to circumvent the plan’s utilization-review program. Mrs. Lobb died. 

Insurance companies do not make their subscribers aware of this limitation. Only by remarkable persistence was one small business owner, of Cameron’s Hardware & Supply in Oxford, Pennsylvania , able to get the insurance carrier to admit to the implications of the “hold harmless” clause, which is probably required by state law. 

A Collision of Rights 

Rights are enforceable. The only way to enforce a right to an economic good such as medical treatment is through taxation: in other words, to give some a license to steal resources from productive persons to pay for benefits to others. Because of taxation a person has no right to use his earnings to support his own life until he has first “contributed” to societal health. As demands inevitably mount, rationing becomes increasingly stringent. Only those with sufficient means to pay twice for medical care have a way to escape. If legally prohibited from purchasing extra care in their own country, they may be forced to go abroad, as many affluent Canadians do. 

Despite the professed benevolent intentions of “universal health care” advocates, they are turning a license to steal into a license to kill those who are not sufficiently healthy by depriving them first of medical care and then of the sustenance that all living things require. The term “health care” is well chosen: it cares for health, and discriminates against the sick. 

There are great campaigns underway to coerce people into being fully vaccinated and aggressively monitored and treated for diabetes, mild hypertension, nonoptimal blood lipids, and signs of incipient “mental illness.” At the same time, people are urged to accept nontreatment plus terminal sedation and dehydration for conditions such as stroke or degenerative neurologic diseases. 

There are many stakeholders to be placated in the political process. There are those with crushing liabilities, including governments and business enterprises with underfunded pension plans, as well as family members who don’t want their inheritances to be consumed. There are those with the potential to profit from administering small-claims payments, churning well patients through a clinic while diverting the sick ones, providing blockbuster drugs and vaccines to a large proportion of the population, garnering votes for reelection, or writing the guidelines and protocols for approved treatments. 

Exploiting human fears of sickness and death is a favorite tactic for politicians and rent-seekers. Promising health while being fully aware of the dark side—premature death, the ultimate leveler—is the supreme hypocrisy. 

Persons who want to be in charge of their own life-and-death decisions need to be aware of the price tag on compulsory insurance. Endlessly escalating demands on your money are guaranteed. But worse, you must trade your right to life—and to the liberty and property required to sustain it—for an obligation to measure up to the official standard for health. Or else. Having assumed responsibility for your treatment, the government must assure your worthiness. 

It is worthwhile to remember that the world’s premier health nuts were members of the National Socialist party. And while the talk is about health, that’s merely a lever. The unstated overarching goal is totalitarian control.

Over a professional career that spanned almost three-quarters of the twentieth century, the Austrian economist Ludwig von Mises was without any exaggeration one of the leading and most important defenders of economic liberty. The ideas of individual freedom, the market economy, and limited government that he defended in the face of the rising tide of socialism, fascism, and the interventionist wel­fare state have had few champions as clear and persua­sive as Mises. He was also the most comprehensive and consistent critic of all forms of modern collectivism. Furthermore, his numerous writings on the political, economic, and social principles of classical liberalism and the market order remain as fresh and rele­vant as when he penned them decades ago.¹

Born in the city of Lemberg in the old Austro-Hungarian Empire on September 29, 1881, Mises came from a prominent family of Jewish merchants and business­men. His great-grandfather Mayer Rach­miel Mises was honored with a nobility title for his service to the Emperor Franz Joseph as a leader of the Jewish community in Lemberg, a few months before Ludwig was born.²

Ludwig’s father, Arthur, moved his family to Vienna in the early 1890s where he worked as a civil engineer for the Imperial railway system. Ludwig attended one of the city’s leading academic gymnasiums as preparation for university studies. He entered the University of Vienna in 1900 and received his doctoral degree in jurispru­dence in 1906. In 1909 he was employed by the Vienna Chamber of Commerce, Crafts, and Industry, and continued to work at the Chamber as a senior economic analyst until he left Vienna in 1934 to accept a full-time teaching position at the Graduate Institute of Interna­tional Studies in Geneva, Switzerland. Besides his work at the Chamber, Mises also taught at the University of Vienna, led an internationally renowned interdiscipli­nary private seminar, and founded the Austrian Institute for Business Cycle Research in 1927, with a young Friedrich A. Hayek as its first director.³

It was during his years in Geneva, between 1934 and 1940, that Mises wrote his greatest work in economics, the German-language version of what became in English Human Action: A Treatise on Economics.⁴ In the summer of 1940, as the Nazi war machine was finish­ing its conquest of western Europe, Mises and his wife made their way from Switzer­land to the United States, where he spent the rest his life continuing his writings and also teaching for most of those years at New York University, until his death on October 10, 1973, at age 92.

In addition, in both Vienna between the two world wars and then again in post-World War II America, Mises demonstrated a unique ability to attract intellectually creative students around him, thus foster­ing new generations of scholars to continue the ideas of the Austrian school of economics.

An appreciation of Mises’s defense of freedom requires an understanding of the political and ideologi­cal trends of the first half of the twentieth century. Throughout most of the nineteenth century, “liberalism” had meant belief in and devotion to personal free­dom, constitutionally limited government, the sanctity of private property, as well as freedom of enterprise at home and free trade among the nations of the world.

But even before World War I many of those who labeled themselves “liberals” were in fact advocates of what a few decades earlier had been called “state social­ism” in prewar Imperial Germany. For almost 40 years before World War I, many of the leading German econ­omists, historians, and political scientists—who became widely known as members of the German Historical School—had argued that the socialists had been correct in their criticisms of free-market capitalism. The unregulated market, they said, resulted in an exploitation of the workers and a disregard of the “national interest.” Where the socialists had gone wrong, they insisted, was in their radical demand for a revolution­ary overthrow of the entire existing social order.

What Germany needed instead, they stated, was “state socialism,” under which social reforms would be intro­duced to ameliorate the supposed “excesses” of unbridled laissez faire. The German Historical School sup­ported and encouraged the imposition of the modern welfare state by the German “Iron Chancellor,” Otto von Bismarck, in the 1880s and 1890s. Socialized medicine, state-managed old-age pensions, minimum-wage laws, and government-sponsored public housing and recreational facilities would provide “cradle to grave” security for the “working classes,” and would thus lure them away from the more-radical pro­posals of the Marxian socialists.⁵

At the same time, government regulation of industry and agriculture through tariffs, cartels, and subsidies, as well as production and price controls, would assure that the activities of the “capitalist class” would be harnessed to what the political authorities considered to be in the “national interest.” Pragmatism and expediency in all economic and social policy decisions were hailed as the highest forms of political wisdom and “statesmanship,” in place of “inflexible” constitutional restraints that limited the discretionary power for government intervention.

Members of the German Historical School argued that old-fashioned classical liberalism had been purely “negative” in its understanding of freedom, and in advo­cating that government’s role was simply to secure the lives, liberty, and property of the citizenry from violence, aggression, and fraud. Government, they said, had to be more “positive” and active in providing social safety nets for the masses against the uncertainties of life. Hence, they and their “progressive” followers in England, France, and especially the United States soon were referring to their ideas as a newer and more-enlightened “liberalism,” which would create a truer and more complete “freedom” from want and worry.⁶ The concept of liberalism, most particularly in the United States, was changing from a political and economic philosophy of individual liberty and free enterprise under the rule of law and limited gov­ernment, to a notion of political pater­nalism with an increasingly intrusive hand of government in the social and commercial affairs of its citizens.⁷

Socialism and Nationalism

The last decades of the nineteenth century also saw the growth of two other modern forms of collec­tivism: socialism and nationalism. Their common premise was that the individual and his interests were always potentially in conflict with the best interests of society as a whole. The Marxists claimed to have discovered the inescapable “laws of history,” which demonstrated that the emer­gence of the division of labor and private property split society into inherently antagonistic social “classes.” Those who owned the means of production earned rent and profit by extracting a portion of the wealth pro­duced by the non-owning workers whom the owners of productive property employed in agriculture and industry.

Eventually this class conflict would lead, through a process of historical evolution, to a radical and revolu­tionary change in which the workers would rise up and expropriate the property of the capitalists. After having socialized the means of production, the new workers’ state would introduce central planning in place of the previous decentralized and profit-oriented production plans of the now expropriated capitalists. Socialist cen­tral planning, it was claimed, would generate a level of production and a rising standard of living far exceeding anything experienced during the “capitalist phase” of human history. This process would culminate in a “post-scarcity” world in which all of man’s wants and wishes would be fully satisfied, with selfishness and greed abol­ished from the face of the earth.⁸

The proponents of aggressive nationalism argued that there was, indeed, an inherent conflict among men in the world.⁹ This antagonism, however, was not based on social classes as the Marxian socialists defined them. Instead, these conflicts were between nations and national groups. Unfortunately, the nationalist ideo­logues said, individuals within nations often acted in ways inconsistent with the best interests of the nation to which they belonged. Thus the particular interests of businessmen, workers, and those in various professional groups had to be regulated and controlled for the fur­therance of the greater national good. As a result, aggres­sive nationalism dovetailed—especially, though certainly not exclusively, in Imperial Germany—with the inter­ventionist and welfare-statist policies of state socialism and the newer “progressive” liberalism.

