Walter Eucken’s Concept of Economic Order and Business Cycle Analysis

Abstract

AbstractWalter Eucken formulated his concept of economic order as a solution to the tension between theoretical approaches and empirical observation that had constituted the conflict between the Austrian School of Economics and the German Historical School. Previous literature has established the linkage between the German-language business cycle debate of the late 1920 s and Eucken’s concept of economic order. This paper discusses how his concept of economic order can help to understand the severity of economic crises and thus concentrates on the elements constituting the economic order, i. e. its ideal types, with whose help Eucken aimed to derive hypothetical propositions. Based on the writings of his students Leonhard Miksch and Friedrich A. Lutz who underscored the role of equilibrium in business cycle research, this paper suggests that abstract theory of economic crises should employ ideal types as models and thus study how exogenous shocks affect the endogenous economic variables. The subject of inquiry should be oriented to the process of equilibrium reestablishment. Crucial for this paper is that the equilibrium reestablishment depends on institutional factors. This method to explain economic crises represents the link which connects the business cycle debate of the 1920 s and 1930 s to the subsequent emergence of the ordoliberal theory of institutions and orders.