Fri Mar 9th, 2012 at 04:20:17 AM EST
Monetarism, Austrianism, Austerianism, Austeritarianism, gold-buggery... The terms have not been lacking on this forum to attempt description of the mindset obdurately (and increasingly apparently parochially) shared by a majority of German economists, central bankers, and political personnel. Just recently, the word "ordoliberalism" has made its entry. What follows is an attempt to pull on a few threads and find out more about what ordoliberalism means and where it comes from.
In a paper for the European Council on Foreign Relations, Sebastian Dullien and Ulrike Guérot contend that
...there is more to Germany's distinctive approach to the euro crisis than the much-discussed historical experience of the hyperinflation in the Weimar Republic on the one hand and simple national interest on the other. Rather, there is an ideological edifice behind German economic orthodoxy with which Germany's partners must engage. While a change in the government after the next general election, in 2013, would lead to a change in German economic policy, it is unlikely to dramatically change the country's approach to the euro crisis.
Dullien and Guérot point to the post-WWII economic history of Germany, and to an influential school of economic thought called ordoliberalism:
While ordoliberalism nowadays is no longer an important academic current in Germany, most economists have at some point in their career been influenced by ordoliberalist ideas. Conversely, unlike in other European countries and the United States, there are very few influential Keynesian economists in Germany.
So what kind of liberalism is ordo?
If you're thinking of order, you're not far wrong. The usual explanation for the term is that it comes from a (still existing) economics journal called ORDO. But ordo is Latin for order, and the full title of the journal includes ordnung: Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft. (The journal was first published in 1948, and the term "ordoliberal" first used in 1950.) So the name "ordoliberalism" suggests liberalism with a strong component of order.
What kind of liberalism, what kind of order? Dullien and Guérot say:
The central tenet of ordoliberalism is that governments should regulate markets in such a way that market outcome approximates the theoretical outcome in a perfectly competitive market (in which none of the actors are able to influence the price of goods and services).
These are liberals who believe in the perfectly competitive market, but consider that the state should intervene to regulate and to create institutions that help to bring it into being and maintain it. This is the sense of "order" - an "economic order" in which the market may flourish, or, another term, a carefully-built "competitive order" ruling out monopolistic tendencies and cartels - and:
the economic order is not to be regarded as an isolated system but rather as a part of the overall social system, which comprises the legal order, the societal order as well as the governmental order
(Stefan Kolev, "Hayek as an Ordo-Liberal" (pdf))
Private property is to be defended and expanded. State intervention must be supply-side: that is, regulation and the organisation of institutional support must be in favour of enterprise, production and supply, not consumption and demand.
In terms of the "governmental order", ordoliberalism favours elite decision-making in a system of decentralisation and subsidiarity.
Ordoliberalism - Wikipedia, the free encyclopedia
Ordoliberal theory holds that the state must create a proper legal environment for the economy and maintain a healthy level of competition (rather than just "exchange") through measures that adhere to market principles. This is the foundation of its legitimacy The concern is that, if the state does not take active measures to foster competition, firms with monopoly (or oligopoly) power will emerge, which will not only subvert the advantages offered by the market economy, but also possibly undermine good government, since strong economic power can be transformed into political power. Quoting Stephen Padgett: "A central tenet of ordo-liberalism is a clearly defined division of labor in economic management, with specific responsibilities assigned to particular institutions. Monetary policy should be the responsibility of a central bank committed to monetary stability and low inflation, and insulated from political pressure by independent status. Fiscal policy--balancing tax revenue against government expenditure--is the domain of the government, whilst macro-economic policy is the preserve of employers and trade unions." The state should form an economic order instead of directing economic processes, and three negative examples ordoliberals used to back their theories were Nazism, Keynesianism, and Russian socialism.
These are not classical 19C laissez-faire liberals. They are, and claim to be, neoliberals of a particular kind, who consider that the market will not spontaneously create for itself the optimal conditions for its own efficient functioning: those conditions must be deliberately instituted by the creation of an "economic order".
The term "neoliberal" was first used (at least in such a way that it took among those who were happy with it as a label) at the Colloque Walter Lippman in Paris in 1938, by one of the two German economists present, Alexander Rüstow, later to be an influence on the government of West Germany along with the other German present, Wilhelm Röpke.
Colloque Walter Lippmann - Wikipedia, the free encyclopedia
At that meeting the term neoliberalism was coined by Alexander Rüstow referring to the rejection of the (old) laissez-faire liberalism
In a broad sense, ordoliberals were neoliberals in that they were part of the mid-20C neoliberal movement. In a narrower sense, ordoliberalism itself exhibited a more social tendency (Sozialogischer Liberalismus), and a group less in favour of state intervention, who held on to the "neoliberal" tag.
