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In this essay, liberalism will be understood to mean the doctrine which holds that society — that is, the social order minus the state — more or less runs itself, within the bounds of assured individual rights. In the classical statement, these are the rights to life, liberty, and property.

This is closer to the French meaning of libéralisme, rather than the meaning that liberalism has acquired in the United States, Britain, Canada, even in Germany and other countries. In this respect, the French have remained true to the original and historical conception of liberalism. It is not by accident that the French term laissez-faire is used throughout the world as a synonym for the freely-functioning economy.

Understanding liberalism as grounded in the self-regulating capacity of society is even, I believe, methodologically necessary, in order to enable us, as Anthony de Jasay writes, to distinguish liberalism from the other ideologies. There is, however, no space to argue for this thesis here.

In recent years there have been some very interesting developments in regard to the treatment of liberalism.

First of all, a massive shift has taken place in scholarly attention away from socialism, and especially from Marxism, towards liberalism. This has to do with some well-known events in world politics, namely, the collapse of "real-existing" socialist regimes. With that has come the general recognition that private property and free enterprise are indispensable for the furtherance of the wealth of nations.

Second, there is a growing awareness of the intimate connection between liberal ideology and what has been called "the European miracle" — that is, the breakthrough to sustained economic growth that has characterized Europe and its offshoots around the world, including America. After decades of enormous effort devoted to scrutinizing the history of socialist fantasies, scholars seem to be waking up to the need to examine in greater depth the institutional foundations of our own society and at the same time the ideas that accompanied the evolution of those institutions.

Finally, there is an enhanced consciousness that liberal ideas have never been limited to English-speaking nations. That used to be the prevailing view in Britain and the United States. To take one example: for a long while, virtually the only French liberal thinker of the nineteenth century who was discussed was Alexis de Tocqueville. Even major surveys of modern political thought — for instance, the two-volume work by John Plamenatz of Oxford — did not even mention Benjamin Constant, and it is only recently that a few of Constant's more important political writings have been made available in English.

And if that is the case with Benjamin Constant, it is easy to imagine how little justice has been done to the Censeur Européen group, to Frédéric Bastiat, Gustave de Molinari, or to the myriad of other contributors to the Journal des Économistes, which was produced in Paris for a century by successive generations of writers — right up to June, 1940 — and which was the greatest liberal journal ever published anywhere.

There is also, for instance, a burgeoning interest among Anglophone scholars in the great tradition of the Late Scholastic thinkers of the late sixteenth and early seventeenth centuries, who laid the foundation for modern economics. Besides the treatment of these mainly Spanish writers in Murray Rothbard's history of economic thought and some earlier pioneering works, we now have the work of Alejandro Chafuen, of the Atlas Foundation, who has highlighted their great importance in his study, Faith and Liberty. One could also mention the growing attention to the Italian liberal economists of the late nineteenth and early twentieth centuries, who contributed importantly to the theories of the school of public choice.

The fact is becoming increasingly evident that the great edifice of the liberal doctrine has been the achievement not only of the British and the Americans, but of many other peoples as well — not least of all, the Austrians.

There has been a growth of interest also in German liberalism. This tradition was unduly neglected for decades, especially after what was seen as its ignominious defeat in the later Imperial period.

Oswald Spengler spoke for the nationalistic-authoritarian school of his time when he wrote: "There are principles in Germany that are detested and disreputable; but on German soil it is only liberalism that is contemptible." Spengler's disgust was seconded by many others, across the political spectrum, a disgust that was in proportion to the consistency arid "doctrinairism" of the liberal principles espoused.

Paul Kennedy, of Yale University, writes of "the sheer venom and blind hatred behind so many of the assaults in Germany on Manchesterism." This term, "Manchesterism," was an abusive label — a Schmähwort. As Julius Faucher, a leader of the free trade party, noted in 1870, it was invented by Ferdinand Lassalle, the founder of German socialism. It then went the rounds of the conservative press, finally, as Faucher wrote, coming to "form the alpha and the omega of political wisdom," even for the Prussian government. For decades it was standard even in the supposedly value-neutral scholarly literature.

It is clear that there can be no question that German liberalism was never the equal of, for instance, French liberal thought. Yet upon examination, the political and even intellectual contributions of German authentic liberalism are evident.

A master-concept used by many historians in recent decades has been of the Germany's Sonderweg — its special or peculiar path of historical development. Whatever heuristic value this concept may have had, there is little doubt that it has been very much over-applied. Germany after all is not Russia. The German experience included: the free towns of the Middle Ages; scholasticism and the doctrine of natural law taught in the universities; the Renaissance and the Reformation; the rise of modern science; and an outstanding role in the Enlightenment of the eighteenth century.

The twelve-year experience of National Socialism, with all its atrocities, was terrible. But it should not lead us to forget that for a thousand years before Hitler, Germany was an integral part of western civilization.

Dietheim Klippel is a leading scholar of German liberalism in the later eighteenth century. He has suggested some of the political factors that have at different periods conditioned the acceptance of either a negatively — or sometimes a positively — charged concept of the German Sonderweg, or special path of historical evolution. In particular, Klippel has effectively criticized the view of Leonard Krieger, author of an influential work on German ideas of freedom. This book, Klippel complains, pitted "a peculiar German attitude towards liberty" against an (undefined) "western" conception. But the fact is, that, besides the publicists and scholars influenced by the French Physiocrats, there existed in Germany in the eighteenth century "a wide stream of democratic and liberal ideas in all possible shadings."

