History of Theory of Orders
Theory of Orders promotes thinking in terms of orders. These are analytical concepts for investigating social phenomena. A distinction is made between "designed" and "spontaneous" order. A designed order is brought about by the conscious coordination of human activity, such as enterprises and households. A spontaneous order has evolved through the independent activities of thousands of individuals. Such orders include language, the legal system, the economy, and society. They are unintended results of human activity, but they serve to achieve the goals that individuals pursue through their activities. The recognition of the existence and subsequent theorization of spontaneous orders have a long history. The first approaches to thinking in orders can be traced back to ancient Europe and classical China. Thus, approaches to self-organized economic and social orders can already be found in Aristotle, Epicurus, Cicero and Confucius.
Afterward the idea had almost disappeared in the European Middle Ages, it resurfaced during the transitional period from the Middle Ages to the early modern period (e.g., in late Scholasticism). However, it was the Scottish moral philosophers of the 18th century who fully rehabilitated the idea of spontaneous order.
Based on this classical theory of economic development, the German Ordoliberals and members of the Austrian School of Economics developed the idea of order into an increasingly coherent economic policy concept at the beginning of the 20th century. This concept—now called the "competitive order"—was first applied in the reconstruction of the Federal Republic of Germany after World War II, as it formed the theoretical basis for the "Social Market Economy."
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Thinking in Orders - from antiquity to the early modern period
In ancient Greece, economic life was confined to the polis. Therefore, economic questions were treated only marginally in the philosophical pursuit of knowledge, even by Aristotle. While he disapproved of the pursuit of profit, he advocated clear constitutional rules within a polis and affirmed the necessity of private property. Aristotle calls law—in the sense of general and abstract rules—"reason without desires" and distinguishes it from "democracy" as a degenerate variant of popular rule. Also important for modern economic theory is his distinction between commutative justice of exchange and the market, and distributive justice, which we today call "social justice."
The Stoics took a further step toward a universalistic theory of order by integrating social rules as a "natural order" into the overall cosmic process. This expanded the narrow polis perspective of the classics. Universal human rights were developed, such as the concept of equal property rights for every human being, including slaves. Epicurus reduced the state to a universal contractual order for the purpose of mutual non-harm. He can thus be considered the inventor of the "night-watchman state."
While Roman antiquity brought practical economic interdependence throughout the known world, it also brought little further development of economic ideas. Perhaps this is due to the fact that the Romans generally had little scientific inclination and merely promoted legal theory. It is therefore not surprising that the only contribution of Roman antiquity to the theory of economic order comes from political and legal theory. According to Cicero, the state is particularly responsible for the protection of inviolable property. Expropriation or redistribution, according to Cicero, are not benefits of the state, but rather signify a dissolution of its moral foundations. This makes Cicero an influential theorist of the constitutional state based on natural law, which is characterized by the rule of law rather than the rule of man.
Unfortunately, for centuries in medieval Europe, no further development of ancient ideas of order was undertaken. Scholastic thought (e.g., Thomas Aquinas) merely attempted to integrate ancient ideas of state and economy—particularly those of Aristotle—into theology. While Roman law had still given market participants free rein in setting prices, the Church now demanded a "just price" (justum pretium), which would be achieved through the exchange of goods of equal cost. Only late Spanish Scholastic thought was able to make a further significant contribution to the modern theory of spontaneous order. The School of Salamanca defined the "just" price as a competitive price, explained the function of the entrepreneur, and derived interest on capital from the time preference of economic agents. Thus, trade as an institution was no longer morally questionable. However, it was not until mercantilism that a complete abandonment of scholastic moral ideas occurred.
Mercantilism is an economic policy doctrine that prescribes "recipes" for the state to achieve a specific economic result through the conscious control of the economic activity of the members of an economic order. The main proponent of this doctrine was Jean-Baptiste Colbert, Finance Minister under King Louis XIV. A quote from Adam Smith's The Wealth of Nations can illustrate this doctrine very well: "The industry and commerce of a great country he (Colbert) endeavored to regulate upon the same model as the departments of a public office ... he bestowed upon certain branches of industry extraordinary privileges, while he laid others under as extraordinary restraints, to encourage more the industry of the towns than that of the country" (Smith [1776] 1981, 664). Thus, mercantilism undermined the idea of spontaneous order.
