The Ordoliberal Quest for a Privilege-Free Order
by Stefan Kolev / March 28, 2021
“In April 1947, at the shores of Lake Geneva, young George Stigler and Milton Friedman attended the founding meeting of the Mont Pèlerin Society. The scholars who met in the Swiss idyll amid war-scarred Europe came together to diagnose the collapse of the liberal order since 1914, and to debate therapies for a more robust liberal order in the decades to come. Of all the experiences from their first trip to Europe, Stigler and Friedman recalled decades later in their memoirs the particularly strong impression which a German economist had made on them: Walter Eucken. It was not only Eucken’s personality or his account of German totalitarianism that left this lasting imprint.
Early neoliberals tended to view market power and monopolies as phenomena that somehow had to be reined in by an institutional framework in order to maintain the pressure of competition. https://t.co/4sUA9FTB0S
— ProMarket (@ProMarket_org) December 18, 2021
In addition, striking scholarly parallels emerged at the meeting. Henry Simons, a formative teacher of Stigler and Friedman at the University of Chicago, had died in 1946, and so it was left to Aaron Director to present Simons’s politico-economic legacy at Mont Pèlerin. Director’s and Eucken’s papers were stunningly similar, in content and rhetoric. Both diagnosed the future of liberty to depend crucially on the systematic limitation of power in economy and society. For that purpose, the establishment and cultivation of a “competitive order” constituted the overarching goal both at Chicago and Freiburg. In the early 1930s, Eucken and the lawyer Franz Böhm had founded the Freiburg School of ordoliberalism as a research community in law and economics. They understood society as a set of distinct but interdependent sub-orders, each of them with a different logic and purpose, and put the spotlight on the interface between the economic and the legal order. The ordoliberals conducted an explicitly normative search. They looked for orders which could fulfill a double criterion: enable material prosperity and, equally important, a humane life in liberty and justice. The archenemy they identified, in theory and their lives in a totalitarian state, was above all: power, of all varieties and in all combinations.
University of Freiburg
With respect to private economic power, the ordoliberals made a U-turn against a dominant intellectual tradition in German economics. During Germany’s first Great Depression, which persisted from 1873 to 1894, economists and lawyers had first foundational debates about cartels, understood as the umbrella term for collaborative monopolization of markets. A main culprit for the long crisis was identified in “excessive,” “ruinous” competition. According to the prevailing opinion, in their strife to gain market share companies systematically produced too much, entailing overproduction, too low prices and bankruptcies. Cartels came to be seen as an important stabilizer of business cycles. They were called “children of misery,” that is of economic instability, and the coordination among companies within the cartel should help against systematic overproduction and unnecessary bankruptcies. This stance coincided with a truly consequential decision of the Imperial Court from February 4, 1897. The court proclaimed that cartel contracts were binding for its members. A company could not exit the cartel against the will of the other members, while the cartel was given the power to harm an outsider’s business. The number of cartels rose steadily before World War I, and the war made things even worse. The global economy took a serious blow and markets disintegrated, so national cartels became more dominant in these disintegrated markets. The number of cartels in Germany exploded from about 700 in 1914 to about 2,500 in 1930. Entire industries were organized in associations (Verband) that represented their special interests, both as cartels in the market and as lobbyists in politics. The Cartel Decree of 1923 targeted the abuse of power but did not ban cartels. Once the National Socialists seized power, they very soon passed the Compulsory Cartel Act and took full control of the existing cartel system. The 1920s were the period when the ordoliberals gained their formative practical experiences in Berlin. Eucken, Böhm, and most of their associates and students worked for a while either in associations or in the ministerial bureaucracy. Observing the ever-deepening power entanglement between the state and special interests was a crucial impulse for the inception of ordoliberal political economy. Power as a problem and disempowerment as a procedure became the decisive challenge: not only as a scholarly, but also as a civic challenge. The ordoliberals engaged in resistance circles and drafted proposals for the future after National Socialism. In the last months of the war, members of the Freiburg circles were imprisoned and barely escaped their execution.