Klippel has paid particular attention to the younger German school of natural law, which succeeded the older, absolutist-oriented natural-law doctrine of the school of Christian Wolff. Methodologically under the influence of Kant and contentatively inspired by John Locke, this school provided a theory of the priority of civil society as against the State; of private property, private enterprise, and competition as the essence of the self-regulating society; and of the need to protect social life against state usurpation.

Klippel emphasizes that the economic-liberal position of these scholars was "aimed directly against the legal position of segments of the bourgeoisie," against the guilds, but equally "against monopolies and privileges of manufactures and mills." Here he highlights a facet of the class struggle that is systematically muddled by authors who draw on the Marxist, rather than the liberal, conception of class conflict.

By the nineteenth century, however, this natural-law school was totally eclipsed by Hegelian and other doctrines.

One key figure in late eighteenth century German liberalism exerted a powerful, if unappreciated, influence on the history of European liberalism in general. This was Jakob Mauvillon, of French Huguenot descent. Among the numerous posts Mauvillon held in his relatively short but very active life, was professor of politics at Brunswick. Although he is usually classified as a Physiocrat, Mauvillon actually took as his model in economic theory the great Turgot, whose Réflexions sur la formation et la distribution des richesses he translated and published.

Mauvillon was, in fact, more "doctrinaire" — a more consistent proponent of laissez-faire — than any of the French writers of the time. He advocated the privatization of the whole educational system from primary schools through to the universities, of the postal system, and of the upkeep of the clergy. He even entertained the idea that, under ideal conditions, the whole apparatus of state provision of security might also be privatized.

Mauvillon was a tireless publicist for his cause, and it is likely that his ideas eventually penetrated to the world of the higher officials in Berlin, who in the 1790s were increasingly attentive to the slogan: Freedom [of Property]: To Possess, to Enjoy, to Earn."

But by far the most important channel of Mauvillon's influence was via a 20-year-old friend from Lausanne who came to live in Brunswick, for whom Mauvillon was a kind of father-figure as well as mentor. That young friend was Benjamin Constant. Kurt Kloocke, in his excellent intellectual biography of Constant, goes so far as to assert that: "It is impossible to overestimate the importance of Mauvillon for Constant's intellectual evolution." From Mauvillon Constant derived the foundation of his idea of freedom as freedom from the state. He took over from the German thinker "the demand for an uncompromising acknowledgment of religion as the basic constituent of a sphere free of the state."

The conceptual cluster of personal freedom, the rule of law, and laissez-faire that was the heart of Constant's liberalism, perfectly reflected Mauvillon's political philosophy, down to the urgent necessity of keeping the educational system free of state involvement.

I have emphasized this episode of the impact of Jakob Mauvillon on the formation of the thinking of Benjamin Constant for a number of reasons.

First, because it is virtually unknown, and besides is of intrinsic interest. In addition, it illustrates the international character of the liberal doctrine, the cross-fertilization of ideas within the common cultural space of western civilization. Finally, because of the great importance of Benjamin Constant. Hayek claimed that the characteristic great liberals of the nineteenth century were Tocqueville and Lord Acton. In my opinion, if one had to choose a single fountainhead of liberalism in the century, it would be Benjamin Constant.

The German Enlightenment produced one of the great classics of liberal thought, translated into English under the title of The Limits of State Action, by Wilhelm von Humboldt. Both Hayek and Mises considered this work to be the finest expression of classical liberalism in the German language. Humboldt's book, as well as the political philosophy of Immanuel Kant, was a principled reaction against the Polizeistaat, the eighteenth century welfare state, which was a central component of the state absolutism of the time.

In the meanwhile, economic liberalism in the form of the ideas of Adam Smith had penetrated the German academic world, especially at Göttingen and at Königsberg, where Christoph Jakob Kraus, a close friend of Kant's, was their chief proponent. The professors played a role in generating the Beamtenliberalismus (Bureaucratic Liberalism) that produced liberal reforms, especially in Prussia, including the reforms of the Hardenberg-Stein era.

Given this flowering of liberal ideas in eighteenth century Germany, what happened to change things? Why did such a reversal of opinion occur in German political culture?

There is no doubt that a major — perhaps the major — reason for the change lies in the political and military history of the period: basically, the attempt of revolutionary France to conquer and rule all of Europe.

The Jacobins who rose to power during the Revolution undertook to force their ideas onto Europe at the point of French bayonets. The rights of man, popular sovereignty, the French Enlightenment with its hatred of the age-old traditions and religious beliefs of the European peoples would be imposed by military might. To this end, the victorious, irresistible French armies invaded, conquered, and occupied much of Europe.

In the nature of things, these invading armies, bringing with them an alien ideology, produced hostility and resistance against that ideology, a militant nationalist reaction. That is what happened in Russia and in Spain. Most of all, that is what happened in Germany. Individualism, natural rights, the universalist ideals of the Enlightenment — these became identified with the hated invaders, who subjugated and humiliated the German people. This identification was a burden that liberalism in Germany had to carry from that time on.

