Friday, June 4, 2010

Wilhelm Ropke and Broken Windows

From Crises and Cycles - an interesting passage that I came across yesterday. I think Bastiat would understand precisely what Ropke was saying. Modern fans of Bastiat might not.

"We are brought face to face with the intricate relationships of the innermost heart of our economic system when we remember that a political catastrophe like the Great War or a natural catastrophe like the Japanese earthquake of 1923, instead of retarding economic life, generally enlivens it, and thus tends to bring about not a crisis but a boom. Certainly catastrophes lead to an impoverishment of the economic system, but we must guard against confusing impoverishment with a crisis, all the more so as this confusion is an extremely common one. If we agree to understand by an economic crisis a temporary paralysis of the economic process which leads to a disturbance of the exchange apparatus with its consequences of over-production, surplus stocks, and insolvencies, we realize that it is characterized not by a scarcity but by a superfluity of goods, while the hall-mark of impoverishment is a deficiency of goods. This deficiency of goods generally spurs on the economic machine to make the highest number of revolutions it is capable, as was very markedly the case during the war. An economic crisis is therefore not an expression of shortage but of abundance or - to put it better - of what seems to us 'abundance' because of the temporary paralysis of the process of exchange and of the economic process in general. That it leads in the long run to an impoverishment of the economic system is self-evident, but this does not affect the question of the origin of crises, which is the question we are discussing here."

I'm a big fan of the broken window fallacy - I'm afraid that a lot of the people who talk about it most don't really understand it.

Speaking of German ordoliberals like Ropke, the Mises Institute recently came out with Ludwig Erhard's Prosperity through Competition.

I have a question to readers - does anybody know of an Ordoliberal that thought highly of Keynesianism or even considered himself Keynesian? Generally speaking, the relationship between Ordoliberals and Keynesians was chilly. I'm guessing this is mostly due to the central European experience with inflation at the time that the Anglo-American world suffered under deflation, as well as a lack of acceptance of Keynesian theory itself (Keynesian policy does look awfully suspicious if you don't operate with a Keynesian theoretical framework). And yet, even in that piece above (which has nothing to do with Keynesianism), the potential common ground between Keynesianism and Ordoliberalism is crystal clear. Ropke practically announces an aggregate demand based theory of the business cycle, for God's sake! But was the gulf between the two schools ever explicitly bridged? Not that I'm aware of, but I'm curious if anyone else is.


  1. I'm not sure if this answers your question, but I know that Gottfried Harberler was a quasi-Mesesian (see: Prosperity and Depression) who later abandoned strict Austrianism and became quasi-Keynesian.

    For an opposite example, L. Albert Hahn was a proto-Keynesian (much of what Keynes would write in The General Theory had, in fact, already been [to one degree or another] written by Hahn) who later approached Austrianism. See:

  2. One aspect of the commonality between some of the ORDO Liberals and the Keynesians was the belief that an economy can get into a spiral of cumulative decline in income, employment, and demand that only could be broken by an infusion of government spending to put a floor beneath which the economy would no longer fall. (The Keynesians called it the negative "multiplier" effect that required government deficit spending to reverse the process. ORDO Liberals such as Roepke called it the "secondary depression" that played no "helpful" correction process, and fed on itself making the situation worse.)

    But while the Keynesians believed that the market economy was inherently susceptible to these destabilizing swings in employment and output, the ORDO Liberals believed that these were rare and occasional situations that required exceptional policies.

    But, in general, Roepke and his German colleagues argued that the market was self-adjusting and self-correcting that required allowing the market to rebalance, itself. They considered the most frequent cause of economy-wide fluctuations to be mismanagement of the monetary system and distortions in the market interest rates due to monetary and credit expansion brought about by misguided central bank policy.

    I have summarized and explained Roepke's views on these and related issues in my article, 'Wilhelm Ropke: A Centenary Appreciation,' "The Freeman" (Oct. 1999),

    Richard Ebeling

  3. Thanks Richard - and welcome to the blog.

    I've heard the point about the "secondary depression" before, but I had not realized that ordoliberals actually embrace fiscal policy to address those rare circumstance. I'll have to take a look at your article.

    The way I always think about Keynes, though, isn't that every descent from full employment is a wage-price spiral, but that the economy can stay steady at an underemployment level. That there is no natural mechanism guaranteeing full employment. This is not to say, of course, that such spirals are foreign to Keynes - only to say that he explicitly makes the point in the General Theory that the economy moves along neither at full employment nor in abject poverty, but at some tolerable underemployment level. Market instability for Keynesians, in other words, is not a propensity to frequent crashes, but a stable state of underemployment.

    I wonder if since Patinkin and some of the new Keynesian work, Keynesians look more like the ordoliberals.

  4. Daniel, nice to comment on your blog.

    The problem I see with the Keynesian logic is that it that economic laws change in times of crisis, so that, in the words of Krugman, what was a virtue becomes a vice.

    But I never understood how it supposedly happens.

    You would say that savings are not translated into investment because of low investment demand due to high real interest rates. But it is implicit in this statement that savings in a crisis do not depend on the interest rate. Am I right?

    But then the liquidity trap logic does not apply to savings. And therefore, the monetary authority may supply savers with all the money they want to hold regardless of whether the nominal rates are at the lower bound.

    Or do you imply an unlimited liquidity preference on the part of the savers?


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