Commercial and military conflict among the nations of the world was inevitable in the eyes of these nation­alists. The prosperity of any one nation could only come at the expense of other nations. Hence, the task of all national statesmen was to foster the power and triumph of their own national group through the conquest and impoverishment of others around the world. Since no nation would willingly accept its own political and material destruction, war was an inescapable aspect of the human condition. Militarism and the martial spirit were likewise hailed as both necessary and superior to the “individualistic” and “pacifistic” spirit of production and trade.¹⁰

The culmination of these collectivist tendencies was the outbreak of World War I in 1914, an analysis of the causes and consequences of which Ludwig von Mises offered in his 1919 volume, Nation, State, and Economy.¹¹ The Great War, as it was called, not only brought forth the triumph of the nationalistic spirit; it also saw the imposition of various forms of socialist central planning as virtually all the belligerent nations either nationalized or thoroughly controlled private industry and agricul­ture in the name of the wartime national emergency. The governments at war also established welfare-statist rationing and regulation of all consumer production since the needs of total war required total state respon­sibility for the supposed well-being of entire popula­tions.

Out of the ashes of World War I there arose new totalitarian states, first with the establishment of a com­munist dictatorship in Russia following the Bolshevik Revolution of 1917 under Lenin’s leadership, and then with the rise to power of Mussolini and his Fascist Party in Italy in 1922. Both the communists and the fascists rejected the ideas and the institutions of classical liberal­ism. Constitutional government, the rule of law, civil lib­erties, and economic freedom were declared by both these variations on the collectivist theme as reactionary hindrances to the success of, respectively, the worker’s state in Soviet Russia and national greatness in Fascist Italy. Both communism and fascism insisted that the individual needed to be “reeducated” and made to con­form to the wider socialist or nationalist good. The indi­vidual was to be reduced to a cog in the machinery of the all-powerful and all-planning state. ¹²

Germany’s defeat in the war had resulted in political and economic chaos, which culminated in the disastrous hyperinflation of the early 1920s.¹³ Many of the social and cultural anchors of German society were unhinged by the war and the inflation.¹⁴ A growing number of Germans longed for a “Leader” to guide them out of the morass of political instability and economic hardship. In 1925 Mises analyzed these trends in Germany and con­cluded that they were leading the German people toward a “national socialism,” instead of either classical liberalism or Marxian socialism.¹⁵ Anticipating the tri­umph of Hitler and his National Socialist (Nazi) move­ment in 1933, Mises warned in 1926 that many Germans were “setting their hopes on the coming of the ‘strong man’—the tyrant who will think for them and care for them. ”¹⁶

In later years Mises emphasized that while the Marx­ists in the Soviet Union used the tools of central plan­ning to culturally redesign a socialist “new man” through various methods of indoctrination and thought control, the National Socialists in Nazi Germany took this a step further with their scheme of centrally planning the racial breeding of a new “master race. ”¹⁷

This was the historical context in which Mises pub­lished some of his most important works in the period between the two world wars: Socialism (1922), Liberalism (1927), and Critique of Interventionism (1929).

1. On Mises’s life and contributions to economics and the phi­losophy of freedom, see Richard M. Ebeling, Austrian Economics and the Political Economy of Freedom (Northampton, Mass.: Edward Elgar, 2003) chapter 3, “A Rational Economist in an Irrational Age: Lud­wig von Mises,” pp. 61–99; and Richard M. Ebeling, “Planning for Freedom: Ludwig von Mises as Political Economist and Policy Ana­lyst,” in Richard M. Ebeling, ed., Competition or Compulsion: The Mar­ket Economy versus the New Social Engineering (Hillsdale, Mich.: Hillsdale College Press, 2001), pp. 1–85; see, also, Murray N. Roth-bard, Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von Mises Institute, 1988), and Israel M. Kirzner, Ludwig von Mises (Wilmington, Del.: ISI Books, 2001).
2. On Mises’s family background and the cultural climate of Vienna and Austria in terms of the Jews and anti-Semitism, see Richard M. Ebeling, “Ludwig von Mises and the Vienna of His Time,” Parts I and II, The Freeman, March 2005, pp. 24–31, and April 2005, pp. 19–25.
3. On Mises’s work as policy analyst and advocate in the Austria of the interwar period, see Richard M. Ebeling, “The Economist as the Historian of Decline: Ludwig von Mises and the Austria Between the Two World Wars,” in Richard M. Ebeling, ed., Globalization: Will Freedom or Global Government Dominate the International Marketplace? (Hillsdale, Mich.: Hillsdale College Press, 2002), pp. 1–68.
4. Ludwig von Mises, Human Action: A Treatise on Economics, 3d rev. ed. (Irvington-on-Hudson, N.Y.: Foundation for Economic Edu­cation, 1996 [1966]).
5. Bismarck told an American admirer, “My idea was to bribe the working class, or shall I say, to win them over, to regard the state as a social institution existing for their sake and interested in their wel­fare.” See William H. Dawson, The Evolution of Modern Germany, vol. II (New York: Charles Scribner’s Sons, 1914), p. 349.
6. On the ideas and development of the German welfare state and regulated economy in the late nineteenth and early twentieth cen­turies, see Richard M. Ebeling, Austrian Economics and the Political Economy of Freedom, chapter 7, “The Political Myths and Economic Realities of the Welfare State,” pp. 179–202, especially, pp. 179–84; and Richard M. Ebeling, “National Health Care and the Welfare State,” in Jacob G. Hornberger and Richard M. Ebeling, eds., The Dangers of Socialized Medicine (Fairfax, Va.: The Future of Freedom Foundation, 1994), pp. 25–37; see also, Mises’s criticisms of the Ger­man Historical School in “The Historical Setting of the Austrian School of Economics” [1969], reprinted in Bettina Bien Greaves, ed., Austrian Economics:An Anthology (Irvington-on-Hudson, N.Y.: Foun­dation for Economic Education, 1996), pp. 53–76, especially pp. 60–69.
7. See Richard M. Ebeling, “Free Markets, the Rule of Law, and Classical Liberalism,” The Freeman, May 2004, pp. 8–15.
8. Mises showed the inherent flaws and contradictions in the Marxian theory of history and class conflict in Socialism:An Econom­ic and Sociological Analysis (Indianapolis: Liberty Classics, 1981 [1922; revised eds., 1932, 1951]), pp. 279–320, and Theory and History: An Interpretation of Social and Economic Evolution (Indianapolis: Liberty Fund, 2005 [1957]), pp. 102–58.
9. On the evolution and meanings of nationality and nationalism, see Carlton J.H. Hayes, The Historical Evolution of Modern Nationalism (New York: Richard R. Smith, 1931); Carlton J.H. Hayes, Essays on Nationalism (New York: Macmillan, 1928);Walter Sulzbach, National Consciousness (Washington, D.C.: American Council on Public Affairs, 1943); and Frederick Hertz, Nationality in History and Politics (NewYork: Oxford University Press, 1944).
10. Ludwig von Mises,“Autarky and Its Consequences” [1943] in Richard M. Ebeling, ed., Money, Method and the Market Process: Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990) p. 138: “Aggressive or militaristic nationalism aims at conquest and the subjugation of other nations by arms. Economic nationalism aims at the furthering the well-being of one’s own nation or some of its groups through inflicting harm upon foreigners by economic measures, for instance: trade and migration barriers, expropriation of foreign investments, repudiation of foreign debts, currency devaluation, and foreign exchange control.”
11. Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time (New York: New York University Press, 1983 [1919]).
12. See Richard M. Ebeling, Austrian Economics and the Political Economy of Freedom, chapter 6, “Classical Liberalism and Collectivism in the 20th Century,” pp. 159–78, especially pp. 159–63; on the polit­ical and ideological similarities of communism, fascism, and Nazism, see Ludwig von Mises, Planned Chaos (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1947), pp. 62–79; also see Richard Overy, The Dictators: Hitler’s Germany., Stalin’s Russia (New York:W.W. Norton, 2004);A.James Gregor, The Faces of Janus: Marx­ism and Fascism in the Twentieth Century (New Haven, Conn.: Yale University Press, 2000); François Furet, The Passing of an Illusion: The Idea of Communism in the Twentieth Century (Chicago: University of Chicago Press, 1999); and Richard Pipes, Russia Under the Bolshevik Regime (NewYork: Alfred A. Knopf, 1993), pp. 240–81.
13. For Mises’s analysis of the Great German Inflation, see his monograph, “Stabilization of the Monetary Unit—From the View­point of Theory” [1923], in Percy L. Greaves, Jr., ed., Ludwig von Mises, On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978), pp. 1–49, and Ludwig von Mises, “Busi­ness Under German Inflation” [1946], reprinted in Ideas on Liberty, November 2003, pp. 10–13; also Richard M. Ebeling, “The Great German Inflation,” Ideas on Liberty, November 2003, pp. 4–5.
14. See Albrecht Mendelssohn Bartholdy, The War and German Society: The Testament of a Liberal (New York: Howard Fertig, 1971 [1937]), and Mortiz J. Bonn, Wandering Scholar (London: Cohen & West, Ltd., 1949), pp. 273–90.
15. Ludwig von Mises, “Anti-Marxism” [1925] in Critique of Interventionism (Irvington-on-Hudson, N.Y.: Foundation for Eco­nomic Education, 1996 [1929]), pp. 71–95.
16. Ludwig von Mises, “Social Liberalism,” [1926] in Critique of Interventionism, p. 67.
17. Mises, Planned Chaos, pp. 77–78.

by Thomas Fleming

Basic Books • 2003 • 543 pages • $30.00

Reviewed by Richard M. Ebeling

Imagine how different the twentieth century might have been if Lenin and the Bolsheviks had never come to power in Russia in 1917 and had not set in motion all the cruel crimes that were committed in the name of making a new socialist man for a bright and beautiful communist future. Imagine if Mussolini and Hitler had never come to power and we had been spared the fascist and Nazi variations on the totalitarian theme.