The lesson that one could reasonably draw from that experience is this: if you wish to spread liberal ideas to foreign peoples, in the long run example and persuasion are much more effective than guns and bombs.

By the 1830s and 1840s, the population explosion that affected Germany and other countries was becoming acute. Everywhere there were signs of growing pauperism, which the inherited, still largely mercantilist system could not cope with.

This is the socio-economic background of the rise of the German free trade party.

Free trade, in the sense of abolition of barriers to international trade, had already progressed considerably in the German states, above all, in Prussia. The Zollverein, or Customs Union, led by Prussia, was creating a larger and larger free trade zone within the German Confederation. Moreover, at the time Prussia was more advanced on the road to international free trade than any other European nation, even including England.

The aim of the free trade party was to extend the principles of economic liberalism to all areas of economic life. From the 1840s to the mid-1870s — first in the German states and then in a unified Germany — this movement had a powerful and lasting effect on German institutions. It set the stage for the country's phenomenal economic growth in that period and afterwards.

More than anyone else, John Prince Smith was the creator of this free trade movement and its leading figure from the 1840s until near his death in 1874. To Wilhelm Roscher, of the "Older Historical School," he was "the leader of this whole [free trade] current," while the British economic historian W. O. Henderson termed him the great rival of Friedrich List.

Prince-Smith, as he was usually referred to in Germany, is an obvious example of the foreign influences on German liberalism, since he was born in London in 1809 of English parents. He moved to eastern Prussia in 1831, where he became a teacher at a gymnasium (lycée). Later he moved to Berlin and became a journalist.

One of the few influences on his thinking which he acknowledged was that of Jeremy Bentham, which was clear both from his pronounced legal positivism and his insistence on treating all economic questions from a strictly utilitarian viewpoint.

However, in a crucial respect Prince-Smith is much closer to the French liberals of the time: to the writers of the Industrialiste school, Charles Dunoyer and Charles Comte; to Bastiat; and to their successors. Where Benthamite utilitarianism was open-ended as to the state's "agenda," Prince-Smith held to a strictly minimal state, laissez-faire position: "To the state, free trade concedes no other task than simply the production of security" ("la production de la securité" was the Industrialiste catch-phrase for the single function they permitted to the government). This rule was necessary, Prince-Smith believed, in order to counter the dynamic of state-expansion, by which the state attempts "to grab as many functions as possible for itself, to tie as many economic interests as possible to its own."

Pursing his aim of establishing a movement on the model of the Anti-Corn Law League, in 1846 — the year of the repeal of the Corn Laws in England — Prince-Smith assembled a number of business leaders and publicists to form a German Free Trade Association; branches of the Association were set up in Hamburg, Stettin, and other north German towns.

It was about this time that Prince-Smith gathered around him a group of bright and idealistic young men with journalistic ambitions, for whom he acted as a mentor in economics. He inspired them with the gospel of free trade, but that was only the starting-point. As one of the most prominent of them, Julius Faucher, put it, free trade was merely the "driving in of the first wedge into the welfare apparatus and happiness-making machine (that the epigones of the eighteenth century on the continent had made of the state)." The state's duties must be restricted to acting as the "carrier and guardian of the force necessary for the defense of justice and of the borders." In other words, to defend against internal and external aggressors. But, Faucher added significantly in the 1860s, "if need be, also for the expansion of the borders."

The 1848 movement for liberal constitutional reform had little effect on Prince-Smith. His efforts continued to be focused instead on economic improvement. Nor did he and Faucher attract attention from the men at the Frankfurt Assembly, who were concentrating on precisely the issues Prince-Smith considered secondary: political freedom and constitutional change.

Prince-Smith quickly recognized the incomparable value of the works of Frédéric Bastiat to his cause, and translated and published Bastiat's Economic Harmonies in 1850. In fact, if there was any "alien" spirit presiding over the German free trade movement, it was not mainly English, but French, in the form of Bastiat's thought.

Prince-Smith had early on demonstrated his disagreements with the pessimistic prognoses of Malthus and Ricardo on the trend of living standards for the working classes and society as a whole. In Bastiat's optimism — which was characteristic of the French school in general — he found a confirmation and amplification of his own views. It has been pointed out that a major reason for the success of the free traders is that they did not present their program as a set of ad hoc demands or piecemeal reforms, but as deductions from an overall, intelligible social philosophy, namely, that of Bastiat's laissez-faire.

Economic science, as exemplified in Bastiat's works, demonstrated that the way to get "idle hands" to fill "empty stomachs" is through capital accumulation. Government interventions and high taxes tended to reduce such accumulation of capital, and so create poverty. A major hindrance was the military budget. Prince-Smith had long held to an anti-militarist position, which was characteristic of Bastiat and the English Manchester school as well.

An interesting sideline is that the methodology of Prince-Smith and his followers was the one traditional in British classical political economy, namely, that of deductive science. They were attacked on this account by the members of the German Historical School. Thus, the famous Methodenstreit, or dispute over the method of economics, that Gustav Schmoller, the leader of the Historical School, waged with Carl Menger, the founder of Austrian economics, was already prefigured in the dispute over method between the historical economists and the German free traders.