The first modern approaches to the idea that the formation of economic phenomena, such as the wealth of nations and institutions, are expressions of spontaneous order and not the conscious design of a central authority can be seen in Bernard Mandeville, who, in his 1714 work "Fable of the Bees, or Private Vices Public Benefits," exaggeratedly expressed the idea that the vices of individuals, under certain conditions, are transformed into public benefits. But this can only happen if "wise legislation establishes the rules of the game" that "limits the arbitrary exercise of government power to a minimum" (quoted in Hayek [1966] 2017, 110). Furthermore, Mandeville introduced the concept of the division of labor. Thus, Mandeville paved the way for the systematic investigations of spontaneous orders by the Scottish moral philosophers and the representatives of the Austrian School. First, however, the importance of the Physiocrats must be emphasized.
This video from the University of Amsterdam explains the fable of the bees and their influence on Adam Smith's thinking (in English):
Sources / Literature:
Habermann, Gerd –Order thinking – an intellectual history sketch, in: ORDO, Vol. 53 (2002), 169-187.
Mandeville, Bernard –The Bee Fable or Private Vices, Public Benefits(The fable of the bees), Frankfurt am Main 1980.
Here is a video about the "Fable of the Bees" and the ideas of Adam Smith from the University of Amsterdam (in English):
Physiocrats and Scottish moral philosophers
The French physiocrats (physiocracy = rule of nature) were the first social scientists to clearly formulate thinking in terms of orders. Their main representative, Françoise Quesnay (1694-1774), distinguished between “ordre positif” and “ordre naturel”. While "ordre positif" characterizes the actually established order, "ordre naturel" refers to a desired order that is also considered natural. Walter Eucken later took up this distinction. The competitive order was considered to be ordre naturel, which in the 18th century replaced the antiquated feudal system and the mercantilismdemanded a natural economic order ("ordre naturel"). Principles of this "ordre naturel" included, in particular, free ownership of land and freedom of trade under competitive conditions. Quesnay already emphasized the interdependence of economy, society, and politics. Because Quesnay imported essential ideas of his teachings from China, which was popular among the European upper classes at the time, he was also called the "French Confucius." In particular, he incorporated the Confucian idea of evolutionary custom, which has prevailed through a long process of selection and is therefore superior to centrally imposed rules and rules imposed by power, into European liberalism.
In response to Cartesian rationalism, 18th-century Scottish moral philosophers (particularly David Hume, Adam Smith, and Adam Ferguson) developed a completely new social theory based on the theories of common law and natural law. They demonstrated that a constant process of trial and error, combined with increasing division of labor, creates a complex, unplanned network of mutual benefit in which the state only has to enforce the existing rules. Rules thus develop from the actions of individuals and solidify into lasting social institutions when they successfully help solve people's problems. The market economy is thus based on rules of justice that have emerged through a long evolutionary process.
Self-interest and the common good need not be opposites. For example, Adam Smith explains: "In pursuing his own interest, the individual often promotes that of the community much more effectually than when he really intends to promote the latter. And in directing this industry in such a way as to render its produce of the highest value, he intends only his own gain, and is, in these, as in many other cases, guided by an invisible hand to promote an end which forms no part of his intention." (See Adam Smith – Wealth of Nations)
Contrary to popular belief, however, Adam Smith does not advocate a state-free economic order. He devotes approximately two-fifths of his major economic work, "The Wealth of Nations," to the question of which functions the state must fulfill in a free community. His list ranges from the provision of infrastructure and monetary policy to education and healthcare. One can therefore say that the economic order he designed is dual, namely an order of market and state. Thus, Adam Smith is not a proponent of "laissez-faire," but rather a founder of ordoliberalism. Smith's economic ethics is thus also clear: any regulation promoting social welfare is good if it is implemented under conditions that allow the individuals affected to choose freely between different alternatives. This can be understood as an early plea for consistent Ordnungspolitik.