No one can say how the twentieth century would have taken shape if these collectivist demons had not been set loose. But it can be said with a fairly high degree of certainty that the triumphs of communism, fascism, and Nazism would not have occurred except for one event: the First World War.

How different was the epoch before 1914 from everything that came after it! It is true that nationalist, neo-mercantilist, and socialist ideas and policies were gaining influence in the years before the beginning of World War I. But for the most part—even in militarist-minded Germany— there was a dominant sense that governments should respect a certain conception of what it meant to live in a civilized society.

That conception included the ideas of individual liberty, private property, rule of law, relatively free commerce and trade, and limits on the method of fighting wars. As one historian pointed out, an Englishman, before 1914, could go through practically his entire life and never be confronted by the state, other than in the form of the policeman walking his beat and the occasional irritation of serving on a jury.

That world, however imperfect from a principled classical-liberal perspective, was nonetheless a paradise of human liberty compared to what followed through the rest of the twentieth century. It came to an end with the opening shots of the First World War in 1914.

Thomas Fleming’s book, The Illusion of Victory: America in World War I, focuses on Woodrow Wilson’s crusade to bring the United States into that European conflict, and the domestic and international consequences resulting from American participation.

The personality characteristics that Fleming finds in Wilson include arrogant self-righteousness, a lust for power, petty vindictiveness, cruelty toward enemies and opponents, lack of political common sense, and a streak of near-irrational stubbornness that resulted in personal and political tragedy for himself.

Wilson was manipulated by British propaganda once World War I had begun. He was taken in by fabricated atrocity stories about German brutality in Belgium and France, and was swayed by British and American interests wanting to assure an Allied victory for various political and economic reasons.

After running for re-election in 1916 on the slogan “He kept us out of war,” Wilson asked Congress for a declaration of war on April 12, 1917. Once the United States had entered the war, he introduced a Committee on Public Information that censored the press and suppressed dissent and disagreement.

Conscription was introduced, adding compulsory military service to many other wartime restrictions on domestic life. More than a million young men were sent to France. Many thousands of them never returned home or only with permanent injury, after being sent into the meat-grinder of trench warfare.

At the war’s end Wilson went to Europe to remake the world in his own image of a just society of nations. After spending seven months in the company of the other Allied leaders, he discovered that all his earlier rhetoric and pronouncements about a peace without vengeance, without territorial annexations, and rights of self-determination for small countries were a fool’s dream in the real world of nationalism and imperialism. The peace treaty imposed on the Germans was one of revenge, political and economic emasculation, and deep humiliation. Wilson had been willing to accept virtually anything the British and the French wanted, as long as he could get their acceptance for a League of Nations.

When he returned to the United States, Wilson discovered that many Republicans and a sizeable number of Democrats considered the peace terms to be either too harsh or too soft. Unwilling to compromise, he insisted on fighting an all-or-nothing campaign in favor of the peace treaty and the terms for a League of Nations. The treaty twice went down to defeat in the Senate and the campaign brought on a stroke from which Wilson never recovered.

Fleming suggests that if the United States had stayed out of the war, a compromise peace would have been forced upon the exhausted European combatants. And even if the terms had been more in favor of Germany than the Allies, it still might very well have been a far better outcome, from the perspective of hindsight, than a war that went on so long that its unintended by-product became those twentieth-century forms of collectivism and totalitarianism.

Richard Ebeling is president of the Foundation for Economic Education.

Another Century of War?

by Gabriel Kolko

New Press • 2002 • 160 pages • $15.95 paperback

Reviewed by John V. Denson

Most libertarians, or believers in the free market, probably met Professor Gabriel Kolko through reading his 1963 revisionist interpretation of American economic history from 1900 to 1916, The Triumph of Conservatism. Since then, Kolko has been primarily a historian of war and American foreign policy, his 1994 magnum opus being Century of War: Politics, Conflicts, and Society since 1914. The publisher of that work suggested he continue the theme by commenting on the events of September 11, 2001.

Kolko states the purpose of his book: “In the following pages I outline some of the causes for the events of September 11 and why America’s foreign policies not only have failed to exploit communism’s demise but have become both more destabilizing and counterproductive. I also try to answer the crucial question posed in my title: Will there be another century of war?”

His theme is that the United States has become the single most important arms exporter, thereby contributing to much of the disorder in the world. Further, contrary to America’s claims of bringing stability by its interventions, especially since 1947 in the Middle East, it has caused death, destruction, and turmoil. For Kolko, America has become the sole rogue superpower, no longer restrained by the possibility of the Soviet Union’s counterpunch.

Kolko notes that much changed since September 11. With terrorism becoming the worldwide target of the U.S. government, the result may be perpetual war: “Bush had campaigned in 2000 as a critic of ‘big government,’ but after September 11 he became an ‘imperial’ president with new, draconian powers over civil liberties.”

In regard to U.S. policies in the Middle East, Kolko argues that the CIA set up a Vietnam-type trap for the Soviet Union in Afghanistan, and with financial assistance from Saudi Arabia, the U.S. government armed and supplied Osama bin Laden to fight the Soviets. When Saddam Hussein invaded Kuwait, bin Laden offered to repel Iraq, but this offer was refused. Instead, the American coalition, with financial support from Saudi Arabia, pushed Hussein back within his borders, while leaving American troops in Saudi Arabia. This alienated bin Laden, who vowed vengeance on America. He mobilized his forces into al Qaeda in 1989 by training up to 70,000 potential fighters and terrorists, and creating cells in at least 50 countries, all initially financed with U.S. and Saudi money. Kolko states: “But both of America’s prime enemies in the Islamic world today—Osama bin Laden and Saddam Hussein in Iraq—were for much of the 1980s its close allies and friends, whom it sustained and encouraged with arms and much else.” (Some analysts, such as Peter Bergen, author of Holy War, Inc., dispute this.)

Kolko contends that our massive support for Israel, which began in 1968, was one of the turning points in American foreign policy and has led to enmity against America: “This aid reached $600 million in 1971 (seven times the amount under the entire Johnson administration) and over $2 billion in 1973. Thenceforth, Israel became the leading recipient of U.S. arms aid. Today it still receives about $3 billion in free American aid. Most of the Arab world, quite understandably, has since identified Israel and the United States as one.”

The author maintains that America faces a dire future if it continues its frequent interventions and warfare throughout the world. He writes, “Should it confront the forty or more nations that now have terrorist networks, then it will in one manner or another intervene everywhere. . . . America has power without wisdom, and cannot recognize the limits of arms despite its repeated experiences. The result has been folly, and hatred, which is a recipe for disasters. September 11 confirmed that. The war has come home.”

Kolko concludes that we cannot afford further interventions and wars since weapons of mass destruction are prevalent throughout the world and available to terrorists everywhere.

This little book, so full of wisdom and good common sense, should lead the way toward reaffirming America’s original foreign policy of noninterventionism.

John Denson is a lawyer in Opelika, Alabama, and the editor of Reassessing the Presidency and The Costs of War.

The Future of U.S. Capitalism

by Frederic L. Pryor

Cambridge University Press • 2002 • 367 pages • $35.00

Reviewed by Gary M. Galles

In The Future of U.S. Capitalism, Frederic Pryor attempts “to analyze the most probable future of the economic system on the basis of the best information currently available.” He arrives at pessimistic conclusions, described variously as a tendency toward “a merciless economy,” “capitalism with a very hard edge,” and “capitalism with an inhuman face.”

Unfortunately, while Pryor includes some useful insights in his discussion, the core strands in his analysis are confused, at best. Therefore, even if some of his premises are correct, there is no reason for confidence in the conclusions drawn. Perhaps most important, though, his conclusions are pessimistic only because of his strong statist leanings. To anyone familiar with the case for limited government, his gray cloud is actually the silver lining.

The useful sections of Pryor’s book deal with demographic problems and financial-sector fragility. The pending retirement of the baby boom may well reduce savings and investment, cutting economic growth as well as confronting the U.S. taxpayers with tens of trillions of dollars in unfunded commitments to Social Security and Medicare recipients. Combined with the electoral clout of the elderly, that is likely to lead to substantial increases in taxes. Reduced saving could also lower asset prices, causing difficulties or even bankruptcy for pension plans, which might lead to further government bailouts. Dovetailed with increases in financial-sector fragility due to greater debt, the result may be increased vulnerability to financial shocks and serious bankruptcy and/or illiquidity problems.

The rest of Pryor’s book, however, is built on false premises. The most serious involve income and wealth inequality, his reliance on market concentration as a useful measure of competition, and the presumption that government intervention successfully improves and stabilizes the economy.

Pryor, who teaches economics at Swarthmore College, argues that income inequality has risen and that it will continue to do so (even though that is inconsistent with the most recent trends). This will supposedly cause social unrest and increasing “need” for government intervention.

He cites reams of data, but misunderstands them. He relies on reported income statistics, ignoring that consumption is the more relevant measure and that the lowest income quintile (20 percent) spends substantially more than twice its measured income each year. He also ignores that the worsening situation he sees for “the poor” is largely caused by the increasing fraction of retired people, many with near-zero measured income, which skews the average sharply downward at the low end of the income distribution. He claims that upward income mobility in the United States is limited, ignoring many studies to the contrary. He even concludes that having more high-income people somehow causes harm to low-income people, rather than seeing that in a world of voluntary market relationships, higher incomes mean greater benefits have been provided to others.

