Walter Eucken, born in Jena on 17 January 1891, was the son of the philosopher and Nobel laureate Rudolf Eucken. He studied economics and obtained a doctoral degree in Bonn in 1913.

After World War I, he followed his professor, Hermann Schumacher, to Berlin. He was appointed to a professorship in Tubingen in 1925, and from 1927 to 1950 he taught in Freiburg.

After the Nazi seizure of power, a group formed in Freiburg that discussed ques­tions of ethics and resistance from a Christian perspective. Eventually the circle around Eucken developed plans for a restructuring of the economy and the legal system. Some of them were arrested after the attempted assassination of Adolf Hitler in 1944; Eucken was among those who were interrogated. Members of the circle were later among the close advisers to Ludwig Erhard, the first West German economics minister and the “father” of the social market economy. While giving lectures as a visiting professor in London, Eucken died of a heart attack on 20 March 1950.

Eucken’s early studies were still written in the descriptive style of the historical school. However, when he wrote his Kritische Betrachtungen zum deutschen Geldproblem, pub­lished in 1923 at the time of the Great Inflation, he was already discussing the quantity theory of money and the purchasing power parity of money espoused by the Swedish economist Gustav Cassel. He opposed Georg F. Knapp, whose work Staatliche Theorie des Geldes (1905) had ignored the risks coming from governments printing money. By expressing these views, he became one of those who inculcated in the Germans a deep- seated fear of any government-induced expansion of the money supply.

At this time, the notion began gaining ground that the creation of credit was the key causal factor behind the fluctuations in economic activity. Eucken’s study “Kredit und Konjunktur” (1929) focused attention on this question. Contrary to the non­monetary over-investment theory of the German doyen of business cycle research, Arthur Spiethoff, he did not believe that the depression made a sufficient amount of unused capital available and automatically supplied the forces for the recovery - “additional credit” was a necessary requirement for the change from a downturn to an upswing.

With the 1931 banking crisis, the demand for “productive credit creation” was sud­denly high on the agenda. Eucken’s friend Wilhelm Ropke, who had also lost confidence in the market’s ability to self-adjust, proposed a credit-financed programme. In doing so, he coined the term “initial ignition”, which was to jump-start the engine of the economy. But Eucken remained sceptical. Cartel pricing and wage rigidity had to be broken first. Pointing the way to a new liberal economic order instead of directing economical processes, the creed of the later so-called ordoliberalism began to take shape.

In this environment, the first manifestos of ordoliberalism emerged in 1932: a speech by Alexander Rustow at the Verein fur Sozialpolitik and Eucken’s essay “Staatliche Strukturwandlungen und die Krise des Kapitalismus” about changes in the structure of the state and the crisis of capitalism. Both men complained that in the course of democ­ratization, the state had degenerated into a tool of various interest groups and their calls for intervention. Eucken argued that the regulatory effect of the price system had been reversed by government intervention. This was the cause of the crisis, and now the gov­ernment had to find the strength to “liberate itself from the influence of the masses” once

again. Although Eucken proved to be a critic of the Weimar Republic, this did not make him sympathetic to the Nazis.

When Eucken’s most important work, Die Grundlagen der Nationalokonomie, was first published in 1940, Germany was celebrating Hitler’s successes, Stalin had established a planned economy and Roosevelt’s New Deal had been put to work. The question of what was the right economic system was up for debate, and Eucken was going against the flow.

Methodologically, Eucken’s Grundlagen is a late contribution to the Methodenstreit between the historical and the marginalist school, a debate especially over whether the inductive or the deductive method should be adopted. Eucken wanted to overcome this “great antinomy”.

In the exchange economy, individual plans are coordinated via markets and prices. Exactly how this process works depends on the economic subjects’ position of power, and on the respective dominant market forms. According to Eucken, perfect competi­tion, partial oligopolies, oligopolies, partial monopolies and monopolies were conceiv­able on both the supply and the demand side, and this led him to distinguish between 25 market forms in terms of which all economic systems at all times and in all places can be understood. Which of these forms existed “when” and “where” was a question of empiri­cism, while the clarification of the laws applicable in them was the task of theory.

According to Eucken, the distribution resulting from the free market leads to social problems when the levels of prices and incomes are not based on scarcity relationships but on positions of power resulting from imperfect markets. For this reason, he favoured a strong state that guaranteed an economic order in which wages and prices develop according to the rules of functioning markets. He argued in favour of a properly func­tioning and humane economic order and criticized central planning as a system that did not correspond to “the essence of man and his concern”.

According to Eucken, private property could and collective property must lead to abuses, because the free development of prices was impossible. The political conse­quences were serious: Eucken agreed with Hayek’s view that the planned economy was subject to a tendency toward state slavery. However, with his critique of laissez-faire he was closer to the classic liberalism of a John Stuart Mill than to the neoliberalism of a Friedrich Hayek.

When considering the small number of great German economists of the twentieth century, the name Eucken stands out. His work had the greatest influence on the course of economics and the structuring of the economic order in Germany after World War II. Eucken’s importance lies in the combination of theory and policy, of academic and moral integrity in search of answers to the pressing questions of a difficult time. He offered a starting point, particularly to those who refused to accept the enforced con­formity of the universities after the Nazi takeover and aspired to a new, free economic order. Against this historical background, his ability to establish a school of thought in Germany becomes understandable. In addition to the “Freiburgers” Franz Bohm, Hans Groβmann-Doerth, Friedrich Lutz and Leonard Miksch, Rustow and Ropke are also part of this group. Some would also include Erhard and Alfred Muller-Armack.

Ordoliberalism survived both the heyday of Keynesianism and the monetarist revolu­tion. Eucken’s defining influence in Germany started to wane noticeably in the 1970s. With the advent of the financial crisis in 2008-09, his criticism of laissez-faire policies has gained a new relevance.

Hauke Janssen

See also:

Gustav Cassel (I); German and Austrian achools (II); Friedrich August von Hayek (I); Historical economics (II); Gustav Friedrich von Schmoller (I); Arthur Spiethoff (I).