Heinrich von Stackelberg (1905-1946)

Life

Heinrich von Stackelberg was born 31 October 1905 in Kudinow near Moscow, into a noble Baltic-German family from Estonia. After the October Revolution the family fled to Germany, first to Ratibor in Silesia and later to Cologne, where they settled down.

Heinrich von Stackelberg studied economics and mathematics at the University of Cologne as an undergraduate and graduated in 1927 with a thesis on the quasi-rent in Alfred Marshall’s work (“Die Quasirente bei Alfred Marshall”). He continued his studies as a PhD student in economics under Erwin von Beckerath. Only three years after his diploma he graduated in 1930 with a dissertation on cost theory (“Die Grundlagen einer reinen Kostentheorie”), which was published in 1932 in Vienna and which received international recognition. In 1932 he went on several research trips to Vienna, where he worked together for a couple of months with the founders of the New Vienna School such as Gottfried von Haberler, Friedrich August von Hayek, Fritz Machlup, Oskar Morgenstern, Hans Mayer, and Richard von Strigl. Afterwards he went to Italy where he wrote works on imperfect competition under the influence of Luigi Amoroso (see Konow 1994: 148). In 1934, von Stackelberg completed his habilitation with the title “Marktform und Gleichgewicht” (“Market structure and equilibrium”) published in 1934. After his habilitation he worked as a lecturer at the University of Cologne for one term before he became associate professor at the University of Berlin, where he taught until 1941. He was one of the co-founders of the Archiv fur mathematische Wirtschafts- und Sozialforschung that was issued between 1935 and 1942. In 1941, von Stackelberg became full professor of economics at the University of Bonn. During the war, he was twice recruited as a soldier for a few months. For the rest of the time, he was exempted from military service in order to be able to proceed with his teachings.

In 1943, because of the difficult teaching and research conditions in Germany, he accepted an invitation as a visiting professor at the Complutense University of Madrid in Spain, where he worked for the following three years (see Fuertes 1996). Heinrich von Stackelberg died on 12 October 1946, just before his forty-sixth birthday, from the incurable Hodgkin’s disease.

In his minority group of German-Baltic descent, German-nationalist and right-wing conservative attitudes were widespread (see Moller 1992). Owing to these influences, von Stackelberg turned to nationalist and conservative groups. In 1931, he joined the Nationalsozialistische Deutsche Arbeiterpartei (NSDAP). In June 1933, he became a member of the SS. At about the same time, he became leader of the lecturers at the University of Cologne. However, as early as 1935, von Stackelberg tried to quit the SS. He also insisted on a wedding in church, which contradicted the NS ideology and further alienated him from the NS regime (see Senn 1996). He was in contact with Jens Jessen and Ulrich von Hassell, who were murdered after the assassination attempt against Hitler. While the war was still going on, he stayed in contact with the Freiburg Circle (Erwin von Beckerath, Walter Eucken and Constantin von Dietze) - an oppositional and illegal group (see Eucken 1948). Another sign of his alienation from the NS ideology was his taking part in the probably last doctoral proceedings of a Jewish doctoral student (see Senn 1996).

Works

Von Stackelberg was one of the most talented German economists in the 1930s. He had a deep mathematical understanding that enabled him to use mathematical methods to analyse complex problems. The topics he dealt with are mostly microeconomic in nature. His first scientific work is his doctoral thesis that combines traditional cost accounting with marginal analysis. His most important extension of traditional analysis is its application to joint production. He decomposes the optimization problem of the firm into two steps: first, the derivation of the optimal level of production for any possible composition of output and, second, the choice of the profit-maximizing level of production.

Another contribution is his analysis of transfer prices within a firm. The last chapter of his thesis contains some reflections on dynamic development, for example, owing to technological progress. When technological progress causes a decrease in average cost, market concentration can be expected to increase, that is, an oligopolistic or monopolistic market structure is likely to occur.