Given that increasing inequality drives much of his analysis, Pryor’s failures to understand the income measures and trends he relies on completely undermines his forecast’s credibility. But that is far from his only confusion.

Pryor’s understanding of competition amounts to little more than long-discredited measures of market structure, which displays no understanding of the process of competition. He needs to do some serious remedial reading of analysts such as Dominick Armentano and Harold Demsetz.

Pryor further argues that big business will increasingly control an accommodating government. This mistakes increasing political action to rein in the growing government extortion of business for an increase in business control over government. Aside from corporate welfare and protectionist policies, the business-government relationship is more of a war by government against businessmen (or more precisely, private property) than increasing control of government by business.

Perhaps Pryor’s greatest analytical error, however, grows from his vision of government. He expresses a naive Keynesian view of fiscal policy as a successful stabilization tool, and simplistically credits activist monetary policy with similar success. Therefore he mourns rather than celebrates the increased limits, thanks to globalization, on government power to “stabilize” the economy, as well as to engage in protectionism.

He wants a government even more massively involved in income redistribution (that is, theft) than it is today, favoring a society in which “public choice, rather than individual demand, becomes the arbiter of services.” He thinks poor educational achievement “can be solved in part by the infusion of federal and state funds,” and endorses such counterproductive policies as the minimum wage.

Thus Pryor’s gloomy conclusions stem from faulty understanding and analysis, combined with his desire for the government to do more of what in fact it should not do at all.

Gary Galles is professor of economics at Pepperdine University.

Creative Destruction: How Globalization Is Changing the World’s Cultures

by Tyler Cowen

Princeton University Press • 2002 • 171 pages • $27.95

Reviewed by George C. Leef

A main gripe against globalization is “American cultural hegemony.” When “we” build McDonald’s restaurants or sell designer jeans in culturally different nations, we’re guilty of undermining, if not destroying, the indigenous culture. “Culturecide” is nearly as bad as genocide.

The anti-globalization protesters have never thought deeply about the relationship between culture and trade (for that is all globalization comes down to—ever widening trade), but Tyler Cowen certainly has. In his latest book, the George Mason University economics professor carefully analyzes the impact of globalization on culture and finds that, as Joseph Schumpeter said of the process of competition generally, it’s a case of creative destruction. When the people of Culture A encounter the arts, products, technologies, and so forth of Culture B, they may end up abandoning some aspects of their own culture for things they prefer from the other. But those choices should not be lamented, Cowen argues.

He begins with a crucial insight: “Individuals who engage in cross-cultural exchange expect those transactions to make them better off, to enrich their cultural lives, and to increase their menu of choice. Just as trade typically makes countries richer in material terms, it tends to make them culturally richer as well.” Contrary to the anti-globalist rant about domination, the spread of cultural influence is not a case of “ours” somehow taking over “theirs.” It is a matter of individual actions. If Chinese teenagers like listening to Western pop music rather than traditional Chinese music, that isn’t domination. It’s peaceful change.

Cross-cultural exchanges, Cowen points out, increase diversity within cultures, while at the same time decreasing diversity among cultures. Using the example above, when Chinese add American pop music to their cultural mix, they now enjoy a wider range of choices. However, in doing so, the difference between Chinese and American cultures decreases. That bothers some cultural “purists,” who think it akin to species extinction when “we” start to contaminate the “authentic” cultures in other parts of the world.

Cowen treats the cultural purism with disdain. First, there aren’t really any pure cultures. With many interesting illustrations, he demonstrates that what we may think of as authentic native cultures are the products of considerable cross-cultural exchange, usually having taken place long before people were paying attention to the phenomenon. Consider the steel-drum music associated with Trinidad. Where did the steel drums come from? The answer is that American military forces brought many with them during World War II. The “authentic” music of Trinidad was based on bamboo percussion, which the Trinidadians happily abandoned when American steel drums became plentiful.

Similarly, Cowen points out that Navaho weavers hardly have a culturally pure product. Their dazzling geometric designs were not indigenous to the Navaho culture, but were borrowed from the ponchos of Spanish shepherds living in northern Mexico, designs that the Spanish had adapted from the Moors. Once machine-spun yarn and chemical dyes became available, the Navaho eagerly experimented with and began using them.

Even if we arbitrarily denominate the current cultures of China, Trinidad, the Navaho, and others as “pure,” so what? Does it follow that anti-globalists are doing those populations a favor in trying to protect them against Western contamination? Cowen has no patience for that argument, writing that “poorer societies should not be required to serve as diversity slaves.” That’s what the elitist position comes down to. People in all those exotic places with their quaint, “authentic” cultures should be denied the opportunity to adopt aspects of Western culture so that some elitists can bask in the warmth of knowing that they have helped protect against the ravages of capitalism.

Besides its resounding call for a laissez-faire approach to culture, Creative Destruction has a delightful side dish for the reader: Some embarrassing truths about one of the most overrated men of the twentieth century, Gandhi. Gandhi railed against Indian purchases of British textiles, calling them “defiling” and “our greatest outward pollution.” He insisted that Indians, no matter how poor, burn their foreign garments. Evidently, Gandhi regarded Indian weaving as “authentic” and foreign textiles as somehow a desecration of Indian culture. Cowen has sport in pointing out that “Western technologies provided critical pieces of the economic network behind Indian handweaving.” Gandhi comes off like a cranky authoritarian.

Anti-globalists need “issues” to grumble about. The supposed destruction of native cultures is one of those issues. Thanks to Tyler Cowen for showing that it’s nothing but hot air.

George Leef is book review editor of Ideas on Liberty.

Lewis writes that there are values of community “that may require deviations from the cold logic of market theory.” Note of course that logic is only criticized for being “cold” when it is being used by one’s opponent. One presumes that Lewis uses it himself to make inferences and persuade others on a regular basis.

But rhetorical analysis aside, is it true that there are some values of community that contradict market principles? Of course it is! But they tend to be values Lewis probably doesn’t support, like suppression of dissent (mustn’t offend community sensibilities) or the subjugation of the individual to the state (mustn’t promote excessive individualism). For example, Lewis relates an anecdote about the Nazis killing the men of one village, Civitella, and how the remembrance of that massacre helps foster a sense of community in the village. But the Nazis were hardly robust individualists! Like Italian fascism, Nazism was a profoundly communitarian movement. The remembrance of the massacre may well promote a sense of community, but I hope those people also remember that it was an ideology in which the community was accorded supreme status that made the massacre possible. Ideas like a master race, or a fatherland, or theocracy, are examples of attempts to foster a sense of community, not examples of unbridled individualism and devotion to free markets.

More to the point, however, Lewis has chosen as an example of something that promotes a spirit of community something that doesn’t require an abandonment of market principles. The people of that village come together voluntarily to remember the massacre, their sense of solidarity genuine and freely given. Not only does that not contradict market principles, it is an example of what makes market principles work, although it may seem crass to use that terminology.

Markets operate by allowing people to work together voluntarily to achieve genuinely shared goals in the commercial sense. Similar examples of “coming together” in noncommercial senses are harder to see in economic terms, but are the same in their voluntariness (and, often, in their lack of central planning). People are not coerced to commemorate the massacre any more than they are coerced into saying “good evening” to one another or letting the kids play outdoors. These institutions are as much an “invisible hand” or “spontaneous order” as any market.

The logic of markets isn’t even “cold”: it allows people the freedom to seek happiness and prosperity in their own way rather than having them be told how to live. The logic of markets is that most people are presumptively decent judges of their own interests (even if some are not), and that freedom to trade promotes the well-being of all concerned. That’s only a “cold logic” if you think people are too stupid to determine their own well-being or are incapable of cooperating in a shared project. It is people who believe those kinds of ideas who end up supporting powerful statist governments, like the ones in Italy and Germany 50 years ago, or in China now.

Community Coercion

Indeed, of Lewis’s seven examples of things about that village which foster a sense of community, only two have even the faintest relation to markets and public policy: agriculture subsidies and national health care. But of course, these two do involve coercion. Lewis points to olive groves and vineyards that he calls “uneconomic,” claiming that they wouldn’t exist without subsidies from the European Union. He rhetorically contrasts this with “corporate agriculture” taking over and transforming all those quaint little farms into a single crop. But is there any evidence that, say, Archer Daniels Midland would turn all the olive groves into wheat fields? There is a reason why the crops that grow in Tuscany grow there, and one suspects that world demand for wine and olive oil is not something that requires subsidy. And those subsidies, of course, mean that someone else in the European Union is being made poorer in order to be sure that farming in Tuscany never changes.

Lewis’s use of medical care is especially puzzling. He describes a handicapped friend who lives in the countryside, and for whom travel to a city for treatment would be a hardship. So she gets home care, courtesy of the government. But here’s the paradox: if these villages have such a sense of community, why would anyone need national-level assistance? Are the people of the village so cold-hearted that they cannot help a member of their community? Of course, they don’t have to answer that, since the national government is taking care of the problem. So does nationally subsidized health care really foster a sense of community, or does it hinder it? In any case, the same objection arises in this regard: we’re happy this patient gets adequate care, but if someone else is getting inadequate care in order to make this possible, it’s not a clear moral victory.

There are arguments Lewis might have made in favor of socialized health care and farm subsidies, but he cannot make them, since he continues to endorse the claim that markets actually do produce greater prosperity for everyone. So he builds his case on vague notions like “a sense of community.” After all, everyone likes a sense of community. But we need to keep in mind that most of the good things a community offers have nothing to do with coercive state measures, and recent history’s worst evils were uniformly the result of putting too much emphasis on the community over the individual.

