Reviving Germany after the War: the Economics of Freedom

At the end of WW2, Germany was a devastated nation. The physical infrastructure was nearly nonexistent; the population lacked the millions who died during the war; the economy was barely functioning, and what little function it mustered was shackled by rigid regulations - regulations originally imposed by the Nazis and bizarrely kept in place by the victorious western Allies.

When the Allies began to turn over control of West Germany to the civilian government, debate arose among the Germans about the best way to revive the economy.

The Social Democratic Party (SPD) wanted to keep in place the wage controls, price controls, and high taxes imposed by the Nazis. They feared that deregulation would kill the tiny amount of economic activity which still took place.

By contrast, the Freiburger Schule (a group of economists known as the ‘Freiburg School’) favored deregulation. The Freiburg School had formed in opposition to the Nazis during the late 1930s. They saw a connection between personal political liberty and the free market.

This debate between the SPD and the Freiburg School occurred during Germany’s Stunde Null - the ‘zero hour,’ a historical reset as the nation restarted itself. Thomas Hazlett writes:

There wasn’t much in the program of the Social Democrats that the Freiburg School found to agree with. During the dark days of the Hitler epoch, a liberal resistance movement had developed at the University of Freiburg. Under the leadership of Walter Euken, it included Alfred Muller-Armack. Wilhelm Roepke and Ludwig Erhard. These men constructed one of the most comprehensive political-economic doctrines of this century: the Soziale Marktwirtschaft. The idea of a “socially conscious free market,” as the translation goes, was that totalitarianism is the evil to be most guarded against and that the only way to prevent tyranny is to promote freedom. The theory spread freedom across political and economic lines and espoused a policy of noncontrol - by either the State or individuals - of individual choice. The conclusion was that free markets, and only free markets, can provide human society with the incentives, efficiencies, and freedoms that can lead to a vital and progressive society.

The Freiburg School won the debate. Konrad Adenauer, elected in 1949, appointed Ludwig Erhard to deal with economic matters. Deregulation and tax cuts followed.

The free market approach energized the German economy. In 1945, many observers feared that Germany would permanently be relegated to a ‘third world’ status. By the late 1950s, Germany was one of the most powerful economies in the world, and the economic leader of Europe.

Historians use the word Wirtschaftswunder to describe this amazing recovery: an ‘economic miracle.’ But it was no miracle: it was the predictable and replicable results of the Freiburg School’s free market idea.