A good deal of Prince-Smith's activity in this phase consisted in trying to persuade the German political liberals of the desirability of free trade, as many of the leading liberals of southern and western Germany were protectionists. He also worried that "if the free traders do not provide the popular mind with sufficient nourishment, it will turn to the fare offered by the socialists." In order to proselytize in democratic and radical circles, Prince-Smith's disciples turned to journalism in Berlin, espousing a program that one of them characterized as "of the utmost political radicalism. . . in order to divide the democratic current from the socialist and communist efforts."

In fact, what Faucher and the others had come up with was a form of individualist anarchism, or, as it would be called today, anarcho-capitalism or market anarchism. This was in the 1840s. It is interesting to note that it was at the same time, in Paris, that Gustave de Molinari was proposing, in a more systematic manner, his doctrine of the private production of security. Much later the Molinari position was taken up by Murray Rothbard and, most recently, by my friend Professor Hans-Hermann Hoppe.

This early anarchist interlude of the German free traders — of which Prince-Smith himself did not approve — later proved an acute embarrassment to them when they had become respectable members of the establishment in Imperial Germany.

In 1858, the Congress of German Economists was founded, assembling the chief believers in the cause, many of whom had been led to it by Prince-Smith during his previous twenty years of labor. From 1860 until his death, Prince-Smith was head of the Economic Society, in Berlin; his home was a meeting place for Prussian politicians, among them the leaders of the German Progressive Party and later the National Liberal Party. In 1863, the Quarterly Journal for Economy, Politics, and Cultural History began appearing. The organ of the free trade party, the journal was published for the next thirty years, under the editorship of Faucher, Karl Braun, and others.

The Quarterly Journal, the Berlin Economic Society, the Congress, and the informal influencing of politicians and officials were all elements of the same movement, facets of the same activism, and all inspired, to one degree or another, by the work of John Prince-Smith.

He died in 1875, in the knowledge that he had contributed everything he could to the reality of a Germany united, powerful, and committed to free trade.

As regards political economy, Prince-Smith opposed to the "iron law of wages," proclaimed by Ferdinand Lassalle, what he termed the true "golden law," "which has the effect of raising [the workers] to an increasingly more comfortable mode of life." (Somehow Leonard Krieger, of the University of Chicago, celebrated as a historian of German liberalism, was able to get this point — probably, the single best-known doctrine of Prince-Smith — exactly wrong.) "Capitalization," Prince-Smith declared, "means raising wages."

In the area of historical sociology, Prince-Smith shows a surprising resemblance to Marxist historical materialism, particularly in his early essay, "On the Political Progress of Prussia" (1843).

Prince-Smith's major assertions include the claim that social and political institutions are determined by the "material base"; that in modern society a degree of productivity has emerged "which surpasses by far all previous ones"; that an ever-increasing amount of capital has called into existence a vast class of wage-laborers; and that the capitalist economic order will expand to embrace the whole world. These assertions read like the first pages of The Communist Manifesto, with the signs reversed and five years before the fact.

Prussia, Prince-Smith held, is entering the stage in which the feudal element must necessarily dwindle internally, and peaceful commercial relations become the rule in foreign affairs. This "primacy" of the economic — Prince-Smith's view that the power of economic forces will lead inexorably to a liberal political order — was the premise that underlay the anarcho-capitalist interlude of the young free traders.

This anarchist episode, brief as it was, had serious repercussions on the political stance of the free traders. What remained after they had abandoned anarchism was the disdain for political freedom in the sense of citizenly participation in politics, and the loathing for party-politics as practiced by oppositional politicians.

Through the 1850s, free trade ideas were increasingly seen as a crucial part of the response to the population explosion and the crisis of the German economy. In 1858, the free traders, who had been appearing on the scene in various parts of Germany, who were mainly journalists and activists, organized themselves into the Congress of German Economists. This became the institutional center of the free trade movement, enduring until 1885.

Associated with the Congress were many from the progressive elite of Germany. Participants included the leaders of the various liberal parties and members of the German parliaments, particularly of the Prussian House of Deputies, and later, in the period of the North German Confederation and the German Empire, of the Reichstag. Influential bureaucrats from Prussia other German states and later the Empire were frequently in attendance.

The most important medium for spreading the Congress's views among the general public was the press. Many of the most prominent papers were in the hands of members of the Congress. Indeed, the situation was such that the head of the heavy-industry protectionist pressure group, the Central Union of German Industrialists, complained that "the whole of the press is decidedly free-trade"; the "Manchesterite" views of the Congress had penetrated all social circles. Adolph Wagner, one of the chief Socialists of the Chair, characteristically grumbled at the alleged control of the Berlin press by free-trade Jews.

One after another, the chief economic problems that Germany faced were addressed in detail at the conferences of the Congress and solutions were worked out. With the creation of the North German Confederation in 1867, the leaders of the Congress, now mainly clustered in the new, pro-government National Liberal Party, put their expertise to work for their country.

This period was the high point of the practical activity of the free trade movement. Otto Michaelis, part of Prince-Smith's inner circle, worked with Rudolf Delbrück in the Finance Ministry. Members of the Congress in the Reichstag led the fight for freedom of movement and for abolition of limitations of interest rates. Financial restrictions on the right to marry were abolished, as was imprisonment for debt. The Industrial Code of 1869 did away with compulsory guilds, compulsory tests for entry into crafts, the restriction of certain industries to the cities, and the prohibition on pursuing more than one line of production at a time, among other measures. Karl Braun, the perpetual president of the Congress, boasted, justifiably, that no other association in Europe could show similar accomplishments.