Franz Böhm and Walter Eucken
“Power is evil in itself”: Eucken endorsed this diagnosis of Swiss historian Jacob Burckhardt. And yet humans strive for power in all societal orders, often disguising their interests under an ideological cloak. While power in the hands of the state was assessed as the most dangerous, the ordoliberals did not ignore the potential of one’s fellow citizens to exercise detrimental influence on one’s choices. In market relations, power could be experienced in individual contracts, in the conditions in factories, in the calculation practices of companies and finally in the price formation within different market forms. The smaller the player, the smaller one’s power potential—thus the permanent skepticism about oligopolies and monopolies. Along with the power of the state and the private power on the opposite side of the market, Eucken and Böhm classified “power collectives” of associations and the state as the third variety of power. Private power threatened the interests of the consumer and worker but also, due to its constant tendency to usurp political power, the interests of the citizen. How to combat these power varieties and configurations? The ordoliberal concept of the competitive order contains insights on two levels: the economic and the political. In the economy, competition must be unleashed, following Böhm’s motto that “competition as the most ingenious disempowerment instrument in history.” All markets, including the labor market, should become as competitive as possible, entailing a maximum of choice options for the opposite side of the market. A set of constitutive and regulative principles are at the theoretical core of the competitive order. Open markets are a constitutive principle and a necessary, but not a sufficient condition in the battle against power—above all, markets in 1945 were as closed and fragmented as they had ever been since the 19th century, with little prospect of integration. So the regulative principle of establishing a competition authority as the guardian of a general cartel ban was added. Not abuse of power, but the very emergence of power configurations in the first place was the target.
Franz Böhm and Ludwig Erhard
Regarding natural monopolies, the ordoliberals struggled to identify the least-evil practice. Eucken maintained that they should stay private but be supervised by the competition authority. In sum, the competitive order should enable “performance-based competition” where it is the superior product and not anti-competitive behavior against one’s rivals which decide about success and failure. In the political order, the goal was to find governance forms which would prohibit the 1920s from happening again, especially the fierce competition for rents by special interests. The key ordoliberal notion of policy is captured in the difficult-to-translate term “Ordnungspolitik,” which bases legislation as often as possible on general rules and as seldom as possible on privilege and discrimination. In this plea for a privilege-free order, Böhm warned of a “refeudalization of society” and compared rent-seeking with the feudal strife for privileges in earlier ages. The entanglement between the cartelized economy and the political order of the young Federal Republic of Germany had to be attacked. After World War II, the Allies dismantled prominent cartels like I.G. Farben in the chemical industry, but it wasn’t until 1957/1958 that the Federal Republic implemented its antitrust legislation with the Act against Restraints on Competition. Böhm was one of its fathers, both as a scholar and as a member of parliament. However, the Act encountered a very powerful enemy: the Federation of German Industry (BDI) which, as the successor to the Reich Association of German Industry (RDI), did its utmost to protect the networks of the old cartel system. Despite the exemptions from general rules which such lobbyists smuggled into the final version, the Act became a main pillar of the postwar Social Market Economy personified and popularized by Ludwig Erhard, minister of the economy from 1949 to 1963 and Chancellor from 1963 to 1966. It also inspired the institutionalization of competition policy in the process of European integration.
During the 1940s, the competitive order was the focal point which united the intellectual efforts at Freiburg and Chicago. The notion was equally central for F. A. Hayek’s The Road to Serfdom (1944) and his contributions at Mont Pèlerin 1947. Yet during the postwar decades, the need to systematically foster competition lost some of its urgency. Global markets re-integrated, and their openness provided a substantial barrier to anti-competitive behavior. In recent years, however, protectionism has threatened globalization’s open markets, while the economic properties of digital technologies have rendered market power even more topical. The lesson from the ordoliberal quest for a privilege-free order is that once in motion, the refeudalization of society through the entanglement of private and state power is very difficult to reverse. Above all, the ordoliberals were well aware that cultivating a culture of competition for better products, rather than competition for a better grip on the state, would remain a never-ending task for future generations.”
How Ordoliberal Competition Theory Can Address Market Power in the Digital Age
by Isabel Oakes & Anselm Kusters / November 14, 2021
“In early October, Facebook whistleblower Frances Haugen told the US Congress that Facebook’s platforms “stoke division and weaken our democracy,” detailing how these platforms deliberately used algorithms that encouraged the spread of divisive misinformation for commercial reasons. In a bizarre coincidence, Facebook also suffered from a global network outage on the previous day that affected the Facebook-owned Instagram and WhatsApp as well. While there are valid economic causes of high market concentration in the digital age, such as economies of scale and network effects, these events brought to light important problems regarding the highly-centralized nature of digital markets, as well as the extent to which these problems transcend the economic sphere.
