Abstract
Ordnungstheorie (~ system theory, ordo theory) and New Institutional Economics have opposing objectives: The objective of Ordnungstheorie is the “…scientific understanding of real economic life”, given the institutional framework (economic system or “order”) within which economic life happens, while the objective of the New Institutional Economics is the economic analysis of the institutional framework of the economy itself (its “order”). That is, in spite of their different objectives, the two approaches have one common point of interest: the institutional framework of economic life. For that reason it may be of interest to neoinstitutionalists to have a closer look at German Ordnungstheorie.
With slight changes reprinted from Schmollers Jahrbuch, Journal of Applied Social Science Studies, Vol. 132:4, pp. 473–500 (Duncker & Humblot, Berlin, Germany).
The original paper has been presented at the 15th annual meeting of the International Society for New Institutional Economics, June 16–18, 2011, Stanford University, USA. My thanks for critical comments go to an anonymous referee, to Günther Hönn and Dieter Schmidtchen (both Saarbrücken) for their discussion of earlier versions.
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Notes
- 1.
Eucken (1950, 221).
- 2.
The term “New Institutional Economics” was introduced by Williamson (1975) and became a standard (or banner) under which a diverse group of economists assembled, who shared one common intellectual ground of not only that institutions matter (as in what became “constitutional economics”) but that the determinants of institutions can be analyzed with the aid of economic theory—taking into account transaction costs, incomplete foresight and bounded rationality. A different (at first sight possibly more obvious) way to deal with issues of Ordnungstheorie is in terms of Buchanan’s (1987) “Constitutional Economics” as is illustrated by Vanberg (1988, 2005).
- 3.
That culminated in Hicks (1939/1946).
- 4.
Eucken (1950, 117 f.).
- 5.
Which has many facets. Eucken’s attempts to clarify it: 1950, p. 263 and Note 59.
- 6.
Debated was the relevance or usefulness of marginal productivity theory for the explanation of real world income distribution. Böhm-Bawerk (1914) defended in a well-known paper Austrian marginal utility theory against Stolzmann (1909) who argued that it is power alone that determines the distribution of income.
- 7.
“…in the central authority, which alone formulates economic plans and controls the actions of all the members of the community, who for their part are left without power or freedom.” (Eucken 1950, p. 265).
- 8.
Eucken (1950, p. 269).
- 9.
That is probably what Eucken (1950, p. 205) calls “complete general equilibrium” or the “static state of the Lausanne School”, i.e., what we now call “general equilibrium.”
- 10.
Schmoller (1906) vividly illustrates this aspect of economic power.
- 11.
As for the “centrally administered” economy, “…because of the size of the community and the number of goods to be valued, it is impossible to express the values of goods in quantitative terms….[and] as history shows, economic calculation, and therewith any precision in the control of the economy, encounters the greatest difficulties.” (Eucken 1950, p. 119, 120) “Men have experienced the extraordinary disadvantages that are related with centralised planning.” Eucken (1952a, 118 f.).
- 12.
By applying “the method of ‘isolating’ abstraction, or of abstraction of the distinguishing or significant characteristics“ that starts from the individual fact—in contrast to the “generalizing” abstraction with which the constructors of “stages” or “styles” of development work (Eucken 1950, p. 107). [“Pointierend hervorhebende” or “isolierende” Abstraktion“ (Eucken 1947, p. 114)].
- 13.
A good summary of Eucken’s views on these matters provides Schmidtchen (1984, 57 f.).
- 14.
See, e.g., Weber (1968, p. 6).
- 15.
See Eucken’s list of “forms of market” (1950, p. 158).
- 16.
“Supply and demand are ‘open’ if every individual or group has access to the market as supplier or demander, and if each individual can supply or demand whatever quantity he thinks fit.” (loc. cit. p. 134)
- 17.
Such as competition, oligopoly, monopoly either on supply or demand side or both, with open or closed markets (loc. cit. p. 158).
- 18.
Eucken (loc. cit.178 ff.)
- 19.
Loc. cit. (loc. cit. 186 ff.)
- 20.
Loc. cit. 198 ff.; Eucken mentions at the sidelines Knight (1921), thus his term of “risk” might have included “Knightian” uncertainty.
- 21.
According to Hutchison (1979, p. 433) there are two modes of arguments for free markets:
a “Smithian” and a “Ricardian.” The latter would be also followed by some “neoclassical.” It is derived from an abstract, purely economic model of competitive equilibrium…”, while the Smith mode is formulated in much broader terms, “…comprehending the political and social order, and especially the legal foundations and framework of the economic order.” The ideas of Eucken’s Ordnungstheorie and Ordnungspolitik follow this Smithian mode.
- 22.
The first issue appeared behind issues 2 and 3.
- 23.
On the intellectual movements of the 1920 and 1930 see, e.g., Kiesel (2007, Vierter Teil).
- 24.