After 1871, the liberal reforms were incorporated into the legal structure of the Reich, and other reforms, e.g., a uniform currency on the basis of the gold standard (yet another proposal from the Congress) were put into effect. The policies advocated by the Congress were increasingly the basis for the government's agenda. Free trade seemed to have swept the field.

By 1878, however, the man who had effected this policy, the hero of the free traders, Otto von Bismarck, Minister-President of Prussia and German Chancellor, had a change of heart, and the world of the free traders was overturned overnight.

We must now turn, to the crucial political developments in Prussia and Germany in the 1860s. There was first of all the Prussian constitutional crisis.

The government of Wilhelm I introduced military reforms — basically, the increase of the monarch's control over the army — which provoked the opposition of the main body of parliamentary liberals. A deadlock ensued. The conflict between government and the House of Deputies, controlled by the liberals, escalated. A climate of opinion arose in the country in which even the word "revolution" was bandied about.

In the midst of this crisis, the king appointed Otto von Bismarck as head of the ministry. To put the matter briefly, Bismarck contemptuously ignored the House and Deputies and the liberals, implemented the army reforms, and proceeded with his program of unifying Germany. Two successful wars, against Denmark in 1864 and then against Austria and other German states in 1866, led to the creation of the North German Confederation, under Prussian leadership in 1867. (Finally, in 1870-71, the Franco­-Prussian War sealed the unification of Germany.) The parliamentary liberals split over the question of whether to support Bismarck.

The small but influential Prince-Smith group in the House of Deputies, which included, besides Prince-Smith himself, Julius Faucher and Otto Michaelis, naturally sided with Bismarck, whom they had admired from the start for his free trade views and for his leadership in German unification. They saw no reason to oppose a ministry that was proving to be so obliging on economic reform, especially since for them constitutional questions were inherently subordinate to the all-important economic issues.

The primacy Prince-Smith postulated of economic over political forces implied for him and his followers an automatic evolution towards the minimal state. Their highly limited and thoroughly economically-conditioned conception left no room for any strong interest in working to install concrete constitutional barriers to government power — these would emerge on their own, as a consequence of the advance of the economy.

This position, they held, was the consistently liberal one. Prince-Smith and his school had carried the distinction between society and the state to the point where the only rights which they regarded as ultimately important were those exercised within the societal sphere, the rights that comprised the essence of Benjamin Constant's "modern freedom." Political rights were at best instrumental values, serving to bolster the fundamental rights, especially the rights to property and contract. If, in a given configuration of circumstances, it happened that the rights of civil society could best be guaranteed by the curtailment of political rights — if, for instance, the government rather than the popularly elected parliament showed itself supportive of economic freedoms, or was in a better position to realize them — then it was not difficult for the free traders to choose the side of the government.

Yet there were dangers involved in neglecting what Constant had termed the system of guarantees. When, in 1863, the Quarterly Journal proclaimed rather grandiloquently: "Politics is dead, and the economy alone occupies the conquered territory," it was not the death of politics per se that was being announced. Clearly the Prussian state had no intention of vanishing. Instead, what the free-traders were proclaiming was the end of any concern with constitutional arrangements. It is as if the early engagement of many of them with anarchism had left behind a permanent repugnance for the political struggle. While for mainline western liberalism, including consistent liberalism in Prussia at the time, this struggle was a necessary and enduring feature of liberal endeavor, the free traders leaned towards the line, for instance, of the French Physiocrats. They preferred to work with and through the holders of political power, rather than oppose them. Whether a free economy would be safe in the absence of a free constitutional system was, however, an open question.

Like the majority of the Prussian liberals, the free traders were now speaking in terms of "Realpolitik" and "the power of facts." Naturally, they eagerly supported the Indemnity Bill, by which Bismarck sought to reconcile the constitutional opposition while withholding any assurances regarding the government's future conduct. The more consistent liberals, like Waldeck, Schulze-Delitzsch, Hoverbeck, Virchow, and, still outside of parliament, Eugen Richter, rejected the overture. The free traders were among the first to leave the Progressive Party in 1867 to form the new National Liberal Party. From now on, German liberalism was split into (at least) two factions. Incidentally, Ludwig von Mises, in Omnipotent Government, considers that this defeat in the constitutional conflict of the 1860s signified the real end of German liberalism.

For a time, the viewpoint of the National Liberals seemed justified, as they worked with Bismarck after 1867 to create the institutional foundations of a liberal economy in Germany. In 1879, however, Bismarck dissolved the "pact" with the free-trading National Liberals, and turned to protectionism and state-socialism.

The strategy of Prince-Smith and his followers proved to be an illusion.

Meanwhile, another development became highly significant.