This is not the first time that the relationship between powerful firms and their wide-ranging impact on society has come under scrutiny. In Weimar Germany, the increasing concentration of economic power was heavily criticized by a group of economic, legal, and sociological thinkers called “ordoliberals,” among them Walter Eucken, Franz Böhm, Wilhelm Röpke, and Alexander Rüstow. Observing the failures of laissez-faire capitalism and the detrimental economic, political, and social effects of economic concentration, these scholars developed a reformed understanding of competition. They aimed to identify a regulated, legal framework for an efficient market economy that, rather than benefitting the select few who controlled the cartels and monopolies at the time, ensured freedom and equal rights to all its participants. Their emphasis on a strict but rule-based antitrust law and policy can therefore be understood as a “quest for a privilege-free order.”
Some of the lessons this group of ordoliberal thinkers uncovered during the interwar period could help us tackle the current challenges posed by the significant market power held by Big Tech companies like Facebook. These lessons are especially useful when considering certain parallels between the historical circumstances in which ordoliberalism emerged and the socio-economic and political trends of today. These parallels pertain to how the growth of economic concentration can influence the political order, has negative effects on consumer welfare, and reduces the contestability of future markets. In other words, similar to the Weimar period, economic concentration today has far-reaching effects that transcend the economic sphere. These effects have often been overlooked when weighing the anticompetitive effects of digital platforms against their extraordinary economic efficiencies. In light of these similarities, one might ask whether a “contemporary ordoliberalism” could help guide antitrust enforcement in the digital age. Germany’s interwar economy saw a dramatic increase in industrial concentration, which can partly be traced back to the legal support given to cartels by the German Supreme Court from the late 19th century onwards. The controlled war economies of the First and Second World Wars and the increasing disintegration of the global market, as well as the Great Depression, further increased the spread of cartels, syndicates, and ultimately monopolies.
This, in turn, opened up the possibility for an endemic interdependence between large firms, banks, and far-right politicians, which arguably facilitated the rise of the Nazi party. While not all firms participated equally, several dominant firms secured implicit future protection by providing the Nazi regime with organizational resources that helped control the economy and by undermining democratic features within their firms. The ordoliberals observed how concentrations of economic power contributed to a distortion of the political order and, consequentially, developed theoretical concepts and practical plans that envisioned the return to a more competitive market order. Studies on economic concentration have found that many global markets have, once again, become less competitive over the past decades. In the past two decades, for instance, more than two-thirds of US industries have experienced an increase in concentration levels. And while there is significant variation across markets and within industries, a similar rise in concentration has been found in the EU. The most important example of this trend is the digital “surveillance economy,” which is dominated by a few powerful companies, known as GAFAM (Google, Amazon, Facebook, Apple, and Microsoft), that face limited competition and exert an increasing impact on other sectors and the economy. As a result, these Big Tech companies take up the position of key gatekeepers for access to multiple markets, which prevents smaller or mid-sized companies with innovative ideas from entering. If the state is “negligent in its duties as policeman of the market,” Rüstow remarked at the Walter Lipman Colloquium in 1938, then competition “degenerates” and can be “abused by robber knights.”
Similarly, competition in the digital economy no longer corresponds to the ordoliberal vision of a highly diversified market structure with multiple players but has resorted to a form of “toxic competition” that reflects a more centralized market structure, whereby dominant players can dictate what ordoliberals often referred to as the “rules of the game” of the free market order (see, for example, Eucken’s 1940 book The Foundations of Economics, in German Die Grundlagen der Nationalökonomie). This trend has sizeable welfare effects: recent research by Bruno Pellegrino estimates that moving from the current oligopolistic market setting to a perfectly competitive market, as envisioned by the ordoliberals, would lead to large increases in both total surplus and consumer surplus.
In addition to these economic effects, ordoliberals realized, in the context of the struggling Weimar Republic, that the detrimental effects of concentration went “beyond supply and demand” (as stated by Röpke), to encompass the political and social orders as well. In his 1946 monograph The German Question, Röpke explored how the growth of cartels and syndicates led to German imperialism. Similarly, Eucken argued that the concentration of economic power led to increased state interventions, which in turn fueled the strive for special privileges that further disturbed both the price mechanism and the political order. This observation of how the accumulation of power by economic giants has repercussions for the political order can be observed in the current digital age as well. Specifically, this encompasses the impact of digital giants on privacy and free speech; the non-transparency of their underlying algorithms; their selection of information and spreading of “fake news” that lead to the emergence of self-contained filter bubbles; their potential influence on political agendas and even elections; their usage of “hyper-nudging,” and their far-reaching networks of lobbyists that extend into the academic world.
