Electronic copy available at: http://ssrn.com/abstract=2142529

1

The Ordoliberal Variety of Neoliberalism

Gerhard Schnyder and Mathias Siems∗

Abstract: Ordoliberalism differs from other liberal theories in not supporting the

simplistic idea that the ‘government is the problem’. The aim of this chapter is therefore

to explain the core features of ordoliberalism and distinguish it from other varieties of

liberalism. We also show that ordoliberal concepts are not isolated phenomena but that

they are related to institutional economic ideas under different names. Such

‘ordoinstitutional’ perspectives have gained in appeal in the context of the current

financial crisis, because they seem to attenuate extreme views of market libertarianism,

while still accommodating broadly neoliberal, anti-Keynesian and anti-socialist ideas.

Keywords: ordoliberalism, neoliberalism, Chicago school, institutional economics,

financial crisis

JEL codes: A12, A14, B00, B25, B41, B52, G01, K20, N42, N44, P51

Final version published in

Suzanne J. Konzelmann and Marc Fovargue-Davies (eds.),

Banking Systems in the Crisis: The Faces of Liberal Capitalism,

Abingdon: Routledge, 2013, pp. 250-268

∗

Department of Management, King’s College, London and Durham Law School, Durham University.

Electronic copy available at: http://ssrn.com/abstract=2142529

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INTRODUCTION

Contrary to Margaret Thatcher’s well known slogan that ‘there is no alternative’ to a

radical market liberalism, not all liberal theories support the simplistic idea that the

‘government is the problem’. A core example is ordoliberalism. The aim of this chapter

is to engage with the defining features of ordoliberal theory1 and distinguish it from

other varieties of liberalism. By comparing ordoliberalism to other varieties of liberal

theory we also show that it is not an isolated theory that mattered only in Germany from

the 1930s to the 1960s but that it is closely related to other liberal and institutional

concepts.

Our focus is not the analysis of how precisely ordoliberal concepts have been

implemented throughout the twentieth century; rather, we discuss their theoretical

implications and attempt to explain differences with other brands of neoliberalism

against the backdrop of the historical context. Still, it is worth noting that the literature

on the role of ideas in political science provides ample evidence that ideas and interests

are intrinsically related and both matter in politics and economics (cf. in particular Blyth

2002; Hall 1989).

The remainder of this chapter is structured as follows. The first part explains the core

features of ordoliberalism. Then, we address US neoliberal schools of thought and in

particular the influential Chicago school. This approach to liberalism is often portrayed

as being opposite to ordoliberalism but both varieties of liberalism also share some

often-neglected similarities. Next we deal with the various approaches to institutional

economics, which overlap with ordoliberalism to an even more significant degree than

the Chicago school. The final part concludes.

1

Arguably ordoliberalism does not constitute one single and coherent theory. Authors that are commonly

associated with the movement defended quite different views on certain aspects (cf. Kolev 2010).

However, in this chapter we seek to single out a number of points that can be considered as the defining

features of what is commonly defined as ordoliberalism and are hence shared by the large majority of its

proponents.

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CORE FEATURES OF ORDOLIBERALISM

‘Ordoliberalism’ was originally conceptualised by the economist Walter Eucken and

the lawyers Franz Böhm and Hans Grossmann-Doerth at the German University of

Freiburg during the interwar period (Boas & Gans-Morse 2009).2 Drawing on the

concept of ‘ordo’, the Latin word for ‘order’, ordoliberalism refers to an ideal economic

system that would be more orderly than the laisser faire economy advocated by

classical liberals (Oliver 1960, 133-34). While there are many overlaps with other forms

of neoliberalism, two distinctive features of ordoliberalism can be identified: a

prominent and positive role for the state in upholding the liberal economic order and the

importance of the ‘social question’ due to the need to embed economic activity in a

sound society. Indeed, Peck (2010, 17, 65) characterises ordoliberalism as a humanist

form of liberalism that seeks to achieve a socially embedded market through state

intervention. In the following paragraphs we discuss these specificities of

ordoliberalism in some detail.

First, the crucial and positive role of the state to create the conditions for a liberal

economy, which led to the seemingly contradictory concept of ‘liberal interventionism’

coined by Alexander Rüstow, is a hallmark of German neoliberalism (cf. Ptak 2009). To

be sure in its original formulation all forms of neoliberalism distinguished themselves

from the nineteenth century laisser faire liberalism by acknowledging a positive role of

the state. While classical liberal theories conceived of laissez faire as a means, the

twentieth century neoliberalism rejected this view and saw competition as the means to

achieve a free economy (Peck 2010, 3-4). However, as we will show below, this

fundamental difference between neoliberalism and laisser faire liberalism has been

increasingly eroded during the second half of the twentieth century in particular in the

US. The role of the state is rejected and oftentimes goes barely beyond the guarantee of

the ‘rule of law’ and an ‘independent’ central bank. Ordoliberalism advocates a more

2 It should be noted that designating the German neoliberals of the Weimar period as ‘ordoliberals’ to

distinguish them from other brands of neoliberalism is strictly speaking an anachronism. The term

‘ordoliberalism’ was first used in a 1950 issue of the review ORDO. The proto-ordoliberals who did not

necessarily form a coherent school of thought before World War II would refer to themselves mostly as

neoliberals, a term which is said to have been coined in 1938 by Alexander Rüstow – later one of the

central members of the ordoliberal group – at the Colloque Walter Lippman in Paris.