In 1869, at Eisenach, the Social Democratic Party of Germany had been formed, led by Bebel and Liebknecht. A typical reaction from the free trade camp was that of Julius Faucher, for whom socialism represented nothing less than a "danger for all of civilization." One should keep in mind that this was long before Eduard Bernstein, long before revisionism became the effective program of the German socialists. At this point, they, like most European socialists, were preaching the total abolition of private property in the means of production. It is understandable that Faucher and his friends, like other liberals throughout Europe, looked on the socialists as the sworn enemies of civilized society.

This is the context of Prince-Smith's last work, a major essay, titled "The State and the Economy."

Although he had constantly reiterated that his purpose was to help raise the living standards of working people, Prince-Smith had never displayed what might be termed a "sentimental­-humanitarian" aspect, in the manner for instance of Viktor Böhmert, another leader of the Congress of German Economists. Yet even given that, his last essay is notable for a pronounced harshness of tone and approach. Prince-Smith reveals himself as a full-fledged Darwinist, claiming that economists had in fact long since understood the central message of Darwinism, which he takes to be ceaseless competition for supremacy among life-forms.

Prince-Smith breaks totally with his earlier thinking on militarism and war, going so far as to ridicule the very positions that he himself had espoused as a young free trader. He condemns proposals to introduce the militia and drastically reduce the military budget. He mocks those who believe that "every nation is only driven against its will into wars gotten up by governments."

Implicitly spurning the campaign undertaken by Richard Cobden, he pronounces well-meaning attempts to abolish war through courts of arbitration to be futile.

Liberals who constantly preach against war are blind to reality, refusing to see, in their one-sided concentration on the economy (sic), the existence and influence of "the sense of state" of the people. Through this "sense of state" the "weak individual person" identifies with a strong community and a political entity "that unfurls an imperious power and forces the world to pay it respect."

In a passage which reads as if it were composed to confirm the Marxist doctrine of ideological mystification under capitalism, Prince-Smith even states that the drive to identify with the community — that is, the state — is also valuable because it helps us "to surmount a good deal of deprivation," and "enables us to bear hardship more easily."

He criticizes those who mistakenly believe that the state's only function is to produce "the indispensable security for labor and property with the least expenditure." That had been, of course, the very same position which he himself had defended for decades.

The economist, Prince-Smith implies, ought to learn from the professional politician, for whom life in the state is "the source of a bracing and uplifting consciousness of self."

Prince-Smith champions state power not only externally, but internally, as well. He opposes parliamentary government, control of taxation by the House of Deputies, and responsibility of ministers to the parliaments, rather than the king and kaiser. Resurrecting an argument used by the French Physiocrats on behalf of "le despotisme légal," Prince-Smith asserts that monarchy possesses the same advantage that falls to an estate with a permanent owner and administrator, in contrast to the predation of a series of temporary tenants. Interestingly, Prince-Smith seems in this way to have foreseen the evolution of democratic government into a mechanism for uncontrolled taxation and redistribution of the wealth of productive members of society.

Prince-Smith is fearful of the consequences of the universal manhood suffrage that Bismarck introduced into the new Reich constitution in order to destroy the electoral power of the liberal middle classes. The simple truth, according to Prince-Smith, is that the people do not know their own true interests and are easily seduced by demagogues. Left to themselves they would endorse confiscatory attacks on property or, as he had noted as early as the Frankfurt National Assembly of 1848, limit competition in order to preserve the privileges of one or another group of producers. It is impermissible that the continued existence of society should be given into the hands of the ignorant people and selfish private-interest groups.

Prince-Smith sees capitalist society as pressed into a race against time. Years before, he had been certain that prosperity would quickly follow on the introduction of a free market, "as long as the state does not devour too much of what is produced." Now his earlier optimism — as well as his censorious attitude towards state expenditures, especially for the military — has vanished.

Thus, it is not surprising that now he ends on a deeply pessimistic note: "whether the people can be brought to insight, before all too great damage is done, is, unfortunately, quite uncertain."

"The State and the Economy" demonstrates how far Prince-Smith had strayed from his earlier liberal positions in the face of the socialist threat. The unquestioned rule of the monarch, the state and its power as the supreme good, the ready acceptance of war, and the promotion of irrationalist values as surrogates for a subjective economic calculation that in the short run might well come out against the market order — these are all accepted as means to rescue society from the self-destructive masses led by the socialist demagogues.

With this final work, Prince-Smith places himself in the line of liberal thinkers who turned to the authoritarian state as a defense against revolutionary socialism. The first of this line may well have been Charles Dunoyer, in the period of the July Monarchy. Somewhat later, Boris Chicherin, the greatest liberal thinker of nineteenth century Russia — who, by the way, had been converted to economic liberalism by reading Bastiat — was coming to similar conclusions. Chicherin wrote, "Seeing this communist movement [in Russia], nothing remains to the sincere liberal but to support absolutism."

This reversal, really apostasy — from radical liberalism to support of authoritarian government — might be called the "Pareto syndrome," after its most famous exemplar.

The German historian Wolfgang Mommsen has written of the "deficient resistance of liberalism" to Fascism in the early decades of the century, particularly in Italy, but also in Germany. He attributes this to the liberals' inability to deal with the "new problems of industrial mass-society."

