German “Ordnungstheorie”. From the Perspective of the New Institutional Economics

German “Ordnungstheorie” (~ system theory, ordo theory) relates essentially to Walter Eucken (Freiburg) who attempted to strike a balance between the economics of the German Historic School, still relevant in Germany of the 1930s, and its opposing neoclassical analysis. The paper starts, therefore, with a brief description of Eucken's morphological approach, his “isolated abstraction,” as an analytic method that is focusing on a precise description of the institutional framework of the analysed economy with only vague assumptions on human wants, behaviour, behavioural constraints etc. Its considerations may be loosely compared with the strategic reasoning of lawmakers who are primarily interested in the general consequences of their draft bills and not in (theoretically or econometrically established) predictions of their effective functioning. Marginal analysis is abandoned and replaced by general behavioural assumptions such as “… all normal men everywhere and at all times act in accordance with the economic principle.” Target of Eucken's Ordnungspolitik (ordo policy) is to minimize (measurable market) power instead of striving for (immeasurable) Pareto efficiency. Eucken's morphology, his ideal typical description and ordering of institutional frameworks by way of “isolating abstraction,” may be seen as a predecessor of Williamson's formation and use of “efficient governance structures.” Eucken's questioning of the regulative ability of laissez faire anticipates (instinctively) the consequences of Olson's logic of collective actions. Eucken, together with the other members of the Freiburg school, demand from the state the establishment and guarantee of an economic constitution of a free market economy based on David Hume's principles of natural law: private property, freedom of contract and personal liability. This paper continues with a neoinstitutional discussion of Eucken's ordo-liberal principles of Ordnungspolitik, which served as basis of the West German Wirtschaftswunder after the currency reform of 1948. It ends with a critique of Eucken's deliberations and some reflections on Douglass North's “adaptive efficiency” as another substitute for the empty concept of “Pareto efficiency”.