The title of Lewis’s essay was “A Civilized Society.” A civilized society is one that respects individual human beings and doesn’t treat them either as incompetent children or as cogs in a machine. What Lewis derides as the logic of the market is the instantiation of that respect in the economic sphere. It has nothing to do with being courteous to one’s neighbors. A truly civilized sense of community requires the “logic of the market,” in the sense that a civilized community respects individual autonomy and people’s ability to cooperate in truly shared projects.

Röpke told his audience that Germany was in the grip of a “revolt against reason, freedom and humanity.” The National Socialists under Hitler were now the dominant force in an attack against the fundamental principles of liberalism and Western civilization. Liberalism, correctly understood, represented a 2,000-year-old intellectual heritage of political, civil, and economic liberty. Liberty required the rule of reason, resting on “truthfulness instead of obscurantism, clarity instead of hysteria, the advancement of knowledge instead of sensationalism for the masses, logic instead of wallowing in moods and emotion. . . . It is only the liberal ideal of the use of Reason in the service of truth that has engendered science . . . that alone has liberated Europe from the stupor and wretchedness of barbarism.”

An additional element in the philosophy of liberalism, rightly understood, Röpke explained, was the idea of humanity. “The idea of humanity is seen in all its full significance when conceived as the rejection of the principle of violence in favor of the principle of reason. Violence is relegated to the very bottom of the scale of value; its use is admitted only as a last resort and with the utmost reluctance. This, ultimately, is the essence of civilization.”

But Nazism was the culmination of Germany’s sinking into “illiberal barbarism,” Röpke said, the elements of which were based on: (1) “servilism,” a “longing for state slavery,” with the state becoming the “subject of unparalleled idolatry”; (2) “irrationalism,” in which “voices” in the air called for the German people to be guided by “blood,” “soil,” and a “storm of destructive and unruly emotions”; and (3) “brutalism,” in which “The beast of prey in man is extolled with unexampled cynicism, and with equal cynicism every immoral and brutal act is justified by the sanctity of the political end.” Röpke warned that, “a nation that yields to brutalism thereby excludes itself from the community of Western civilization.” He hoped Germany would step back from this abyss before its people had to learn their mistake in the fire of war.^[1]

Röpke also spoke out against the Nazi dismissal of Jewish professors and students from German universities, which began in April 1933. The Nazis denounced him as an “enemy of the people” and removed him from his professorship at the University of Marburg. After an angry exchange with two SS men sent to “reason” with him, Röpke decided to leave Germany and accept exile rather than live under National Socialism.^[2]

Leading Figure

Wilhelm Röpke was a leading intellectual figure of twentieth-century Europe. He combined conservatism with classical liberalism to develop a political philosophy he called a market-oriented “middle way” between nineteenth-century capitalism and twentieth-century totalitarian collectivism. He also became a spiritual guide and political-economic architect of Germany’s “social market economy” in the post-World War II era. As Ludwig von Mises wrote when Röpke died in 1966 at the age of 66,

For most of what is reasonable and beneficial in present-day Germany’s monetary and commercial policy credit is to be attributed to Röpke’s influence. He—and the late Walter Eucken—are rightly thought of as the intellectual authors of Germany’s economic resurrection. . . . [T]he future historians of our age will have to say that he was not only a great scholar, a successful teacher and a faithful friend, but first of all a fearless man who was never afraid to profess what he considered to be true and right. In the midst of moral and intellectual decay, he was an inflexible harbinger of the return to reason, honesty and sound political practice.^[3]

Röpke was born October 10, 100 years ago in Hanover, Germany. He grew up in a rural community of independent farmers and cottage industry craftsmen. His father was a country doctor. That upbringing can be seen in his later belief that a healthy, balanced, small community is most fit for human life.

The event, however, that shaped his chosen purpose in life was his experience in the German army in the First World War. War was “the expression of a brutal and stupid national pride that fostered the craving for domination and set its approval on collective immorality,” Röpke explained. The experience of war made him decide to become an economist and a sociologist when the cannons fell silent. He entered the University of Marburg, from which he earned his doctoral degree in 1921. At first, Röpke thought that socialism was the answer to the world’s problems. But he soon discovered that the only realistic solutions were to be found in classical liberalism and the market economy.^[4] Among the most important influences in that discovery were the writings of Austrian economist Ludwig von Mises. “It was his book, Nation, State and Economy (1919) . . . which was in many ways the redeeming answer to the questions tormenting a young man who had just come back from the trenches,” Röpke wrote. And it was Mises who “rendered me immune, at a very early date, against the virus of socialism with which most of us came back from the First World War.”^[5]

In 1922, Röpke became an adviser to the German government on the problems of reparation payments resulting from the Treaty of Versailles. From 1924 to 1928 he was a professor at the University of Jena, spending part of the time, in 1927–1928, in the United States studying American agrarian problems under the auspices of the Rockefeller Foundation. After returning to Europe he was a professor of economics at the University of Graz, Austria, in 1928–1929. In 1929 he was appointed professor of economics at the University of Marburg, a position he held until his expulsion by the Nazi regime in 1933. He also served as a member of the German National Commission on Unemployment in 1930 and 1931, and as an adviser to the German government in 1932.

After leaving Germany in 1933 he accepted a position at the University of Istanbul, Turkey, which he held until 1937, and during which he undertook the reorganization of its department of economics. He also founded and was the first director of the Turkish Institute of the Social Sciences.

Teaching Career in Geneva

In 1937 he was invited to become a professor of international economic relations at the Graduate Institute of International Studies in Geneva, Switzerland, a position he retained until his untimely death on February 12, 1966. The Graduate Institute had been founded in 1927 by the famous economic historian Paul Mantoux and the internationally respected economist, political scientist, and leading classical liberal William E. Rappard. In the Graduate Institute’s comfortable building overlooking Lake Geneva, Röpke took up his teaching duties. He was in the company of such colleagues as Mises, the eminent Italian historian Guglielmo Ferrero (an exile from the fascist regime in Italy), the Polish free-market economist Michael Heilperin, and the Austrian legal philosopher Hans Kelsen.

After the German occupation of France, Röpke was three times offered a teaching position at the New School for Social Research in New York (in 1940, 1941, and 1943) as a means of escape from Nazi-occupied Europe. But each time he turned down the invitation to leave neutral Switzerland, having decided to continue to be a voice for freedom and reason in a totalitarian-dominated Europe. In the immediate aftermath of the Second World War, Röpke circulated a memorandum offering a “plan for an international periodical” that would be devoted to the restatement and defense of classical liberalism and the free-market economy against all forms of political and economic collectivism. The journal was never established, but the ideas conveyed in the memorandum served as support for F. A. Hayek’s successful founding of the Mont Pelerin Society in 1947, an international association of scholars and opinion makers dedicated to the philosophy of freedom. Röpke served as the society’s president from 1960 to 1962.

In the 1950s, he was an economic adviser to the government of West Germany. He also was one of the leading figures of a group of market-oriented German economists who in the postwar period became known as the ordo-liberals; their purpose and goal was the construction of a “social market economy” that assured both an open, competitive order and minimal social guarantees.^[6]

Business-Cycle Theory

In the 1920s and for part of the 1930s, a primary focus of Röpke’s writings was business-cycle theory and policy. His most significant work in this field was his 1936 volume Crises and Cycles, which summarized and elaborated on his earlier writings, mostly in German, on the subject.^[7] Röpke argued that a complex division of labor with a developed structure of roundabout methods of production, held together by the delicate network of market prices for finished goods and the factors of production, had the potential to occasionally suffer from the cyclical waves of booms and depressions. The cause of such cycles was periodic imbalances between savings and investment in the economy. While not completely following the “Austrian” theory of the business cycle, Röpke’s approach moved along similar lines, arguing that a monetary expansion that kept the market rate of interest below the level that could maintain a balance between savings and investment would feed investment projects and cause misdirections of labor and resources into production processes in excess of the savings available to sustain them in the long run.

Röpke’s particular contribution to the analysis of the business cycle was his theory of what he called the “secondary depression.” When the boom ended, an economic downturn was inevitable, with the investment excesses of the upturn having to contract and be readjusted to the realities of available savings and the market-based patterns of supply and demand. But while serving on the German National Commission on Unemployment in 1930–1931, he came to the conclusion that there were negative forces at work at that time far beyond any normal type of post-boom adjustment. The failure of cost prices to promptly adjust downward with the decline of finished-goods prices was causing a dramatic collapse of production and employment. Rising unemployment resulted in declining incomes that then created a new round of falling demands for goods in the economy, that in turn brought about another decrease in production and employment. At the same time, growing unprofitability of industry made businessmen reluctant to undertake new investments, resulting in the accumulation of idle savings in the financial markets. Such a sequence of events generated a cumulative contraction in the economy that kept feeding on itself.