There is some truth in this interpretation, but only if these "problems of modern industrial society" are understood in a certain way. The central "problem" that engendered a certain liberal drift towards the authoritarian state was the emergence of a political movement that claimed the allegiance of the bulk of the industrial working class, and that proposed to destroy the social order based on private property. Whether it relied on universal suffrage, as in Prince-Smith's time, or on violent means also, as in the period of the Comintern, the radical socialists who posed this threat left many European liberals "at a loss," as Mommsen puts it. In Italy, liberals like Pareto, Alberto de Stefani, and Luigi Einaudi supported Mussolini's seizure of power. They did so not out of any inclination towards "anti-Modernism," but out of fear of the imposition of a Leninist terrorist dictatorship on Italy.

It was, indeed, a historical tragedy, not least of all because the liberal movement, which had started out by projecting a world of nearly limitless freedom, as in the early essays of Prince-Smith, sometimes ended under historical pressures by siding with the authoritarian state. But we must ask: Who was ultimately responsible?

Prince-Smith and his group looked to collaboration with the political powers in order to further the liberal cause. In the end, their plan failed. At the same time an alternative strategy was being pursued by another liberal leader: the achievement of a free society through the erection of constitutional guarantees and the strengthening of the democratic element in Germany. That leader was Eugen Richter.

Eugen Richter (1838–1906) was the most important advocate of authentic liberalism in the era of the German Second Empire, from the 1870s to the early years of the twentieth century. Richter was always a champion of private property and freedom of exchange, international free trade, the rule of law and respect for minority rights, and anti-imperialism, anti-militarism, and peace. Together with Ludwig Bamberger — a great admirer, again, of Bastiat — he was the principal opponent of Bismarck's welfare state. He argued against the growing anti-Semitism in Germany, to which Bamberger finally fell a political victim.

From the beginning to the end, Richter denounced the rising socialist movement. Socialism, he maintained and argued in detail, would lead not only to universal poverty but also to a new authoritarian regime, more oppressive than the Prussianism that had gone before. For Richter, the liberal cause was his whole life, and in the end he sacrificed his modest fortune as well as his health to his principles.

Eugen Richter is forgotten today, except by some specialists. Yet in his own time he was a famous figure in German politics. He was the brilliant if occasionally too masterful leader of the Progressive Party and later of the Freisinn, the political expressions of German "left liberalism," or "determined" (entschieden) liberalism, through thirty years, in the Imperial German Reichstag and the Prussian House of Deputies. He was moreover an untiring journalist, the publisher of a daily newspaper in Berlin, and of many books and pamphlets. His short imaginative work, Pictures of a Socialist Future, was translated into many languages and sold many thousands of copies. It also earned the animosity of the German Social Democrats of his time and of socialist historians ever since.

Outside of a narrow group of friends and political associates, the opinions on Richter have been mostly quite negative. His "rigidity," "dogmatism," and "carping doctrinairism" have been repeatedly attacked.

Yet even his enemies were compelled to concede him some extraordinary talents. Even Bismarck — his greatest enemy — conceded that Richter "was certainly the best speaker we had. Very well informed and conscientious; with disobliging manners, but a man of character. Even now he does not turn with the wind." Another political opponent — this time from the liberal camp — stated that Bismarck gave up attending Reichstag sessions out of fear of Richter's debating skill. Max Weber declared that Richter was able to maintain his unshakeable position of power in the liberal party despite his personal unpopularity because of his great addiction to work and in particularly his unrivaled knowledge of the government budget. He was the last deputy who was able to argue with the war minister about every last pfennig.

Richter studied political science with Dahlmann and Mohl, and public finance with Karl Heinrich Rau, who was then at the high point of his economic liberalism. He began attending meetings of the Congress of German Economists and contributing articles to the press.

Richter held fast to the Progressive Party when in 1867 the group that was to become the National Liberals capitulated to Bismarck on the constitutional conflict occasioned by the government's army reform bill in the early 1860s. The National Liberals remained the major liberal group throughout the 1870s, up till Bismarck's turn to protectionism in 1879. Then the economic liberals, led by Ludwig Bamberger left the National Liberals and for a while formed "The Secession." Soon they united with the Progressives to form the Deutschfreisinnige Partei, led by Richter.

By 1884, Richter headed a unified left-liberal party that boasted more than 100 seats in the Reichstag. The Crown Prince Friedrich, the most liberal of the Hohenzollerns, was set to ascend the throne. It seemed that the hour of liberalism had at last arrived in Germany.

But Bismarck's political skills saw to it that Richter's party lost massive numbers of seats in the next two elections, and when Friedrich became emperor in 1888 he was already mortally ill from cancer. Still, for another two decades Richter held fast to the same liberal principles, which appeared increasingly obsolete and irrelevant.

The cornerstone of Richter's social philosophy was the interdependence of political and economic liberty. As he put it, "Economic freedom can have no security without political freedom, and political freedom can find its security only in economic freedom." Throughout his career he conducted a "two-front war," against Bismarckian "pseudo-constitutionalism" and a revived mercantilism on the one hand, and on the rising socialist movement on the other. This strategy of a, "two-front war," incidentally — of combating both the reactionary conservatives and the socialists — was standard for the European liberals of the nineteenth century at least from the time of Benjamin Constant.