If reforming antitrust law for the digital age necessitates linking market freedom more closely with democracy and, more generally, with the political order (which is currently increasingly being advocated, for instance, by members of the Open Markets Institute, such as Barry Lynn), ordoliberal lessons from the past might be useful. The hyper-centralized interwar period led ordoliberals to strive for an ideal-type situation of what they repeatedly called “complete competition,” in which no corporate entity possessed the authority to coerce the action of others (Walter Eucken primarily developed this concept, for example in his 1938 essay “What is the Use of Economics?,” in German “Wozu Nationalökonomie?”). Through restructuring markets and enacting stringent regulation, complete competition would secure an equal distribution of market power as well as the prevention of unfair market advantages and thus symbolize the ultimate expression of freedom on the market and beyond. Rather than merely ensuring the efficient allocation of scarce resources, as in the textbook conception of competition, complete competition was tasked with ensuring general welfare and democracy, hence being elevated to a moral authoritative status that ordoliberals summarized under the notion of an “economic constitution.” Viewed through this lens, the numerous reform proposals that are currently drafted to create a safer digital space and to establish a level playing field for digital companies can be understood as puzzle pieces of a broader economic constitution that is urgently required for the digital economy of the 21st century.
A further structural parallel between the world in which early ordoliberals operated and the present day relates to the wide-ranging societal effects of economic concentration. There is no denying that Weimar Germany saw some improvements in its welfare system, such as the introduction of social rights to the new Constitution, unemployment insurance, and municipal welfare policies. However, the cartelization of the German economy during this time also enabled powerful market actors to dictate the “rules of the game” in the economy, thereby restricting the wants and freedoms of others in favor of their own, and thus economic inequality widened. Eventually, massive economic and social problems led to the breakdown of society. After the Second World War, confidence in the German state apparatus had completely collapsed, which the ordoliberals sought to remedy by conceptualizing the state as an impartial arbiter that was inherently linked to a competitive economy embedded in a regulated legal order. It comes as no surprise that at a time of chaos and upheaval, the German population sought out order and regulation. As well as promoting a completely competitive order that should ensure what we would nowadays call consumer welfare, the ordoliberals developed the concept of Vitalpolitik (“vital” or “organic policy”), which aimed to maintain a humane economy and encompassed all qualitative factors, laying outside the market, that influenced an individual’s quality of life, such as family, nature, working environment, and equal starting positions in life.
Werner Bonefed, a prominent scholar of ordoliberalism, highlights how Vitalpolitik sought to maintain the vitality of an entrepreneurial society “in the face of a socially and morally disintegrating market logic.” In concrete terms, this meant that policies should take inspiration from “the peasant, the craftsman” and “rural home workers” who, according to Röpke, generally “earn less and work longer, but lead a fuller, more dignified and human life.” Though ordoliberals tended to romanticize these agricultural and family-orientated communities, these communities arguably make the economic structure more robust and insusceptible to external shocks. The need for a more de-centralized, and thus more resilient, economic structure has been illustrated by the pandemic, during which supply-side bottlenecks of crucial infrastructures became apparent. More generally, the increased interconnectedness and efficiency brought about by digital gadgets is increasingly offset by their negative effects on consumers’ quality of life, ranging from infringements of data protection, communal bonds, and privacy to the foreclosure of future markets and discriminatory effects of certain algorithms.
In the face of increasingly-disintegrating confidence in our current market structure, constructing a Vitalpolitik for the 21st century that incorporates qualitative, humane, and “organic” factors may be very useful. Given the enormous concentration currently experienced in certain markets and its negative impact on politics and welfare, ordoliberal concepts like “complete competition,” “economic constitution,” and “vital policy,” and the lessons from the past incorporated into those concepts, might be productively repurposed for the challenges of today. They can inspire a renewed orientation of competition policy toward market structures, rather than today’s narrow consumer welfare approach. These concepts can also adapt the “rules of the game” to the new economic and technological conditions. As the recent revelations regarding Facebook illustrate, many of our current challenges go beyond the purely economic sphere and require a return to less concentrated markets. The history and teachings of the ordoliberal movement might provide us with conceptual stimulation and practical policy tools for how to get there.”
[ Note: A more detailed exposition of these ideas can be found in the authors’ jointly written paper entitled “Taming Giants: How Ordoliberal Competition Theory Can Address Power in the Digital Age” ]
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