The Walter Lippmann Colloquium

Seven weeks after his wedding, Ludwig attended a historic meeting of the champions of both “old” Manchester-style liberalism and of neo-liberalism. His new bride probably forgave him and may even have joined him on the trip: the conference took place in Paris.

Neo-liberalism was at first a purely informal phenomenon. Virtually all of its proponents were economists who cooperated in a spontaneous network within a few institutions such as the International Chamber of Commerce in Paris. By the mid 1930s, the network had reached the critical mass needed for a more formal organization under the banner of the new third way. One important step toward the organized appearance of the emerging neo-liberal network was made when, in 1937, the American journalist Walter Lippmann published a neo-liberal manifesto with the title Inquiry into the Principles of the Good Society.¹⁰¹

The book appealed to European neo-liberals because Lippmann gave eloquent expression to their own deeply held views about the roots of the present political and economic crisis. Those who still called themselves liberals rejected socialism but did not want to be too strongly associated with the Manchester doctrine of laissez-faire. Lippmann placed himself in opposition both to the old liberals and to the contemporaneous socialist agitators. Lippmann's middle-of-the-road position suited the pragmatic mentality of his countrymen. Americans tended to take a businesslike approach to political conflicts, seeking to solve them through negotiation and compromise. Lippmann shrewdly presented both the socialists and the Manchestermen as stubborn doctrinaires. He contrasted these “extremists” with his own practical-minded scheme. This resonated with the neo-liberal continental European economists of the interwar period, who differed from Lippmann only in the details they envisioned for the Good Society.

One of these was Louis Rougier (1889–1982), a philosopher at the University of Paris and director of a “Centre Danubien.” Rougier considered Lippmann's book a brilliant exposition of a consensus that had emerged among liberal scholars in the recent past, most notably in books by Mises, Robbins, Lavergne, Marlio, and Rueff.¹⁰² He quickly arranged for a French edition of the Good Society¹⁰³ and seized the occasion to convene a five-day colloquium in Paris “with the idea of reviewing the process of capitalism and of trying to define the doctrine, the conditions necessary for its implementation, and the new responsibilities of a true liberalism.”¹⁰⁴

The event took place on August 26–30, 1938 at the International Institute of Intellectual Cooperation and it assembled representatives of very different liberalisms. These men fell into at least four groups with distinctly different views on the history, theory, and political agenda of modern liberalism.

The first group, which represented the mainstream of neo-liberalism, promoted not only practical, but also theoretical compromise with coercive socialism. They were willing to compromise on any particular item to make their general agenda more palatable to the voter. Their position can be thought of as “pro-market” social democracy.

Second, there was a small group of men such as Hayek who were dissatisfied with various aspects of classical liberalism and endorsed a somewhat larger scope for government intervention. In contrast to the first group, however, their fundamental concern was with individual freedom and in time they therefore took an increasingly radical stance, moving ever closer to the classical-liberal position.

Third, there was an equally small group of men such as Alexander Rüstow who were reluctant to endorse classical liberalism root and branch, but their main objection was to the egalitarianism, such as it was, of its advocates. They argued that hierarchy was absolutely necessary for the maintenance of a free society, because only the authority implied in it would effectively transmit the cultural tradition of liberty. The great error of the French Revolution was that it had not only abolished the coercive hierarchy of the Ancien Régime, but also jettisoned the principle of hierarchy per se. In its egalitarian fervor, it had tossed out the natural-hierarchy baby with the coercive-hierarchy bathwater.

Fourth, and finally, Ludwig von Mises upheld nineteenth-century laissez-faire policies on refined theoretical grounds that he himself had developed over the past eighteen years. By the 1930s, he was acknowledged both within and outside libertarian circles as the most important contemporary representative of the Manchester School.¹⁰⁵

The Lippmann Colloquium showed that three of Mises's insights had had a profound impact on the neo-liberals. First, his demonstration that socialist calculation was impossible had liberated them from all notions that a full-blown socialist commonwealth was feasible or even desirable on economic grounds. Second, the socialist-calculation argument had convinced them that competitive pricing is of utmost importance and a defining characteristic of the free market. Third, they endorsed Mises's original case for liberalism, which stressed that a privateproperty order was the only feasible system for the division of labor.

The latter two insights, however, came to be twisted so as to fit the neo-liberal interventionist agenda. Whereas Mises had simply stated that a calculation-based division of labor could take place only where private property exists, the neo-liberals set out to manipulate the legal and judicial systems in order to “improve” on the spontaneous division of labor that would have resulted from political laissez-faire. For these men, the market was critically important, but they believed that government intervention could enhance the “efficiency” and “fairness” of the market process. Unlike socialists, neo-liberals believed that the market took society in the right direction, but unlike classical liberals, they believed that the unhampered market fell short of its true potential.

In a preface to the first German edition of the Good Society (1945), Wilhelm Röpke emphasized the orientation of neo-liberal policies toward the optimization of the social machine:

Thus the question is not: For or against laissez-faire? Rather it is: Which judicial order [Rechtsordnung] fits an economic constitution that is just, free, of the highest productivity, and based on a sophisticated division of labor?¹⁰⁶

As a consequence of this particular interpretation of Mises's theory of social systems, the neo-liberals also reinterpreted the significance of Mises's insights about the importance of competitive pricing. Mises had argued that a rational division of labor could be based only on market prices for factors of production, which in turn required private ownership of these factors. In contrast, the neo-liberals focused exclusively on the prices themselves, neglecting the conditions under which free pricing occurs. For them, the practical conclusion of the socialist-calculation argument was not that government should not interfere with property in general, but rather that it should be kept from meddling with prices specifically. At the Colloquium, Lippmann was praised for his distinction between “market compatible interventions” and interventions incompatible with the operation of a market economy.¹⁰⁷ Only direct interference with the working of the price mechanism was illegitimate. If the government limited itself to controlling only the legal framework within which the market participants would be left free to pursue their projects as they wished, then this intervention would be unobjectionable from a neo-liberal point of view.

The unifying principle of postwar neo-liberal theories was an attempt to justify liberty in some cases and state-sponsored violence in others, through one and the same theory. The most important products of these endeavors were the theory of public goods and the Chicago (Coasean) theory of law and economics.

Mises relentlessly criticized the neo-liberal interpretation of the significance of the socialist-calculation argument. From his point of view, the arbitrary distinction between the “play of the price mechanism” and the “framework of the market” was nonsensical. The nature of government intervention is to violate private property rights, thereby affecting the price mechanism in all cases. While it is true that certain phenomena result only from direct interference with the pricing process—shortages and surpluses, most notably—the larger issue of economic calculation remains. It is ultimately irrelevant whether government intervention meddles directly with prices or indirectly through the “framework” of price formation; in either case, market prices are perverted.