Röpke concluded that this secondary depression served no healthy purpose, and the downward spiral of a cumulative contraction in production and employment could only be broken by government-induced credit expansion and public-works projects. Once the government introduced a spending floor below which the economy would no longer go, the market would naturally begin a normal and healthy upturn that would bring the economy back toward a proper balance.^[8]

In 1933, when Röpke published in English an article explaining the findings of the German Commission on Unemployment, John Maynard Keynes expressed to Röpke his “great satisfaction” that German economists were reaching the same conclusions as he had, namely, that government needed to take an active role in steering the economy. But Röpke had no sympathy for Keynes’s belief that the market was inherently unstable and permanently in need of government management of “aggregate demand.” In Röpke’s view the Great Depression represented a “rare occurrence” of an “exceptional combination of circumstances” that required “a deliberate policy of additional ‘effective demand’ into the economic system.” But, Röpke continued, Keynes’s construction of a “general theory of employment” based on the exceptional circumstances of the early 1930s was a “counsel of despair” and an extremely dangerous one, because it created a rationale for continuous government tinkering and a strong inflationary bias harmful to the stability of the market economy in the long run.^[9] Indeed, Röpke became a leading critic of Keynesian economics after World War II.^[10]

The Crisis of Western Civilization

But the central issue that absorbed almost all of Röpke’s intellectual and literary efforts in the 1930s and 1940s was what he considered the crisis of Western civilization, the most stark and terrible symptom of which was the rise of totalitarian collectivism as represented by Soviet communism, Italian fascism, and German National Socialism. He devoted all his efforts to opposing and challenging this horrible trend in a series of important and highly influential books. In 1937 he published Economics of the Free Society, a treatise on economic principles that not only explained and defended the market economy, but also strongly criticized the ideas of socialism and interventionism.^[11] This was followed in 1942 by International Economic Disintegration, in which he detailed the disastrous consequences that collectivist economics produced by destroying the international division of labor through trade restrictions, exchange controls, government planning, domestic interventions, and policies of national self-sufficiency.^[12]

But the heart of Röpke’s critique of the decay of Western civilization and the path for its renewal was in a trilogy published during the war: The Social Crisis of Our Time, Civitas Humana (later re-issued as The Moral Foundations of Civil Society), and International Order.^[13] This was followed at the end of the war by The Solution of the German Problem (1945).^[14] And a further reformulation of his conception of a properly ordered and balanced society was offered in A Humane Economy: The Social Framework of the Free Market (1958).^[15]

The achievements of the eighteenth century, in Röpke’s view, were the use of reason for a balanced understanding of both the natural and social world; the awakening of an insight into the possibilities of a free, spontaneous order of market relationships; a conception of man that looked at him in proportionate human terms; and a sense of humanity in appreciating and wanting to improve the human condition. Out of these insights came the physical and biological achievements of modern science and medicine; a free-market order that both liberated man from the status and caste society of the past and dramatically improved his standard of living; and the liberal, democratic ideal in which the individual possessed rights to life, liberty, and property, and in which peace and tolerant political pluralism replaced imperial violence and political absolutism.

But as Röpke saw it, many of these achievements and successes had been twisted in the nineteenth century. The use of reason had become “unreasonable,” as there emerged a hyper-rationalism that claimed to have the power to discover the secrets for social engineering. The triumphs of the natural sciences in mastering the physical world had fostered a “cult of the colossal,” in which there was a worship of the things of the material world and the desire for the creation of objects bigger than human life. The grand accomplishments of the market economy had not only freed man from his previous social restraints, but cut him loose from all the societal moorings of family, community, and the harmonies of local life, and in its place reduced man to a proletarianized “mass” in an anonymous, impersonal urban existence. And the ideal of democratic pluralism had been undermined and reduced, increasingly, into an arena of special-interest political plunder.

“Termite State”

The loss of traditional human connections, the dehumanization of man in mass society, and the corruption of the political and economic marketplaces, Röpke argued, had created the sociological and psychological conditions for the emergence of and receptivity to the collectivist idea and its promise of a new community of man, a transformation of the human condition, and a better society designed according to a central plan. All these were false promises and hopes. Collectivism, whether of the fascist or communist sort, meant the end of a rational economic order, threatened the loss of freedom and the end to human dignity, and required the reduction of man to the status of an insect in what Röpke often referred to as the socialist “termite state.”

Röpke was uncompromising in his insistence that only the market economy was consistent with both freedom and prosperity. Only the market, with its system of private property rights, provided the framework to harness individual incentives and creativeness for the benefit of society. Only the market could generate the competitive process necessary for the formation of prices that could successfully coordinate supply and demand. Only the market gave each individual the freedom to be an end in himself while also serving as a voluntary means to the ends of others through the mechanism of exchange.^[16]

Yet in Röpke’s view the market by itself was not enough. The humane society required going “beyond supply and demand,” to the construction of an institutional order that incorporated the market in a wider social setting. It was in this context that Röpke proposed the distinction between “conformable” and “nonconformable” interventions in the market. Nonconformable interventions went against the natural workings of the market through the introduction of price and production controls, which disrupted the normal coordinative processes of market competition. Conformable interventions influenced the underlying supply and demand conditions, and the institutional arrangements on which those conditions are based, for the purpose of modifying the results that competitive process would generate.

Röpke, for example, believed that: antitrust laws were necessary and desirable as a method of limiting some private industrial concentration; urban development restrictions were needed to limit the growth of city size and foster a retention of rural life; income redistribution was legitimate to narrow significant income inequalities; and moderate and limited welfare “safety net” programs were consistent with a humane society that remained essentially market-oriented. In fairness to Röpke it should be pointed out that in the wake of the Great Depression and the growing appeal of socialist planning, a large number of market-oriented economists at the time accepted a greater degree of interventionism and welfare-statist programs than many free-market economists would consider legitimate nowadays.^[17]

But by the 1950s, Röpke began to have serious second thoughts about the welfare state and its tendency to grow beyond the narrow bounds that he considered reasonable.^[18] Röpke agreed with his German liberal colleague Alexander Rustow, who in a paper delivered at a Mont Pelerin Society meeting in the 1950s referred to the welfare state as “the other road to serfdom.” Röpke feared that the welfare state, in a democratic system open to the pressures of special-interest groups, threatened to grow to monstrous proportions and create an increasing dependency on the paternalistic state. Furthermore, the costs of funding the welfare state and Keynesian “full employment” policies acted as an engine for worsening inflation as government resorted to the printing press to pay its bills.^[19]

Finally, Röpke argued that the growing politicization of economic and social life through an expanding interventionist-welfare state undermined the possibility for a successful international order based on peace, mutual prosperity, and a rational allocation and use of the resources of the world. International order required countries to practice sound policies at home: respect for private property, enforcement of contracts, protection for foreign investments, limited government intervention, and non-inflationary monetary policies. Networks of international trade and investment would then naturally and spontaneously connect the world through private market relationships.^[20] For this reason, Röpke was doubtful that European economic and monetary integration could be successfully imposed as long as the member states were unwilling to follow the necessary domestic policies of limited government and open, competitive market capitalism. Tensions and conflicts were inevitable in an age dominated by collectivist and interventionist ideas.^[21]

Wilhelm Röpke was more than just an economist. During some of the darkest decades of the twentieth century, he sounded more like an Old Testament prophet warning of the dangers from a loss of our moral compass. Collectivism had few opponents in our century with as much of a sense of ethical purpose. Precisely because he was an economist by training, Röpke understood the indivisibility of personal, political, and economic freedom in a way that many other critics of socialism in its various forms could never articulate. The appreciation of history and the historical context in his analyses only enriched the persuasiveness of his message. The rebirth of the market economy in Germany and in other parts of Europe after 1945 owes a great deal to his intellectual efforts and legacy.