See Eucken (1950, p. 314; 1952a, p. 336); similarly Eucken (1952b, 95 f.): “The state should influence the forms of economy, but not itself direct the economic process. […] State planning of forms—Yes; state planning and control of the economic process—No!” The latter would distort relative prices and lead to misallocation of resources (see Eucken 1952a, p. 287).
- 25.
In the real world it is not the exact number of suppliers or demanders that determines the market form of perfect competition but “it is the economic plans that decide.” (Eucken 1950, p. 140)
- 26.
Concluded from what Eucken (1950, p. 523) calls „method of variations“—an equivalent to what is called now “comparative static.”
- 27.
Eucken (1952a, p. 255) speaks of the “primacy of currency policy.”
- 28.
- 29.
Graham (1937), Hart (1953, p. 442). The Graham Plan tries to answer the problem of price fluctuations of one single money good by using instead a bundle of money goods whose price fluctuations tend to offset each other. Milton Friedman provides a critical discussion of this and other forms of commodity standards. He concludes: “In every important respect the commodity-reserve currency is technically inferior to the fiat currency.” Friedman (1953, p. 249):
- 30.
At the high time of German hyperinflation Eucken (1923, p. 80), unsurprisingly, advocated the gold standard.
- 31.
Eucken apparently did not attach any great importance to the at his time debated phenomenon of the hog cycle (Hanau 1927).
- 32.
Some early versions where represented in the shape of circulating fluids—called by Coddington (1976, p. 1264) “hydraulic Keynesianism.”
- 33.
By referring an observed real case to its corresponding specific ideal type.
- 34.
- 35.
Furubotn and Richter (2005, p. 512): In some areas, such as contract theory, neoclassic modelling and kind of NIE modelling is mixed. It would be extreme to say that such “… hybrid models have nothing to offer and cannot contribute anything to our understanding of economic phenomena. Yet, it remains true that these models are vague about the fundamental significance of transaction costs and bounded rationality (Denzau and North 1994). All too frequently, the technical discussion moves back and forth haphazardly between different levels of abstraction. Economic activities that are supposedly carried out within one universe are judged relative to an efficiency standard or other considerations that have their origin and justification in a completely different universe. Ultimately, it would seem that analysis cannot be ‘half’ neoclassical and ‘half’ neoinstitutional.”
- 36.
His “perfect competition” demands only a market system (order) of many small (non-cooperating) suppliers and demanders who take the price of the traded commodity as a planning datum—as a consequence of the size of the market and the negligible size of supply or demand [and act according to the economic principle] (see Eucken 1950, p. 140).
- 37.
The collective choice problem of market organizations is “Who pays?” for the public good (like antitrust measures). Olson answers: “…the larger the group, the farther it will fall short of providing an optimal amount of a collective good.” (loc. cit. p. 35) The reason is that large groups will face relatively high transaction costs when attempting to organize for collective action (i.e., high costs of setting up, administering and enforcing a collective order or constitution, incl. the costs of keeping away free riders). In contrast, small groups will face relatively low transaction costs. Furthermore, the incentive to contribute to the collective good (and willingness to pay) differs: individuals in large groups will gain relatively less per capita of successful collective action and thus are less keen to contribute to the “common wheal” compared with individuals in small groups who will gain relatively more per capita. Olson’s logic of collective action contains important insights at the borderline between the NIE proper and public choice theory as originated by Buchanan and Tullock (1962) or the general field of political economy (Bernholz and Breyer 1993; Drazen 2000; Persson and Tabellini 2000).
- 38.
- 39.
Money as a “contrivance for sparing time and labor.” [Mill (1987, chap. 5 as quoted by Niehans (1978, 3)].
- 40.
Hicks (1946, p. 139) explains liquidity preference indirectly as a consequence of “…the uncertainty of the future and the desire (of the consumer) to keep ones hands free to meet that uncertainty, ….”
- 41.
As for the latter, money in its capacity as accounting unit and means of payment is an ingenious way to determine the form of calculating and the manner in which “payments” are made (cash payments, check payments, bank transfers, etc.). Schumpeter (1970, p. 206) describes “payments” as being basically bookkeeping entries in an imaginary “social ledger.” (Richter 1989, p. 100)
- 42.
Furubotn and Richter (2008).
- 43.
See, e.g., Richter (1989, Chapter 4).
- 44.
Milton Friedman favoured 100 % money (Friedman 1948), but rejected the Graham Plan (Friedman 1951). As for the rest, Friedman (1948, p. 246) repeats Eucken’s opinion: “(1) Government must provide a monetary framework for a competitive order since the competitive order cannot provide one for itself. (2) The monetary framework should operate under the ‘rule of law’ rather than the discretionary authority of administrators….”
- 45.
See Furubotn and Richter (2005, p. 21). Or they have to be subject to the same legislative process as tax changes. The suggestion that the rule should be embodied in a constitutional amendment reflects excessive confidence (or hubris).