Bismarck's adoption of protectionism provided the occasion for a critique by Richter and other liberals to analyze this policy in terms surprisingly similar to those used by the modern school of public choice. Bismarck played the role of "political entrepreneur," in today's terminology. Richter bitingly and brilliantly analyzed what was going on in the Reichstag, as iron and steel interests united with the east Elbian agriculturists. The benefits of Bismarck's policy were concentrated among those being subsidized, while the costs were dispersed, among the unfortunate consumers.

But Richter seems to have been unaware of how this analysis undermined his own political stance. The National Liberals had been "betrayed" by Bismarck. In particular, the economic liberals of Prince-Smith's school had seen their strategy of alliance with the powers that be come to ruin when those powers simply changed their views. But Richter's strategy of bolstering the power of the Reichstag against the government turned out to be equally futile. The authentic liberals proved powerless against the logic of mass electoral politics in democratic societies, which leads to the ever-expanding state through the triumph of rent-seeking special interests.

Meanwhile, what remained of the National Liberals continued to capitulate on one issue after another. Even before the Secession, the National Liberals were the leading faction supporting Bismarck's Kulturkampf (struggle of cultures) against the Catholic Church. This anti-Catholic crusade was also taken up by the Progressives, especially Rudolf Virchow, though Richter himself was tepid in his occasional support. The National Liberals endorsed the anti-socialist laws; Bismarck's abandonment of free trade and his introduction of the welfare state; the coerced Germanization of the Poles in eastern Prussia; colonial expansion and Weltpoltitik; and the military and especially naval build-up under Wilhelm II.

Together with Bamberger, Richter was the principal opponent in the Reichstag of Bismarck's creation of the modern welfare state. The liberals had a number of cogent arguments. Ultimately, they held, the welfare state would generate ties and feelings of dependence by the citizens upon the state. This was, in fact, the explicit purpose of Bismarck's welfare state program.

In his last years, Richter was the main fighter against Kaiser Wilhelm II's policy of Weltpolitik, or global politics. Richter opposed German colonialism, as the French liberals opposed colonialism in Algeria, the rest of Africa, and southeast Asia. His position on the military was that Germany should have sufficient forces for defensive purposes. But the absurd and costly surenchère with France and Russia of military expenditures and the army build­up, Richter believed, was likely to create suspicion and hostility. Most of all he was a tireless fighter against the Kaiser's creation of a great German ocean-going navy. Admiral von Tirpitz openly recognized Richter as his most dangerous enemy on the question of the navy. But Richter continually argued that such a huge navy was unnecessary for Germany, and — moreover — would produce antagonism with England. In the end, of course, he was right.

Richter retained a faithful, hardcore following to the end. The supporters of the National Liberals tended to come from the banks, protectionist big business, and capitalists who had interests in imperialist expansion. The conservatives drew their support from the protectionist agricultural sector. The Social Democrats claimed more and more of the industrial working class. Those who remained true to authentic liberalism were a much smaller group: the professional classes (except for school teachers and the clergy); small businessmen; skilled artisans; and the small, entrepreneurial Jewish community, especially in Berlin. One of Richter's fellow liberals described Richter's party as: the party of the little man, who relies on himself and on his own powers, who demands no gifts from the state, but instead only desires that he is not hindered in improving his situation according to his powers, and who strives to leave his children a better lot in life than was accorded to him.

The authentic German liberals have fallen into total obscurity. Today, the figures who are celebrated as early-twentieth century German liberals are men who were, in fact, collectivists and forerunners of the totalitarian state.

A major example is Walter Rathenau. Of this collectivist mystic, F. A. Hayek wrote, in The Road to Serfdom:

"Although he would have shuddered had he realized the consequences of his totalitarian economics, yet [Rathenau] deserves a considerable place in any fuller history of the growth of Nazi ideas. Through his writings he has probably, more than any other man, determined the economic views of the generation which grew up in Germany during and immediately after [the First World War]; and some of his closest collaborators were later to form the backbone of the staff of [Hermann] Göring's Five-Year Plan administration."

Hayek adds to Walter Rathenau the name of Friedrich Naumann, many of whose views, Hayek states, were similar to Rathenau's, and were "characteristic of the combination of socialism and imperialism" that became the prevailing ideology in Germany.

The fitting culmination of this German soi-disant "liberalism" came in 1933. By then the so-called "liberal" party had assumed, suitably enough, the name of Staatspartei, the State Party. The "liberals" in the Reichstag had been reduced to five in number. When Adolf Hitler proposed the Enabling Act, in March of 1933, which handed over total control over German society to the Nazis, the "liberals" of the State Party voted in favor of the Act. The only members of this last, quasi-independent Reichstag to have the honor of voting against the Enabling Act were the Social Democrats. Real liberals must sincerely wish it had been otherwise. Among the "liberals" who voted for the Nazi takeover was Theodor Heuss, later the first president of the Federal Republic and the first leader of the Free Democratic Party.

It was only after the catastrophe of the Second World War that something resembling a genuine liberalism was reborn in Germany, inspired in part by the Austrians, Ludwig von Mises and Friedrich Hayek, who had preserved the liberal heritage of the nineteenth century for the twentieth.

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This essay originally printed in 2004 by Ecole Polytechnique, CENTRE DE RECHERCHE EN EPISTEMOLOGIE APPLIQUEE, Unité associée au CNRS.

[See Professor Raico's full audio course on the history of liberalism here.]