Notes

1. Wilhelm Röpke, “End of an Era?” [1933] in Against the Tide (Chicago: Henry Regnery, 1969), pp. 79–98.
2. Wilhelm Röpke, The Solution of the German Problem (New York: G. P. Putnam’s Sons, 1947), pp. 59–60; and J. Kaufmann, “In Memoriam, Wilhelm Röpke: Humanistic Liberal,” Nieuwe Rotterdamsche Courant, February 19, 1966.
3. Ludwig von Mises, “Wilhelm Röpke, RIP,” National Review, March 8, 1966, p. 200; also, F.A. Hayek, “Tribute to Röpke,” in Peter G. Klein, ed., The Collected Works of F. A. Hayek, Vol. 4: The Fortunes of Liberalism (Chicago: University of Chicago Press, 1992), pp. 195–97.
4. Wilhelm Röpke, “The Economic Necessity of Freedom,” Modern Age, Summer, 1959, pp. 227–36.
5. Wilhelm Röpke, “Homage to a Master and a Friend,” The Mont Pelerin Quarterly, October 1961, p. 6.
6. For an account of the German ordo-liberals and Röpke’s contribution to their ideas and policies, see Anthony J. Nicholls, Freedom with Responsibility: The Social Market Economy in Germany, 1918–1963 (Oxford: Clarendon Press, 1994); for a critical comparison of the ordo-liberals with the Austrian economists, especially Mises, see my “The Limits of Economic Policy: The Austrian Economists and the German Ordo Liberals,” in Richard M. Ebeling, ed., The Age of Economists: From Adam Smith to Milton Friedman (Hillsdale, Mich.: Hillsdale College Press, 1999), pp. 145–66.
7. Wilhelm Röpke, Crises and Cycles (London: William Hodge Co., 1936).
8. Wilhelm Röpke, “Trends in German Business Cycle Policy,” The Economic Journal, September 1933, pp. 427–41.
9. Wilhelm Röpke, “Keynes Revisited,” National Review, March 26, 1963, pp. 239–41.
10. Wilhelm Röpke, “The Economics of Full Employment” [1952], reprinted in Henry Hazlitt, ed., The Critics of Keynesian Economics (Princeton: D. Van Nostrand Co., 1960), pp. 362–85.
11. Wilhelm Röpke, The Economics of the Free Society (Chicago: Henry Regnery Co., 1963 [1937]).
12. Wilhelm Röpke, International Economic Disintregration (Philadelphia: Porcupine Press, 1978 [1942]); also “International Economics in a Changing World,” in William E. Rappard, ed., The World Crisis (Freeport, N.Y.: Books for Libraries, 1969 [1938]), pp. 275–90; “Fascist Economics,” Economica, February 1935, pp. 85–100; and “Totalitarian ‘Prosperity,’ Where Does It End?” Harper’s Magazine, July 1939, pp. 165–70.
13. Wilhelm Röpke, The Social Crisis of Our Time (New Brunswick: N.J.: Transaction Publishers, 1992 [1942]); The Moral Foundations of Civil Society (New Brunswick, N.J.: Transaction Publishers, 1996 [1944]); International Order and Economic Integration (Dordrecht, Holland: D. Reidel Co., 1959 [1945]).
14. Wilhelm Röpke, The Solution of the German Problem (New York: G. P. Putnam’s Sons, 1947 [1945]); also “The German Dust-Bowl,” The Review of Politics, October 1946, pp. 511–27.
15. Wilhelm Röpke, A Humane Economy: The Social Framework of the Free Market (Chicago: Henry Regnery, 1960 [1958]).
16. Wilhelm Röpke, “The Problem of Economic Order” [1951], reprinted in Johannes Overbeck, ed., Two Essays by Wilhelm Röpke (Lanham, Md.: University Press of America, 1987), pp. 1–45.
17. Among American market-oriented economists in the 1930s and 1940s who shared some of Röpke ‘s views on these policy issues were Henry Simon and Jacob Viner at the University of Chicago, and Frank Graham at Princeton University; in Europe the group included F. A. Hayek and Lionel Robbins at the London School of Economics, Walter Eucken and many other market economists in Germany, and Eli Heckscher in Sweden.
18. Wilhlem Röpke, “Is the German Policy the Right One?” [1950] in Wolfgang Stutzel, Christian Watrin, Hans Willgerodt, Karl Hohnmann, eds., Standard Texts on the Social Market Economy (New York: Gustav Fischer, 1982), pp. 37–48.
19. Wilhelm Röpke, “Welfare Freedom and Inflation” [1964] in Overbeck, pp. 49–103; also “Repressed Inflation” Kyklos, vol. 1, no. 3, 1947, pp. 242–53; “Inflation—Hot and Cold,” National Review, January 18, 1956, pp. 15–17; and “The Creeping Inflation of Our Times and Values,” Freedom and Union, September 1961, pp. 12–15.
20. Wilhelm Röpke, “Economic Order and International Law,” in Recueildes Cours, vol. 86, pt. II, 1954, pp. 202–71.
21. Wilhelm Röpke, “Political Enthusiasm and Economic Sense: Some Comments on European Economic Integration,” Modern Age, Spring 1958, pp. 170–76; A World Without a World Monetary Order (Johannesburg: South African Institute of International Affairs, 1963); “European Economic Integration and Its Problems” Modern Age, Summer 1964, pp. 231–44; “European Prosperity and Its Lessons,” South African Journal of Economics, September 1964, pp. 187–98; and “The Place of the Nation: Beyond the One World,” Modern Age, Spring 1966, pp. 119–30.

Vazsonyi was able to escape to the United States in 1959. A virtuoso pianist with a strong interest in philosophy, he has been a keen observer of the American scene ever since. He concludes that for at least 30 years a struggle (he terms it a war) has gone on between those who would transform the United States into a socialist nation and those who would preserve—or perhaps we should say restore—the principles of the Constitution. This book expresses his observations on the course of that war.

The frame in which he encloses his argument is original, and his insights into how the United States is being transformed (which is to say that the war is not going well) are worth studying. Vazsonyi’s early experiences with the twin evils of Nazism and communism make his book all the more compelling.

He argues that the war is really between two different ways of looking at the relationship between man and government: what he calls the “Anglo-American” view that individual rights are prior to government and that government must be constitutionally restrained to protect those rights, and what he calls the “Franco-German” view that government needs to be absolutist and wield enormous power to bring about the best possible society. These peoples are the only ones, in his view, who have produced political theories worth attending to.

This way of characterizing the opposing sides may well produce more heat than light. Neither the French nor the Germans are apt to be pleased at being credited with a series of disastrous, discredited ideas; nor have the Anglo-Americans been pure defenders of the ideas of individual liberty and limited government. England has as good a claim to the title “birthplace of evolutionary socialism” as any.

It is not at all clear to me that ideas have a native habitat and that there are national traits in political philosophy. We do ill, I think, to attribute the liking for or antipathy to various political arrangements to whole peoples. Vazsonyi would have done better to avoid pinning a national label on the contending theories.

That aside, Vazsonyi provides many clear insights into how socialist thought has mutated through hard experience to become more dangerous to America. He writes, for example, “The appetite to manage all corporations, large and small, has given way to the realization that a combination of threats, restrictions, and controls will provide access to the fruit, without ever having to plant the tree, buy the fertilizer, or perform any of the ongoing chores that go with production.” This is the triumph of the fascist (Nazi) side of socialism, the realization that you encounter less resistance and get “better” results by insinuating the state into a position to take key decision-making power away from private owners, rather than trying to expropriate those owners directly.

Having lived under the control of the commissars, Vazsonyi is able to clearly see current trends in the United States. He can see how our own bureaucrats are increasingly resembling those commissars in their control over our lives. Rightly, he understands that the environmental movement and its accompanying hordes of bureaucrats are erecting a structure for a vast expansion of government authority. Since almost every use of land or activity could be said to have some impact on the environment, we are moving toward a future in which government officials will have enormous control over us.

Vazsonyi also correctly sees that piecemeal opposition to the modified socialist program is a losing game. If we argue over the “right” amount of government control, each time hoping to negotiate a somewhat better deal from the socialists than they initially propose, we are certain to see a continuing erosion of our freedom. He argues strongly in favor of an uncompromising return to our original constitutional principles, and to that I shout “Bravo.”

This year marks the 50th anniversary of the founding of the Mont Pelerin Society, one of this century’s most important groups of free-market intellectuals.

The world was a quite different place when 36 free-market thinkers gathered in April 1947 at the Hotel Park at Mont Pelerin, near Vevey, Switzerland.^[1] The Soviet Union, the world’s leading Marxist-Leninist state, had erected an Iron Curtain across Eastern Europe. China, engulfed in a civil war, was on the verge of a communist takeover. In Western Europe, democratic socialist parties formed ruling coalitions; the electoral strength of the Communist Party reached double digits in several countries. The United States was awash in liberal Keynesianism—sound money had been abandoned for the Bretton Woods Agreement, which ushered in the age of inflation. The idea of scientific government economic planning and regulation was in fashion with most intellectuals.

It was against this backdrop of events that Austrian economist Friedrich Hayek organized the first meeting of the Mont Pelerin Society. In 1944, Hayek wrote a seminal book, The Road to Serfdom, which argued that government central planning inevitably led to the rise of the totalitarian socialist state. Marxists maintained that fascism was a form of decaying capitalism, but Hayek’s book also included a trenchant critique of Nazism as a form of socialism. After writing The Road to Serfdom, Hayek toured the United States. The trip contributed to his decision to issue a call to free-market advocates to meet at Mont Pelerin.

I have been surprised, Hayek said in his opening address to the Mont Pelerin Society, by the number of isolated men whom I found in different places, working on essentially the same problems and on very similar lines. Working in isolation or in very small groups they are, however, constantly forced to defend the basic elements of their beliefs and rarely have opportunity for an interchange of opinion on the more technical problems which arise only if a certain common basis of conviction and ideals is present.^[2]

Hayek explained, The need for an international meeting of representatives . . . seemed to me especially great as a result of the war which not only has for so long disrupted many of the normal contacts but also inevitably, and in the best of us, created a self-centredness and nationalist outlook which ill accords with a truly liberal approach to our problems.^[3]

The First Meeting

A visitor to Mont Pelerin is immediately struck by the breathtaking, panoramic view. A broad piazza overlooks Lac Léman (Lake Geneva) and the alpine Dents du Midi, which are visible in the distance. Across the lake is Evian-les-Bain, France, a spa world-renowned for its bottled water. One nearby resort town is Montreux, home of a well-known international jazz festival. From Vevey, a funicular railway travels up the mountainside to Mont Pelerin, a quiet, semi-rural setting conducive not only for reflection, but for hiking as well. One can hike ten minutes from the railway and stand in a rural field, surrounded by cows and lush green grass. In fact, many of the original Pelerinians, including Hayek, were accomplished hikers and mountaineers.^[4]

Pelerin is the French word for pilgrim. Pilgrims, remarked American journalist John Davenport, one of the participants, usually have an idea of the direction they wish to go, though not always agreed on how to get there. Nor is it given to them to know the adventures that will beset them on the road.^[5] So it proved to be here. The participants at the Society’s first meeting were a diverse group, a mix of American libertarian economists and European free-market moderates. Disagreements were apparent during the session. One was between Chicago School monetarists and adherents of the Austrian School, another between theists and agnostics. At the Society’s 1984 meeting at Cambridge, England, Davenport elicited a laugh by observing that the original Pelerinians could agree on everything save the subjects of God and gold.^[6]

The original participants included Hayek and Ludwig von Mises, the dean of the Austrian-school economists; Wilhelm Ropke, who played a key role in the great German currency reform of 1948, along with Walter Eucken, an anti-Nazi pursued by the Gestapo during the war. Others were philosopher Karl Popper, American journalist Henry Hazlitt, and Lionel Robbins of the London School of Economics. Participants from the newly established Foundation for Economic Education (FEE) were Leonard E. Read, F. A. Baldy Harper, and V. Orval Watts. The emerging Chicago School was represented by Milton Friedman, his brother-in-law Aaron Director, Frank H. Knight, and George J. Stigler.^[7]

The Apprentice Conservative

Stigler later devoted a chapter of his book Memoirs of an Unregulated Economist to the Society’s first meeting.^[8] The popularity of Hayek’s book, he wrote, led a conservative midwest foundation, the Volker Fund, to contribute to the support of a meeting he called in Switzerland. . . . I had never met Hayek but my Chicago teachers certified my eligibility for the coming totalitarian firing squads. It showed my lack of inner conviction of the imminence of totalitarianism that the thought never entered my mind.

