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The Secondary Depression: An Integral Part of Wilhelm Röpke’s Business Cycle Theory

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Wilhelm Röpke (1899–1966)

Part of the book series: The European Heritage in Economics and the Social Sciences ((EHES,volume 20))

Abstract

Wilhelm Röpke’s secondary depression constitutes an important approach toward understanding economic downturns. Röpke defined the destructive secondary depression as a consequence of a failed purification process (primary depression) without elaborating on their relationship. Thus, literature on Röpke’s work emphasizes the independence of the secondary depression from the primary depression and even considers this independent secondary depression as his only contribution to business cycle research. However, Grudev points out that the roots of the secondary depression can be traced back to the primary depression which itself depends on Röpke’s definition of the preceding boom. Grudev concludes that the secondary depression is an integral part of Röpke’s business cycle theory, which can be defined as a distinguishable branch of the “Neo-Wicksellian” School.

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Notes

  1. 1.

    The German proto-Keynesian economists formulated different views on the primary depression, but all shared the same opinion that government interventions in this phase would prolong the process of contraction (Klausinger 1999, p. 382).

  2. 2.

    Hayek underlined that Mises developed and even improved the Wicksellian theory by analyzing how a discrepancy between the money interest rate and natural rate of interest had an impact on consumer goods prices and the prices of capital goods (Hayek 1931/1935, pp. 25–26). Furthermore, Hayek emphasized that in “Kredit und Konjunktur” Röpke formulated similar views to those of Mises (Hayek 1929/1976, p. 58).

  3. 3.

    Such criticisms were also made by other German proto-Keynesians—particularly after Keynes gained huge popularity. A possible explanation is a certain disappointment with Keynes due to his lack of attention to those economists who made his views popular in German literature. In the case of Röpke, this disappointment can be regarded as justified since he published “Trends in German Business Cycle Policy” (Röpke 1933c) in the Economic Journal, whose editor was Keynes (Landmann 1981). In “Trends in German Business Cycle Policy,” Röpke stressed the importance of Keynes’ theoretical considerations in formulating the measures proposed by the Brauns Commission to the German government with the purpose of overcoming the depression. Additionally, at the very beginning of his exile, Röpke visited Hayek in London in June 1933 and also met Keynes there (Hennecke 2005, pp. 93–94).

  4. 4.

    “Keynes succeeds in making clearer than others have done the part played by hoarding in the business cycle. The decision of a saver to save is not enough. It is necessary for him also to decide the form which his savings shall take” (Hansen and Tout 1933, p. 127).

  5. 5.

    Psychological factors such as absence of confidence (pessimism) or state of confidence (optimism) played a pivotal role in the theories of A. C. Pigou. His views may have influenced Keynes who emphasized their importance for explaining investment behavior (Haberler 1937/1946, p. 143).

  6. 6.

    According to Richard von Strigl (1891–1942), another member of the Austrian School whose views on the depression were similar to those of Keynes (Röpke 1936a, p. 109), increased liquidity in enterprises and banks was expressed in the low money market interest rates. By contrast, the interest rate in the capital markets surged to unprecedentedly high levels. The outflow of funds from the capital market to the money market was explained by distrust and pessimism (Haberler 1937/1946, p. 60).

  7. 7.

    Röpke described this in one sentence: “[…] money is withheld from expenditure on consumption goods, without any compensation for this non-consumption taking place in the form of investments in capital goods” (Röpke 1936a, pp. 123–124).

  8. 8.

    On similar lines, Strigl explained the mechanics of the depression. According to him, any breakdown of the boom would lead to a process of hoarding and become the reason for deflation. In this environment of pessimism and uncertainty, private enterprises would not be willing to carry out new investment (Haberler 1937/1946, p. 60; Strigl 1934, pp. 214–220). Like Röpke, Strigl stressed that long-term investment on the one hand and the willingness of the banks to lend for a long period on the other were necessary conditions for reviving the economy (Strigl 1934, p. 217).

  9. 9.

    This is similar to the Keynesian analysis where increasing income decreases the marginal propensity to consume (Samuelson 1939).

  10. 10.

    Röpke appraised that insights regarding this problem were derived from the views of underconsumption theorists like Marx (Röpke 1936a, p. 89).

  11. 11.