- 46.
However, price stability (or “sound money”) does not guarantee financial stability—an old problem heavily debated when Peel’s Bank Act of 1844 was passed (Fetter 1965, pp. 165–197). The financial crisis of 2008 reminded central banks of their function of lender of last resort and of the Bagehot rule. The Fed or other central banks took, as is said, “unconventional” measures like “quantitative easing.” They were insofar “unconventional” or “inventive” measures as they consisted in a particularly carefree application of the old Bagehot Rule (Bagehot 1873/1962, p. 25).
- 47.
There is an extensive literature on this topic. In addition to Kydland and Prescott (1977), there are the works of Barro and Gordon (1983), Blackburn and Christensen (1987), Persson and Tabellini (1990) among others. For a survey see Persson and Tabellini (1990). These are works of the “new classical macroeconomics”, according to which in the short-run, despite the hypothesis of rational expectations, room remains for monetary stabilization policy. We announce our doubts about this approach.
- 48.
Richter (2002).
- 49.
Who “loves himself better than any other single person, and in his love of others bears the greatest affection to his relations and acquaintances” (Hume [[1739–40] (1969), p. 539).
- 50.
Understood in the sense of full ownership.
- 51.
Among them information costs due to which knowledge is “not given to anyone in totality” (Hayek 1945).
- 52.
Eucken (1950, p. 281).
- 53.
Because: “In the state of perfect competition [Eucken means: in general equilibrium] are private owners of firms in an equilibrium of economic power.” (Eucken 1952, p. 274) In microeconomic terminology: The state of general equilibrium is Pareto efficient—a term not used by Eucken.
- 54.
- 55.
“If the constitutional State (Rechtsstaat) was able to protect its citizens from arbitrary acts of the State itself, it was unable to save them from the arbitrary acts by other citizens” (Eucken 1952, p. 52). Eucken warns that the constitutional state is only able to succeed completely if together with its public legal order an “adequate” economic order is realized (p. 52).
- 56.
Following Llewellyn (1931–32, p. 708): the term “contract” understood as “the legal effects … of promises.” Time is involved in an essential way—as opposed to the language of the German Civil Code according to which contract is “a juristic act [Rechtsgeschäft], normally consisting of two declarations of will [Willenserklärungen].” (Horn et al. 1982, p. 74).
- 57.
Eucken (1952a, p. 281).
- 58.
Eucken (1952a, 281 ff.).
- 59.
See also Böhm (1937, p. 106).
- 60.
One such moral hazard was that banks, instead of holding loans on their balance sheets, changed to an ‘originate and distribute’ model. ‘They repacked loans and passed them on to various other financial investors, thereby offloading risk’ (Brunnermeier 2009, p. 78). In doing so, banks created ‘structured’ products—collateral debt obligations (CDOs) consisting of diversified portfolios of mortgages and other types of loans—sold in private placements with confidentially agreements. Banks then sliced these portfolios into different tranches, which they sold not only to investor groups with different attitudes toward risk but also to themselves. Furthermore, buyers could also protect themselves by purchasing credit default swaps (CDSs).
- 61.
Especially private property rights, contract law, regulation of personal liability, competition law, labor law, etc.
- 62.
- 63.
Except antitrust legislation that had been enacted later—pretty much watered down (Gesetz gegen Wettbe-werbsbeschränkungen vom 27, 07, 1957).
- 64.
Eucken (1950, p. 293); no reference to marginal utility theory.
- 65.
Hume ([1739–40] 1969, p. 542).
- 66.
“…who find it in their own enlightened self-interest to cooperate with their neighbours in a long term relationship.” (Binmore 1992, p. 21) Game theorists can demonstrate that formally—under ideal assumptions.
- 67.
Hicks’s book is listed but not referred to in Eucken (1950, note 41).
- 68.
Defining a state of the economy in which all individuals maximize their utility under some complex set of constraints.
- 69.
The concept of adaptive efficiency may be read as an answer to Hayek’s claim that “… the economic problem of society is mainly one of rapid adaptation to change in the particular circumstances of time and place.” (Hayek 1945, p. 524).
- 70.
Knight (1921, 268 f.).
- 71.
See Richter (2010) on the role of entrepreneurs as surrogate forward traders.
- 72.
Arrow (1970, p. 142 ff.) expressly points to this problem.
- 73.
North (2005, p. 19).
- 74.
See, e. g., the contributions to various collective volumes such as Möslein (2012) or Grundmann et al. (2012); and, of course, the relevant contributions to the annual International Seminar on the New Institutional Economics, published in the Journal of Institutional and Theoretical Economics, organized and edited by C. Engel and U. Schweizer (Bonn) from 2000 onwards.
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Richter, R. (2015). German “Ordnungstheorie” from the Perspective of the New Institutional Economics. In: Essays on New Institutional Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-14154-1_9
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