It was a revealing first visit, Stigler wrote, for the younger participants, including Milton Friedman and me. En route we were depressed as much by the austerity of the British economy as by their food (if an ersatz sausage is indeed food). We were instructed as well as embarrassed by the casualness of French life: We did not learn until we left France that we required food ration tickets. I concluded that the British obeyed all laws, the French none, and the Americans obeyed those laws that deserved obedience—in retrospect, something of a simplification. Indeed the black market was a boon to French economic life; it allowed prices to perform their functions.

Stigler continues, I was instrumental, for the only time in my life, in instructing Friedman on monetary affairs. We sought to convert some dollars into francs at the unofficial exchange rate rather than the official rate that greatly overvalued the franc. I undertook the exchange and approached the clerk at the Grand Hotel, where we were staying. ‘Could you direct me to the closest outlet for the black market in currency?’ I asked. ‘Go no further, gentlemen’ was the response as he extracted a wallet from his jacket.^[9]

The discussions at the meeting were at a high level, and were not always harmonious. The protection of agriculture and of agricultural classes generally had strong supporters and opponents, Stigler wrote. The gold standard was the cherished goal of the older members, but not of the younger economists. On the last day Hayek proposed a set of basic principles, not as a doctrinaire creed but as a common ground. The first was that we believed in the dignity and cherished the freedom of individuals. The second was that we believed in the institution of private property. Alas, Stigler wrote, a viper in our midst protested! French economist Maurice Allais believed at the time that private ownership of land was untenable . . . [Allais's] fear turned on the fact that if the interest rate went to zero, as he feared it would, land would become infinitely valuable. Stigler noted, Allais subsequently abandoned his capital theory and this fear.^[10]

One of Stigler’s fondest memories involved Eucken, who had opposed the Nazis and yet remained in Germany during World War II. I remember, Stigler wrote, the delight with which [Eucken] ate his first orange in five years.^[11] Friedman also remembers Eucken’s simple pleasure in eating the fruit.^[12]

The German Economic Miracle

Eucken and his fellow Germans were to prove to be the surprise package of the conference, according to Davenport. Most economists present were theoretically committed to the free market and a civilized order in which the pricing system organizes economic activity and allocates physical and human resources. But few if any had tasted at first hand a situation where such a system had completely disappeared and where a once great economy had been reduced to primitive barter. The Germans had experienced such a catastrophe, and had a hair-raising story to tell.^[13]

The German currency was virtually worthless at the end of World War II, cigarettes having emerged as the preferred medium of exchange. In many cases, Eucken told the conference, farmers refused to sell their foodstuffs for any kind of currency. If you lived in a city and wanted food, you packed your furniture and carted it to a farm in search of potatoes. Barter was not merely theory in postwar Germany. The underground economy was economic fact. Moreover, the United States and British military authorities were not disposed to give West Germany a sound currency, or to let free prices and wages restore incentives and a free-market economic order. On the contrary, they attempted to run the nation through a flood of paper directives and allocations, which Eucken termed Der Papier Krieg (the paper war). The paper ordinances were no sooner promulgated than they were disregarded by the German people. In session at the first Society meeting, Eucken pled for sound currency and the lifting of wage and price controls.^[14]

Eucken was no doctrinaire libertarian. The free-market partisans around him outlined a program for a return to free trade—liberalism in Europe—without its seeming political flaws. The terms neo-liberalism and ordo-liberalism (meaning support for a free economy operating within an orderly structure) were coined by the Freiburg University School around Eucken. In the totalitarian climate of the Nazi period a small group of thinkers developed the doctrine of what became known as the Soziale Marktwirtschaft, or the socially conscious free-market economy. Under the Nazis the school was a kind of intellectual resistance movement, requiring great personal courage as well as independence of mind. The free-market doctrine rose in opposition to the dominant conditions of Hitler’s National Socialist regime. It sought to construct an ideal system that would embody the opposites of its authoritarianism and guard against relapses. But the world the Freiburg School painted was not of classical liberalism with its laissez-faire ideal. The Eucken group supported some government action.^[15]

Another participant, Wilhelm Ropke, helped persuade Eucken’s pupil Ludwig Erhard, then economics minister in West Germany’s provisional government, to abolish price controls, and so make possible the famous German economic miracle of the postwar era. Erhard lifted regulatory controls over a weekend, only to be threatened with jail by the Allied military authorities. Erhard replied, Ah yes, General, you may put me in prison, but you cannot imprison prices.^[16]

Ludwig von Mises at Mont Pelerin

The Austrian School was also represented at the Society’s first meeting. The dean of the Austrian economists was Ludwig von Mises, another refugee from Nazi totalitarianism. His views provided a sharp contrast to those of the Chicago School and the Freiburg School.

Mises was the first economist to demonstrate that socialism could not possibly work because of the absence of a price system. In Economic Calculation in the Socialist Commonwealth (1920), he had shown that without the guiding hand of the price system, there was no way to allocate scarce resources intelligently. Mises remained an implacable foe of government economic intervention; this steadfastness brought him into conflict with many of the other attendees, particularly over the role of gold in the monetary system.

To Mises, a monetary system based upon fiat paper currency under the control of the government was a dangerous and unnecessary concession to government economic intervention. He advocated, rather, a gold-based monetary system. This brought about a vigorous debate with the Chicago School monetarists. Having grown up under the gold standard and having seen the economic destruction brought by unrestrained issue of paper money in Germany after World War I, Mises, as Davenport puts it, was not above snubbing those who doubted the efficacy of the yellow metal as a medium of exchange and more importantly as a store of value.^[17]

Mises also clashed with participants who were willing to concede to the government some role in the redistribution of income. This topic led to some spirited discussions. According to Friedman, Mises walked out of one of the meetings, declaring, You’re all a bunch of socialists.^[18]

Looking Back—and Ahead

The legacy of the Mont Pelerin Society is substantial. It helped to keep alight the lamp of classical liberalism and free-market thought at a time when the damp winds of socialism and interventionism threatened to extinguish it. Pelerinians Hayek, Friedman, Stigler, and James Buchanan (and four others) have won the Nobel Memorial Prize in Economic Science. Many others have played key roles in advising governments worldwide on how to move their economies toward the free-market ideal. Asked to assess the Society’s place in history, Milton Friedman answered, That is an open-ended question we cannot answer. . . . It certainly played a part.^[19]

Indeed it did. At age 50, the Mont Pelerin Society is still going strong, boasting as members some of the best minds working in the realm of economics. Inspired by their illustrious predecessors, they will, I am confident, continue to keep that lamp burning brightly.

2. Friedrich Hayek, Opening Address to a Conference at Mont Pelerin. Hayek delivered the address April 1, 1947, the first day of the proceedings. Published in Hayek’s Studies in Philosophy, Politics and Economics (Chicago: University of Chicago Press, 1967).

3. Ibid.

4. John Davenport, Reflections on Mont Pelerin, The Mont Pelerin Society Newsletter, July 1981.

5. Ibid.

6. John Chamberlain, Hayek Returns to Cambridge, National Review, January 11, 1985.

7. Others attending the original conference were Carlo Antoni, Rome; Hans Barth, Zurich; Karl Brandt, Stanford, Calif.; Stanley R. Dennison, Cambridge; Erick Eyck, Oxford; H. D. Gideonse, Brooklyn, N.Y.; F.D. Graham, Princeton, N.J.; T.J.B. Hoff, Oslo; Albert Hunold, Zurich; Bertrand de Jouvenel, Chexbres, Vaud; Carl Iversen, Copenhagen; John Jewkes, Manchester; Fritz Machlup, Buffalo, N.Y.; L. B. Miller, Detroit, Mich.; Felix Morley, Washington, D.C.; Michael Polanyi, Manchester; William E. Rappard, Geneva; Herbert Tingsten, Stockholm; Francois Trévoux, Lyon; and Miss C. V. Wedgwood, London.

8. George Stigler, Memoirs of an Unregulated Economist (New York: Basic Books, 1985). Chapter 9 (The Apprentice Conservative) discusses the Society’s first meeting.

9. Ibid.

10. Ibid.

11. Ibid.

12. Author interview with Friedman, March 1996.

13. Davenport, op. cit.

14. Ibid.

15. See, e.g., Henry Wallich, Mainsprings of the German Revival (New Haven: Yale University Press, 1955).

16. Davenport, op. cit.

17. Ibid.

18. Ibid.

19. Author interview with Friedman. Readers may also wish to consult R. M. Hartwell’s A History of the Mont Pelerin Society (Indianapolis: Liberty Press, 1995), for additional information.