    This autonomy, underlined by Wicksell in order to discuss the nature of the money rate of interest, was the focal point in the work of L. Albert Hahn (1889–1968), especially in Die volkswirtschaftliche Theorie des Bankkredits (Hahn 1930). See also Röpke’s statement on Hahn in Eine Freundesgabe für Albert Hahn (1959) where Röpke stressed the importance of Hahn’s theoretical considerations. Röpke explained that the interest rate was not only a real problem but also a monetary problem, as discussed by Wicksell, Hayek, Keynes, and Hahn (Röpke 1937/1951, p. 257).

  12. 12.

    In “Kredit und Konjunktur”, Röpke defined Wicksell’s interest rate as the real interest rate. It should be emphasized that Irving Fisher’s and Wicksell’s real interest rates are two completely different definitions of interest rates (Hayek 1931/1935, p. 23). For the possibility to combine the two interest rates, see the work of Friedrich A. Lutz (1901–1975), especially Zins und Inflation (1973), and the subsequent comments of Emil-Maria Claassen (1974).

  13. 13.

    It is important that Hayek stated 3 years after Crises and Cycles that the interest rate and the profit rate were completely different concepts, while many wrongly considered them to be the same (Hayek 1939/1975).

  14. 14.

    It should be stressed that Röpke made a distinction between purchasing means (“Kaufmittel”) and purchasing power (“Kaufkraft”). This distinction was also embraced by Hayek (1929b/1976).

  15. 15.

    This gave rise to the phenomenon called “monetary forced saving.” This phenomenon was fundamental for the Austrian Business Cycle Theory, and its use proves Röpke’s proximity to the Austrian School. In contrast, this phenomenon was criticized by Keynes. The phenomenon will be explained as follows: The faster increase in the demand for capital goods of enterprises leads to an increase in their prices. At the same time, these goods appear in the commodity markets where they are in demand by private households. That their income does not rise at the same rate as the income of enterprises forces private households to decrease their demand for these goods. In other words, private households reduce their consumption. The reduction in consumption means an increase in the savings in the community. That this process of saving is not carried out in a voluntary manner explains why it is called “monetary forced saving” (Röpke 1937/1951, p. 88).

  16. 16.

    Haberler emphasized that goods of lower order did not necessarily mean consumption goods but any final goods (Haberler 1937/1946, p. 88).

  17. 17.

    Röpke also stated that the effects of the authoritarian forced savings in planned economies were similar to those of the monetary forced savings in capitalist economies (Röpke 1936b, p. 331).

  18. 18.

    These considerations are from the chapter in Röpke’s habilitation entitled “Causes of the Business Cycles”. This chapter was considered early on an important contribution to understanding the process of business cycles (Fleck 1923).

  19. 19.

    Haberler stated that “in the last few years [it] has been more and more recognized and emphasized, that it is the production of durable goods, consumers’ goods as well as capital goods that fluctuate[s] most violently in the business cycle” (Haberler 1937/1946, pp. 86–87), a pattern which Röpke described 15 years earlier.

  20. 20.

    It is interesting to note how Röpke described metaphorically cyclical movements in the economy. Röpke compared the business cycle to a sea hit by a hurricane, distinguishing between different sea layers representing the different stages of production or goods of different order in the same manner as Menger and Böhm-Bawerk. The bottom of the sea is not affected by the hurricane, whereas the closer to the top we move, the stronger is the impact of the hurricane. In a similar way, the higher the stage of the production or the further away from the consumption sphere, the stronger the volatility of that stage of production (Röpke 1922, pp. 61–62).

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  1. Department of Economics and Behavioral Sciences, University of Freiburg, Freiburg im Breisgau, Germany

    Lachezar Grudev

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  1. Laboratoire AGORA, University of Cergy-Pontoise, Cergy-Pontoise, France

    Patricia Commun

  2. Wilhelm Röpke Institute, Erfurt, Germany

    Stefan Kolev

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Grudev, L. (2018). The Secondary Depression: An Integral Part of Wilhelm Röpke’s Business Cycle Theory. In: Commun, P., Kolev, S. (eds) Wilhelm Röpke (1899–1966). The European Heritage in Economics and the Social Sciences, vol 20. Springer, Cham. https://doi.org/10.1007/978-3-319-68357-7_9

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