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positive role that the state has to play and a more sophisticated theorisation of the state

(cf. Van Horn 2009). The members of the Freiburg School argued that for the free

market to function effectively, the state should assume an active role, supported by a

strong legal system and appropriate regulatory framework. Without a strong

government, they argued, private interests, in a system characterised by differences in

relative power would undermine competition (Oliver 1960; Boarman 1964; Gerber

1994). Moreover, the rules of the game should not favour the powerful and wealthy

(Gerber 1994, 38).

This assessment was based on the experience of the Weimar Republic (1919-1933)

during which ordoliberalism emerged. The weakness of the Weimar democracy and its

perceived permeability to interest group influence led early ordoliberals to lean towards

a preference for strong government bordering even on support for non-democratic

authoritarian rule. Ptak (2009) argues that this constitutes a proximity with a nationalist

theory of the state – such as the anti-liberal theory by Carl Schmitt – and made the

ordoliberal conception of state and society compatible with the Nazi ideology. But it is

also close to the crucial classical liberal claim of the separation of state and society, i.e.

that neither should the state infringe on civil society, nor should it be ‘colonised’ by

private interests of any kind. This crucial concern of ordoliberalism with striking an

appropriate balance between private and public power (Peck 2010: 59) was present in

ordoliberal thinking since the 1920s. To be sure, the rhetoric of strong state and the

early ordoliberals’ disdain for the seemingly harmful party politics of the Weimar

Republic, which brought about disorder and instability, may have made some of these

authors sympathetic to Schmitt’s claims for a strong state capable of leadership.

However, the isolation of the state from particularistic interests is clearly a liberal claim

and most ordoliberals did not approve of Schmitt’s rejection of a Weberian bureaucracy

and hence the rule of impersonal legal-rationalistic norms in favour of a strong

executive power, governing ‘at will’.

Secondly, ordoliberalism stands for a ‘sociological’ conception of the economy, which

stressed the need for a market economy to be embedded in a functioning society and the

fact that the ‘market economy constitutes a narrow sector of societal life only’ (Röpke

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1946, 82-3; cf. Peck 2010: 61). Eucken (1932) used the concept of ‘interdependence of

orders’ in order to underscore that the economic order is interdependent with all other

governmental, societal and cultural orders in a society. The ‘social question’, i.e.

preventing the negative effects of ‘proletarianisation’ of the working class, was a major

concern for ordoliberals. To be sure, the ordoliberal post-war programme of the Social

Market Economy developed mainly by Müller-Armack was at the outset explicitly

conceived of as an alternative to universal welfare (Ptak 2009). However, the

theoretically strong role for the state, the importance attributed to the ‘social question’

and the pragmatic and ‘irenic’ way of implementing the ordoliberal precepts in post-war

Germany,3 made it possible for left-wing ideas to re-appropriate the concept of the

Social Market Economy and increasingly introduce social policy as part of the package

(Ptak 2009). Peck (2010, 58) calls the pragmatic, outcome-orientated neoliberalism of

the German ordoliberals the ‘first third way’, which contrasts with Hayek’s principled,

procedural rules-oriented neoliberalism.

Rather than fundamentally objecting to state intervention that relied on taxation to

finance its activity, some ordoliberals such as Alfred Müller-Armack and Alexander

Rüstow (1957) have shown sympathy with the idea of social policy and the welfare

state as long as it was market-conforming (cf. Siems 2004, 27). To be more precise,

Rüstow (and Röpke) rejected ‘purely material’ social policies, i.e. those advocated by

supporters of the welfare state, and developed instead the concept of ‘Vitalpolitik’,

which should aim to improve people’s living standards and wellbeing not just through

cash transfers, but by including a transformative structural societal policy (strukturelle

Gesellschaftspolitik) including for instance questions of housing standards (cf. Ptak

2009: 104). Contrary to socialist ideas, these policies were not aimed at a social

egalitarianism, but rather at stabilising the ‘natural order’ of society where different

social strata co-existed. Eucken’s concept of ordo, was indeed based on Thomas

Aquinas’ medieval conception of a hierarchical natural order in society, which led

different commentators to label ordoliberalism as ‘socially reactionary’ (cf. Ptak 2009).

Be that as it may, the fundamental opposition to the state’s legitimacy to tax and

3 The ordoliberals concern to maintain social peace contrasts starkly with the confrontational strategies of

the US and UK governments during the 1980s for instance.

