What do they have in common?

1. Is There an Alternative After All? Ordoliberalism as the Possible Future of NeoliberalismMathias Siems Gerhard Schnyder Durham University King’s College London

2. What do they have in common?

3. Niall Ferguson (…) to rediscover the ordoliberal idea of an effective order of competition “before Keynesian economists will succeed to turn the wheel of history backwards” Sarah Wagenknecht (…) ordoliberalism to reconcile market economy with public interest, in particular to limit the power of big corporations. Basis for “innovative socialism”.

4. Goal of the Paper • What is ordoliberalism and how does it relate to other theories (Chicago school, institutional economics etc) ? • Show that there are different liberal traditions (vs TINA) • Ordoliberalism in the context of the financial crisis

5. Core features of ordoliberalism • Developed in 1930-60s, mainly at University of Freiburg, Germany (see also next slide) • Positive role of the state: “ordo”, i.e. not only (!) invisible hand of the market; (but against ad-hoc interventionism; focus on rules) • Why state intervention?  No self-healing power of markets! • Market economy embedded in society: “interdependence of orders” and balance between these orders (Eucken 1932) • Legitimacy of social policy (Vitalpolitik) (cf. Alexander Rüstow)

6. Core features of ordoliberalism “[w]e must stress most emphatically that we have no intention to demand more from competition than it can give. It is a means of establishing order and exercising control in the narrow sphere of a market economy based on the division of labor, but no principle on which a whole society can be built.From the sociological and moral point of view it is even dangerous because it tends more to dissolve than to unite.If competition is not to have the effect of a social explosive and is at the same time not to degenerate, its premise will be a correspondingly sound political and moral framework. There should be a strong state, aloof from the hungry hordes of vested interests, a high standard of business ethics, and undegenerated community of people ready to co-operate with each other, who have a natural attachment to, and a firm place in society” (Röpke 1950, 181; emphasis added).

7. Core features of ordoliberalism Source: Kolev 2010

8. Support of rigorous anti-trust rules in order to “deconcentrate” economic power, i.e. role of state to create functioning economic order (vs. view of natural market order) • NB: Not just for economic, but also for social reasons (proletarisation)  Impact on competition law in Germany and Europe post WWII • Interdependencies call for interdisciplinary approaches to economic research (i.e. economics, politics, law, sociology etc.). Core features of ordoliberalism

9. Ordoliberalism vs. neoliberalism • Origins of neoliberalism: Paris colloquium 1938; foundation of Mont Pelerin Society 1947 (but also ordoliberals until 1960s); • Since 1950s rise of the (2nd) Chicago School  US and UK politics of the 1980s = breakthrough

10. Optimistic view of market forces; government seen as “the problem” Background: politics in 1950s in US (McCarthyism), in contrast to situation Germany (FRG: State draws its legitimacy from role as guarantor of individual freedom) • Shift in anti-trust policy: monopolies accepted as a transitional phenomenon (e.g., Friedman, Director); “big business” can be basis for economic efficiency (Chandler 1962); Markets are efficient (Fama 1960s) Ordoliberalism v US neoliberalism

11. Friedman 1940s: eliminate the separation of ownership and control by transforming directors into owners. This would “eliminate holding companies”, “[…] make mergers more difficult”, and, as a result, it should also “retard the tendency (if it exists) toward increasingly large and monopolistic organizations and stimulate the breakdown of existing giant corporations”(quoted in Van Horn 2009: 215). • Aaron Director 1947: “[t]he unlimited power of corporations must be removed. Excessive size can be challenged through the prohibition of corporate ownership of other corporations […] and perhaps too through a direct limitation of the size of corporate enterprise” (quoted in Van Horn 2009: 212). • 1950s: Monopolies can resist the competitive forces of markets only where governments openly supported them (Friedman 1951: 17; cf. Director 1951; Director & Levi 1956). Chicago: Shift in anti-trust policy

12. Ordoliberalism v US neoliberalism

13. (1) Structured products and other “risky instruments” used to repackage loans • Ordoliberalism: principle of liability (Haftungsprinzip), i.e. that those who benefit from a particular action also have to be liable if things go wrong (quote Sinn next slide) • Response: not prohibition, but better transparency; improve operation of CRAs; capital adequacy requirements; pro-active risk assessment by regulators Ordoliberalism and crisis

14. (2) Problem of destructive incentives: on the one hand bankers and bonuses; one the other, banks and pure number of loans • Ordoliberalism: selfishness of individuals accepted unless destructive effects to market • Here possible responses: restrictions or tax disincentives. Also improvements of corporate governance, e.g., to shareholder protection/ participation (or would this increase short-termism?) Ordoliberalism and crisis

15. (3) Bail-outs of “too big too fail” banks; • Seen as necessary to prevent wider financial collapse (OL = more tolerant towards outcome-orientated intervention than e.g. Hayek) • Would ordoliberals be self-righteous since they would not allow dominant players? but not certain whether “too big too fail” is always linked to market power • Ordoliberalism against ad-hoc interventionism; problem of moral hazard (see also next slide)  intervention violates principle of liability Ordoliberalism and crisis

16. Employee co-determination transplanted from Germany to Chinese company law in 1993. May it work better in a modified communist economy (China) than in a coordinated market one (Germany)? Ordoliberalism and crisis

17. (4) Global dimension of crisis due to interconnectedness and regulatory arbitrage • Ordoliberals would not restrict free movement of capital, but: “global rules for global markets”, i.e. international economic constitution • Today: G20 summits, FSB, Basel III etc. but feasibility not entirely clear Ordoliberalism and crisis

18. (5) Failure of modern economics: e.g., crisis may show limits of economic modelling and quantitative empirical work • Ordoliberalism precedes Samuelson’s approach to economics; more discursive and less technical • But human psychology on financial markets not ignored (see Akerlof and Shiller 2009). • Need for heterodoxy, while not denying the progresses made in mainstream economics Ordoliberalism and crisis

19. Ordoliberalism and crisis 19

20. Conclusion: The End of Neoliberalism? • Naomi Klein 2008: “Rest assured, the [neoliberal] ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis that will be the rationalization for deep cuts to social programs, and for a renewed push to privatize.” • Ordoliberalism as ‘2nd best solution’? i.e. if the future remains neoliberal, at least a more reasonable, considerate and realistic form of neoliberalism

21. Powerful interests support ‘free economy’ • FT 14 XII 2011: pay gap: Labour share of value added keeps falling  widening gap even post crisis • US national income: 2011: 58% labour share (rest investors through profits and interests); 1963: 63% labour share •  Corporate profits up 25-30% after crisis (compared to 2007)  salaries down. • Obviously the top 1% still like the theory!

22. If we haven’t convinced you ….

23. Core features of ordoliberalism 23