Although Scottish moral philosophers advocate government activity, they clearly reject interventionist interventions in economic activity. For example, Adam Ferguson compares politicians who intervene in the market process in a constructivist manner to a "fly on a wheel, imagining that it is the one turning the wheel." On the contrary, according to Ferguson, a free human society is comparable to a fully grown coral reef. Coordination here occurs through abstract rules, prices, and exchange based on the division of labor. It was also Ferguson who first spoke of the rules of a society that "arisen from human action, but not human design" (cf. Adam Ferguson - History of Civil Society). This term was taken up again in the 20th century by Friedrich August von Hayek, who named one of his most famous essays after this quote.
The following video from Arte provides information about Adam Smith and the Wealth of Nations:
Sources / Literature:
Ferguson, Adam –Essay on the History of Civil Society, London 1767.
Hayek, Friedrich August von –The Results of Human Action, but not Human Design, in: ibid., Freiburg Studies, Tübingen 1969, pp. 97-107.
Smith, Adam –An Inquiry into the Nature and Causes of the Wealth of Nations.
Munich 1974.
"Austrians" and Ordoliberalism
Smith's idea of an "invisible hand" guiding mankind to pursue a purpose they had never intended was long met with incomprehensible derision. It wasn't until a century later that Carl Menger revived the idea. Menger was the first to clearly demonstrate how social institutions develop through competition and displacement, i.e., through processes of variation and selection. He thus founded the theory of the evolution of social systems.
Eugen von Böhm-Bawerk supplemented Menger's work by, among other things, investigating the influence of economic power on price formation. The "Austrians," building on Carl Menger's approaches, also demonstrated that established orders cannot be maintained in the long term in a complex society. Ludwig von Mises' "calculation problem" and FA von Hayek's "knowledge problem" were the decisive milestones in this regard. Hayek, in particular, comprehensively reformulated the "Austrian paradigm," emphasizing the emergence and diffusion of knowledge, and the processual nature and complexity of market activity. He also pointed out the difficulty of scientifically working with aggregates, thereby simultaneously taking a counter-position to macroeconomics, particularly Keynesianism. Through the contributions of the "Austrian School" (Carl Menger, Ludwig von Mises, Friedrich A. von Hayek, and others), knowledge of the characteristics of spontaneous orders gradually became more and more comprehensive.
German "Ordo-Liberalism" (Walter Eucken, Wilhelm Röpke, Alexander Rütow, and others) complemented this work by bringing the institutional foundations of the mutually exclusive ordering patterns of established and spontaneous order back into consciousness. Walter Eucken explicitly introduced thinking in terms of orders into the social sciences in order to overcome the collectivist concepts of capitalism, socialism, and communism. In analogy to the physiocrats, Eucken also distinguished between economic order (ordre positif) and economic order (ordre naturel), which represents a desired order, the competitive order. Based on neoclassical theory, Eucken defined the competitive order as an order in which the power of each market participant is limited, in that no one can influence the price. Using his system of thinking, he criticized not only the centrally planned economy (as a socialist command economy or a National Socialist war economy), but also laissez-faire and the "age of economic policy experiments" (interwar period), which had led to unsatisfactory economic results. In his "Principles of Economic Policy," he identifies the governing principles of the desired competitive order. In particular, he names seven constitutive principles and four regulatory principles. He also points out the unconditional interdependence of these principles, the "interdependence of orders." On the basis of this knowledge, Ludwig Erhard and Alfred Müller-Armack established the "Social Market Economy" in West Germany after World War II, an economic order that continued to serve as a model during the years of upheaval around 1990.
In the following video, the famous liberal economist Friedrich August von Hayek speaks in an interview about "Social Justice" from the perspective of the Austrian School:
Sources / Literature:
Eucken, Walter –Principles of economic policy, 6th revised edition, Tübingen 1952/90.
Hayek, Friedrich August von –The results of human action, but not human design, in: ibid., Freiburg Studies, Tübingen 1969, pp. 97-107.
Menger, Carl –Investigations into the Method of Social Sciences with Special Reference to Economics, Leipzig 1883.