From the Imaginative Conservative:
June 20th, 1998, marked the fiftieth anniversary of the German “economic miracle.” Of course, there was nothing miraculous about it. Germany’s success was not due to the hard-working character of her people, or to foreign aid, or to any other special reason. It was the natural outcome of a market economy and currency reform. And yet it was originally intended as something more than that by the men who helped shape this policy, not least of whom was the outstanding economist, Wilhelm Roepke. Instead of a return to nineteenth-century capitalism and its laissez-faire ideology, he wanted a socially responsible economy which avoided and corrected past abuses. His ideas had been well articulated in his earlier books which, though banned by the Nazis, were read surreptitiously, even by the later finance minister, Ludwig Erhard, whose contents he said he “devoured like the desert the life-giving water.”
But it is for more than his influence on policy-makers and German recovery that Roepke commands our attention today. His writings deal with the deeper issues that continue to afflict the West and his policy prescriptions are correspondingly rich and complex—a situation in which it is easy to misunderstand him. For example, his view of the good economy was at once conservative and radical. It combined liberal (in the older, honorable sense) elements of free markets, private property, and limited government with radical proposals to jettison those developments and trends of the nineteenth and twentieth centuries that had been undermining the traditional family, local communities, and basic values, clearly an approach confounding classification by those who insist that the world has only two pigeonholes, laissez-faire or communism. It is an approach that assumes the market system can have more than one form which we are free to shape within certain limits indicated by economic science. Roepke’s question is: What form is most congenial to the flowering of human personality but which still yields needed material benefits? It was a delicate problem of balance and integration, and yet it is precisely this aspect that is often overlooked—or denied—by some “conservative” writers today who choose to emphasize other aspects of his thought, or who dismiss his social concerns as mere sentimentalism. To avoid the same mistake as well as to grasp the real, the essential, Wilhelm Roepke without analyzing his over 800 articles and books, it is helpful not merely to sample his representative work but to divide it into two sections and consider Roepke first as a technical and then as a social economist; naturally, both aspects overlap in his writings.
For his technical economic work, we may identify such books as Crises and Cycles (1936), Economics of the Free Society (1937), International Economic Disintegration (1942), and International Order and Economic Integration (1959), plus numerous professional papers. In these volumes, Roepke affirms the importance of maintaining private property, the free operation of prices, and economic competition, and he vigorously defends multilateral trade as opposed to systematic protectionism and various forms of collectivism.
But of these, perhaps his most interesting, if not also his most important book, is his Crises and Cycles,published in 1936, the same year as John Maynard Keynes’s General Theory, and within a year of Hayek’s Prices and Production (1935). It deals with the problem of business cycles, the boom-and-bust tendency in an industrialized economy. His key contribution which distinguishes him from both Hayek and Keynes is his over capitalization/monetary model of the business cycle. The issue is not a disparity, says Roepke, between the relative rates of saving and investment, the former stable and the latter volatile, the way Keynes thought. Nor is it a problem of undersaving relative to investments the way Hayek thought. Nor is it a strictly monetary problem the way some Austrian economists such as Mises were inclined to think. Most fundamentally, it is the nature of the industrialized economy itself. The same specialization and division of labor that powers a modern economy and economic growth is also the property that causes economic booms and depressions. The problem originates in the difficulties of coordination that such a division of labor brings about. A slight increase in demand at the retail level, say, for shoes, will become accelerated as the demand signal extends upstream to the foreproducts of production in something of a geometric proportion. Ultimately, such production will be out of proportion to the original demand. Inevitably, the boom must turn into a recession or depression. Of course, this expansion is financed through loose credit policies as Austrians, including Hayek, emphasize and with which Roepke basically agrees, but adds: “In our view, it is the steep rise of the absolute amount of investments which matters, not the fact that our economic system must rely on credit expansion to make this rise possible.” This is important not only because it is essential for understanding Roepke’s technical contribution, but also because it leads to an understanding of Roepke as social economist, and his corresponding policy recommendations.
Roepke also explained that in the instant case, the Great Depression had gone beyond the economy’s ability to initiate a functionally corrective downswing that would restore a healthy balance. Instead, it had turned into a “secondary depression” where economic activity stalled out at the bottom more or less permanently, and the usual “self-correcting” market forces were not operative. The problem, then, was a lack of confidence, a failure to spend, a pervasive pessimism so that demand was simply too low. In such an extreme case, Roepke reluctantly recommended, as did many other economists at the time, including Keynes, the need for the famous pump-priming, the need for government to run a deficit to stimulate demand. But he was painfully aware that this was a dangerous course, and he spent some time elaborating its pitfalls.