The Freiburg Boys

In The Shock Doctrine, Naomi Klein argues that radical free market reform requires some kind of crisis. Wars, terrorist attacks and natural disasters pave the way for authoritarian reformers to impose their fundamentalist visions on an unwilling population. Critics like Tyler Cowen have dismissed the thesis as ridiculous but free market guru F A Hayek, would probably have agreed with Klein. He saw the rebuilding of West Germany after World War II as a triumph for liberalism. American military administrators allowed Germany’s neoliberals a free hand in reforming the economy. And, according to Hayek, they achieved things that would never have been possible in a democracy.

Like many left-leaning activists, Klein sees Pinochet’s Chile as a paradigm case of neoliberal reform. After taking power in a coup, Pinochet’s regime murdered thousands, torturing and imprisoning many more. But despite these abuses, the dictator had supporters in the developed world and one of them was Hayek. Seen through the lens of Pinochet’s Chile neoliberalism appears as an authoritarian project by which "a relative handful of private interests are permitted to control as much as possible of social life in order to maximize their personal profit." In the end, says Klein, it’s all about greed. But what if West Germany is the paradigm case rather than Chile?

At the end of the Second World War, Germany was an occupied nation under Allied military control. According to American academic David Gerber:

The United States sought to demonstrate the superiority of its free market-based social system by demonstrating its success in Germany. This dynamic also impelled efforts to make the German test case as "pure" a capitalist economy as possible, on the theory that the "purer" it was, the stronger the proof that the market economy was superior to its socialist competitor.

The military government turned to the Freiburg School neoliberals, one of the few groups of German economic experts who could pass their rigorous denazification standards. According to Henry Oliver, the neo-liberals (or ‘ordoliberals’) were opposed to Keynesianism, price controls, food subsidies, rent control or any other measure that interfered with the price mechanism:

They insist that, when the government takes steps to redistribute income or provide security, it do so in ways that leave the price system unimpaired, or, in other words, that it rest content with progressive taxation, some social services, some varieties of social insurance, and outright relief of extreme need.

These ideas had a strong influence on German economic policy in the immediate post-war period. When Ludwig Erhard, the West German minister of economic affairs, abolished price controls in 1948 he did so against the advice of the American experts. American economist John Kenneth Galbraith argued that the policy wouldn’t work. But instead of descending into chaos, the West German economy boomed. And even though unemployment remained stubbornly high, commentators called it an economic miracle (Wirtschaftswunder).

Hayek clearly admired Erhard. When he was asked about examples of nations that managed to "reinstate the rule of law" after flirting "with socialism or the welfare state" Hayek said:

Oh, very clearly Germany after World War II, although in that case it was really the achievement of a single man almost… Ludwig Erhard.

Elsewhere he said that Erhard

could never have accomplished what he did under bureaucratic or democratic constraints. It was a lucky moment when the right person in the right spot was free to do what he thought right, although he could never have convinced anybody else that it was the right thing (p 241).

As Richard Cockett notes, Erhard joined Hayek’s Mont Pelerin Society at its second meeting (p 110). This placed him at the heart of the post-war free market movement.

But there’s a puzzle here. As Hayek’s biographer Alan Ebenstein points out, "During the years that Hayek praised West Germany, its government share of gross domestic product was in the vicinity of forty to fifty percent" (p 242). And Naomi Klein writes, the West German government "provided subsidized housing, government pensions, public health care and a state-run education system, while the government ran, and subsidized everything from phone company to aluminum plants" (p 83). Yet Hayek strenuously denied that West Germany was on the road to socialism. When the economist Nicholas Kaldor suggested otherwise Hayek shot back:

For Lord Kaldor to describe a country that for twenty-seven years has known no nationalisation, no price controls, no exchange controls, no investment controls and whose now governing ‘social democratic’ party has publicly committed itself to a market economy as ‘much ahead in "socialist policies" of either France, Britain or Italy’ suggests an ignorance of the policies he himself has been advising which is somewhat astounding (p 242).

In The Constitution of Liberty Hayek argued that "it is the character rather than the volume of government activity that is important" (p 222). For Hayek, nationalisation and attempts to control prices and incomes threaten the functioning of the market and, as a result, the welfare of society as a whole. Hayek was opposed to welfare state policies that attempted to redistribute incomes according to merit but did not object to income support paid according to need.

Hayek never advocated a system of laissez faire capitalism. In 1945 he discussed his most famous book The Road to Serfdom on an American radio program. He said:

What I was trying to point out is that there are two basic and alternative methods of ordering our affairs. There is, on the one hand, the method of relying upon competition, which, if it is to be made effective, requires a good deal of government activity directed toward making it effective and toward supplementing it where it cannot be made effective (p 111).

He went on to explain that he had no in principle objection to legislated limits on working hours or minimum wages. While he did not think that minimum wage laws were the most effective way of protecting the welfare of vulnerable workers he did not regard a single, flat minimum wage as step on the road to serfdom. As long as labour laws did not interfere with the price mechanism’s movement of workers between trades and professions they were acceptable.

While Hayek would not have regarded West Germany’s social market economy as ideal, he thought it was a far better system than Britain’s. In the 1976 preface to The Road to Serfdom, he argued that Britain was more socialist than Sweden.

Hayek probably found Margaret Thatcher‘s reforms frustrating slow. In 1982 he wrote her a letter where he mentioned the example of Pinochet’s reforms in Chile. Apparently even Thatcher thought he was going too far. She wrote back pointing out that "in Britain with our democratic institutions and the need for a high degree of consent, some of the measures adopted in Chile are quite unacceptable."

Hayek was suspicious of democracy. He associated democracy with the idea of unlimited government — a government that has the power to ignore or overturn the law whenever it chooses. While some liberals worry that majorities might use these powers to oppress minorities (the rationale for a bill of rights that limits the powers of democratically elected governments) Hayek seemed more worried that a democratically elected government would attempt to sabotage the price mechanism. He suggested that it was possible to have an authoritarian government that would "act on liberal principles" (p 103) and, according to some sources, said that he leant towards a "liberal dictatorship rather than toward a democratic government devoid of liberalism."

Like socialists who think that violent revolutions and communist dictatorships are a necessary stage in establishing a more humane social order Hayek thought that authoritarian coups like Pinochet’s could be justified by their results. In common with the Che-worshipping campus revolutionaries he despised, Hayek displayed a callous disregard for the victims of violent dictators. Klein is right to attack Hayek for supporting Pinochet. But the German example suggests that she is wrong to treat neoliberalism as nothing but a vulture that hovers over scenes of disaster and despair looking for carcass to pick.

What if we decide to give the ‘Freiburg Boys‘ equal status with the Chicago Boys? What if we decide that West Germany really was an example of neoliberal reform and not some aberration? Much of the argument against neoliberalism hinges on the decision that Chile is a better example than West Germany. Interestingly, according to Carl Friedrich, the German neoliberals of the 40s and 50s referred to thinkers like Hayek and Ludwig von Mises as ‘paleo-liberals’ — "old timers who do not recognize the lessons of Communism and Fascism."