Theoretical ordoliberalism in pre and postwar Germany was mainly associated with the Freiburg School, from the University of Freiburg, where the main ordo-thinkers were economist Walter Eucken and jurist Franz Böhm. They and others developed ordoliberal ideas from 1930 on, in opposition to classical 19C liberalism and to the rise of what they saw as totalitarianism, both communist and fascist. They drew on earlier German institutionalist thinking, of which the best-known representative is Max Weber. They also drew on the German experience of industrial policy under Bismarck:
Those methods subordinated domestic demand to the needs of industrial capital and emphasized the importance of supply-side policies... the introduction of a program of social insurance - and pre-emption of the Social Democratic Party - had been central to Bismarck's strategy for securing social peace within the context of rapid industrialization during the Second Reich... one of the least-understood, but most important, legacies of nineteenth century industrialization in Germany was a system of "organized capitalism" involving big business, the banks, and the state, that still gives all but the largest, transnational German-based firms a distinctive character
(Christopher S. Allen : "Ordo-Liberalism" Trumps Keynesianism: Economic Policy in the Federal Republic of Germany and the EU (pdf), in Bernard Moss, ed., Monetary Union in Crisis: The European Union as a Neo-Liberal Construction (2005))
Austrians in all this?
There was considerable exchange between Austrian and German neoliberals. At the Colloque Walter Lippman in 1938, for instance, Hayek and von Mises were present as were Rüstow and Röpke. Röpke, after socialist beginnings, had been a follower of the Austrian School and of von Mises in particular, and also knew and exchanged work with Hayek, later becoming an active member of the Mont Pelerin Society. Hayek, ("frequently classified as an ordoliberal", Wikipedia), was also on particularly friendly terms with Walter Eucken, and often visited Freiburg (where he returned to teach at the Economics faculty years later). Stefan Kolev places Hayek and Eucken's probable first encounter at
the meeting of the Verein für Socialpolitik in Zurich 1928, since they present papers in the same session on "Credit and Cycles", the memorable session which Mises rounds up with his summary that the Austrian theory of the cycle is the consensus theory of the German-speaking world.
1947, Eucken is the only German scholar living in Germany who is invited and effectively joins the founding meeting of the Mont Pèlerin Society and becomes, in Hayek's words, "the star" of the conference. 1948, Hayek on his turn becomes co-founder of the ORDO yearbook, the ordo-liberal journal still existing today which as late as 1991 writes on its cover: "with the cooperation of Friedrich A. von Hayek". Paradoxically, Eucken dies from a heart attack on a lecture tour to the LSE in March 1950, to which Hayek has invited him.
The four principal centres of neoliberalism, according to Kolev (who writes as a sympathizer), were Vienna, Freiburg, London and Chicago.
This evidence of collaboration and broadly shared thinking apart, "Freiburg School" or "ordoliberalism" and "Austrian School" (in the mid-20C) are not coterminous. Von Mises was certainly far more laissez-faire, and Hayek as a mid-century bridge between the two schools would agree with the ordoliberals' legal approach (markets need laws protecting property, for instance) while not sharing their societal concerns (Hayek was sceptical of the "social market economy"). The ordoliberals drew on an institutionalist tradition, while the Austrians were tending, and would do so increasingly, towards a more radical individualism. Though they agreed on the business cycle and the provision of monetary stability by the independent central bank, ordoliberals' emphasis on the vital roles of the state and even the central bank was greater than that of the Austrians. Where the ordoliberals saw the need for careful organisation of the "competitive order", Hayek increasingly saw natural evolution within a free-market context. The later Hayek was barely ordoliberal at all (though there continue to be, to some extent, theological discussions of this, Kolev for example).
This said, the two neoliberal schools followed roughly parallel trajectories, at closer than shouting distance, during the 1930s, '40s, and '50s. The Mont Pelerin Society provided a nexus for discussion and organisation until around 1960.
Where were the Nazis?
The Nazis were as anti-liberal as they were anti-communist. The liberals assembled at the Colloque Walter Lippman in 1938 saw themselves as raising the banner of freedom in the midst of overwhelming collectivism and totalitarianism, Soviet, Nazi, and fascist. Hayek and von Mises were no longer in Anschluss Austria (Hayek was teaching in London, Mises in Geneva), while the two Germans Röpke and Rüstow had been forced to leave Germany in 1933, and had both taken refuge in teaching positions at the University of Istanbul. Eucken and Böhm were not in exile, though Böhm was under a teaching ban and both, through WWII, were anti-Nazis associated with Dietrich Bonhoeffer's Confessing Church.
The fact that the main neoliberals (ordoliberals to be) were disassociated with Nazism was a facilitating factor in their postwar integration into the new federal republic's economic policy-making.
Next part: What happened to ordoliberalism