Liberty vs. Leviathan

Chronicling Liberty's battle against Leviathan

Röpke’s Remedy

I never tire of reading Röpke.  This from Economics of the Free Society, a discussion in the last chapter about profit and competition.  Röpke sometimes takes heat from libertarians for his views on the government.  Notice though that his “strong state” is to use its powers in a way that is exactly opposite of what’s being done today, i.e., provide a moral, stable framework for the market, not destroy the market.

…in the profit principle we have a sure and indispensable criterion for determining whether or not any given enterprise may be fitted into the context of the national economy or not. The dominance of the profit principle merely brings it about that an entrepreneur who fits into this context is rewarded by the market; he who does not is punished by the market. The reward is as high as the penalty is severe, but it is precisely in this way that we are assured of the selection of persons qualified to direct the process of production. And since the fear of loss appears to be of more moment than the desire for gain, it may be said that our economic system is (in the final analysis) regulated by bankruptcy.  The collectivist state must find an equivalent regulatory principle: in the place of profitability it will have to establish another criterion of success and another system of selecting the managers of production. It is very doubtful if such an equivalent can be found. In any case, the fact that those who direct the process of production (the entrepreneurs) personally enjoy the fruits of success and personally suffer all the losses incident on failure is one of the most important (if unfortunately often abused) principles of our economic system. It would be difficult to prove that it is either unnatural or unpurposeful.

But all of this is valid only under one condition, whose importance we must make every effort to grasp if we would understand the structure of our economic system and the true extent of the distortion which it has undergone in recent times. The road which leads to profit may be entered only the condition that an equivalent economic service is rendered in return. At the same time, there must be assurance that deficient performance will find its inexorable punishment in the losses and finally in the bankruptcy proceedings which remove the incompetent persons from the ranks of those responsible for production. Similarly, the use of underhanded methods to obtain income (without corresponding service) and the avoidance of penalties for deficient performance (by shifting losses to others’ shoulders) must be prevented. For the fulfillment of this condition our economic system disposes of two devices. The first is that responsibility and risks (chances for gain and loss) are coupled closely together. Here we encounter one of the most disturbing disfigurements of the modern economic system. The fact is that the growth of the corporation with its much discussed but unfortunately too seldom remedied abuses has led more and more to the assumption of risks by the community (“socialization of losses”). This and many other developments have resulted in a considerable weakening of the coupling principle, a situation which obviously must receive primary attention in any plan of economic reform which is to be truly effective. No less vexing problems arise with respect to the second device, with which the reader is already familiar, viz., competition. All the hardships that it implies and all the admittedly serious problems which it encompasses cannot get rid of the fact that our economic system stands or falls with competition, since only competition can tame the torrent of private interests and transform them into a force for good. It is competition which sees to it that the high road to profit is entered only by the rendering of an equivalent service (business principle). To restrict competition, then, is to jeopardize the principle of economic reciprocity. If this much is clear, then the conclusion can no longer be avoided that the growth of monopoly represents an extremely serious disfigurement of our economic system. The state can effectively fight monopoly by energetically opposing restrictions of competition and by carefully avoiding economic policies which favor the formation of monopolies. For this, however, it is necessary to have a strong state—impartial and powerful—standing above the mêlée of economic interests, quite contrary to the widely held opinion that “capitalism” can thrive only where there is a weak government. The state must not only be strong; unmoved by ideologies of whatever brand, it must clearly recognize its task: to defend “capitalism” against the “capitalists” as often as they try to travel a more comfortable road to profit than the one indicated by the sign “principle of service” and to shift their losses onto the shoulders of the community.

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