These reflections point towards future focuses of his research, that is, the analysis of market structures with imperfect competition and the examination of dynamic developments in an economy. A first analysis of imperfect competition was presented in an essay in 1933 that had been written during his cooperation with Luigi Amoroso in Italy. The essay turned out to be preliminary work to his habilitation thesis Marktform und Gleichgewicht. It also contains his most famous contribution, an analysis of markets with imperfect competition, a prevalent area at the time (see Scherer 1996). The main interest is the analysis of the stability of markets with imperfect competition, especially the case of a supply duopoly. Each firm may be either dependent or independent. In the former case, the duopolist assumes that its rival will not react to its behaviour, that is, the rival’s quantity supplied is taken as given. In the latter case, a duopolist assumes that its rival’s behaviour depends on its own decision. There are three cases to consider: (1) both firms believe the rival’s behaviour to be independent of its own; (2) both firms believe that the rival reacts to its own choice of strategy; and (3) an asymmetric situation where one firm is dependent while the other is independent. In the first case, each firm will maximize its profits, given the other firm’s reaction function. Since both firms act in the same way, the competitive quantity will be supplied, and profits are very small. According to von Stackelberg, however, this situation is unstable since one of the firms could increase its profit by reducing its quantity supplied.

But it remains unclear which of the firms should act accordingly. Further, it may be the case that the firm increases its quantity again at a later stage. In the second case, each firm assumes that the other reacts to its behaviour. This is the Cournot case. The expectations on the rival’s quantity are confirmed, since one firm’s quantity corresponds to the other’s supply according to its reaction function. However, this situation is not an equilibrium either, since, given the dependent position of one firm, the other would prefer to be independent. The third case, which von Stackelberg refers to as an asymmetric oligopoly, may constitute an equilibrium since it is in one firm’s interest to act according to the other firm’s will. However, this will be an equilibrium only if there are substantial asymmetries between the firms with respect to costs or technology. However, this equilibrium has to be considered an exception - in general, oligopoly is a market form without equilibrium.

The analysis is then extended to the relationship between two or several markets, and the profitability of the duopolistic market positions of the firms is examined. Von Stackelberg uses the concept of a reaction function, and introduces isoprofit lines as a new analytical tool. He considers price and quantity competition in different market forms. The analysis confirms the general instability of oligopolistic market structures. These results gave rise to his far-reaching call for an interventionist state that acts as an equilibrating force, for example, by creating and regulating cartels, trade unions, or trade associations.

Besides oligopoly theory, von Stackelberg also analysed questions of spatial economics and provided contributions to the theory of price discrimination. He was particularly interested in intertemporal and dynamic aspects of an economy. In his essay “Beitrag zur Theorie des individuellen Sparens” (“Contribution to the theory of individual saving”) (1938), he deals with the question of why a household should save, and analyses the effects of the expected interest rate on household savings.

Referring to John Hicks and Roy Allen, he analyses the allocation of expenses over time in a framework of intertemporal utility maximization (see Krelle 2008). He derives the law of Bohm-Bawerk on the underestimation of future goods from the law of the decreasing marginal rate of substitution, and shows in what way it affects the optimal allocation of expenses over time. In the framework of the Austrian theory of capital, the time structure of production is of central importance. Defining the per se problematic concept of an average production period in a manageable way may be considered his main contribution. Thus, in his contribution “Kapital und Zins in der stationaren Verkehrswirtschaft” (“Capital and interest in a stationary economy”) (1941), he suggests the approach of defining the average production period in an economy by the solution of the equation w = (₁ 1 _r) t where w denotes the factor income, r is the interest rate, and y denotes output. That is, the average period is defined by that period over which the output has to be discounted in order to be equal to the factor income.

His last major work is Die Grundzuge der theoretischen Volkswirtschaftslehre (Principles of Economic Theory) (1943), which was republished in 1948, after his death, in a significantly extended version with the title Grundlagen der theoretischen Volkswirtschaftslehre (Fundamentals of Economic Theory). The work consists of six chapters that deal with large parts of contemporary economic research and makes it accessible to the German public (see Maks and Haan 1996). He shows that, given the initial endowments, utility and profit maximization induces an efficient allocation. The distribution of income may, however, be devised by the government according to the political ideas of fairness and equality.

Impact

Jurg Niehans dubbed von Stackelberg a “creative eclectic” who made contributions to each topic he concerned himself with (Niehans 1992: 204). Today, especially his works on oligopoly theory form an important part of industrial organization.

They belong to the classical models of imperfect competition, where the approach is of major importance in the framework of sequential decision making when an individual or a firm has the option to commit itself to some action. Numerous models are built on the approach developed by von Stackelberg, and it is applied to various economic problems. Because of the formal methods and concepts, he was of major importance for German economic theory as, besides Wilhelm Krelle and Erich Schneider, he was one of the few German economists that kept up the connection to mainstream economic research.

Ulrich Schwalbe

Heinrich von Stackelberg (1905-1946)

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