6

redistribute income was much weaker in ordoliberalism than in other schools of

liberalism.

The rather traditionalistic conception of a social order based on the medieval Thomist

concept of ordo contrasts with a strong modern conception of individual freedom in the

economic sphere; a contradiction which Herf (1984) has termed ‘reactionary

modernism’. The ordoliberals believed that liberalism – the freedom of individuals to

compete in markets – should be separated from laisser faire – the freedom of markets

from government intervention. Thus, they favoured a rigorous competition law, but also

state intervention (cf. ‘liberal interventionism’) in order to ‘de-concentrate’ economic

power when a market became dominated by one or a few large players. This leads

ordoliberals to be more willing to err on the side of too much state intervention than

other neoliberals would be. While the principle of ‘in dubio pro libertate’ was accepted

by ordoliberals too, market concentration was seen as the greater evil than limited state

intervention. This distinguishes them notably from other neoliberals like Friedrich von

Hayek who also accepted the principle of a need to de-concentrate economic power, but

saw in the ‘invisible hand’ of the market a sufficient mechanism to make market-power

concentration a merely temporary phenomenon, and refusing on these grounds, state

intervention to de-concentrate economic power (Gamble 1996: 72). As we will show in

the next part, this is also a crucial difference that emerged between ordoliberalism and

the Chicago brands of neoliberalism during the 1950s.

It is precisely regarding this aspect that Walter Eucken, one of the most influential

representatives of the Freiburg School, criticised laisser-faire liberalism for holding

onto the belief that the market is a ‘natural given’ order which occurs spontaneously if

the state does not hamper its emergence (Foucault 2004). On the contrary, Eucken’s

understanding of the market and of competition is very much at odds with the classical

(and neo-classical, see below) liberal notion that markets constitute some sort of natural

order, which requires protection from state interference. In Eucken’s view, market and

competition can only exist if a strong state establishes an economic order. The state’s

role must be clearly delimited; but in the area where the state has a role to play, it needs

to be powerful and active. For ordoliberals, government is the solution to the problem,

7

as long as it is the right kind of government. Only specific constitutional and regulative

principles created and upheld by the state can establish competitive markets. It is not

about rolling back the state to free the underlying natural market order. Rather, it is

about a strong state creating a functioning and humane economic order (Goldschmidt &

Rauchenschwandtner 2007; Eucken 1932; Rüstow 1953 and 1957).

This conception of markets and the state made of an active competition policy is one of

the hallmarks of the ordoliberal political programme. In particular one of the earliest

ordoliberals, Franz Böhm was a very strong believer in the need for a strong and

rigorous competition law (Siems 2004, 37). His views had strongly influenced the

elaboration of the first German Competition Act (Gesetz gegen

Wettbewerbsbeschränkung; GWB) after World War II and were reflected in the Josten

proposal of 1949, which would have included both a plain prohibition of cartels and

legal and political intervention to prevent and reverse the concentration of economic

power (Quack & Djelic 2005, 259). It is interesting to note that the US occupation

authorities while strongly favourable to a prohibition of cartels similar to the one

enshrined in the US Sherman Act of 1890, were much less supportive of the second part

of the proposal and were indeed favourable to an ‘oligopolistic’ organisation of the

German economy, based on the US example (ibid). This contrasts starkly with one of

the central claims of the ordoliberal school, namely, creating an economy where

production is decentralised and takes place in relatively small units (Röpke 1950 and

1981; Rüstow 1953 and 1957). This episode illustrates a major difference between

German and US neoliberalism to which we come back in the next part: for ordoliberals,

like for classical liberals such as the Chicago economics professor Henry Simons, it was

not the state but private monopolies that were the main enemy of a free society. In order

to preserve a free society, the state had to be strong and impose a rigorous competition

policy. Indeed, establishing the competitive order necessary for a free society was the

raison d’être of the state (e.g. Rüstow 1932). Röpke, at the very beginning of the

ordoliberal school of thought, too defined the aim of ordoliberals as fighting for ‘the

idea of the state and against the lack of freedom in which private economic monopolies

– supported by government leading a shadow existence – keep the economy captive’

(Röpke 1923; quoted in Megay 1970, 425).

8

The concern for interdependencies and the sociological understanding of the economy

leads ordoliberals also to be open to more interdisciplinary approaches than economics

since the ‘marginal revolution’. Röpke explicitly argued for an anthropological-

sociological approach to markets and the economy in order to achieve a truly socially-

embedded market economy (Peck 2010, 61). The ‘interdependence’ or ‘coexistence’

idea explains why ordoliberalism seems less prone to the hubris of other neoliberals

who advocate the application of market principles to all areas of human life both in

practice (e.g., the New Public Management) and academia (e.g., Gary Becker’s

extension of neo-classical models of man to the phenomenon of marriage). Aaron

Director a founding member of the Chicago School considered ‘politics’ to be

negligible in economic analysis and Chicago neoliberals generally deny the existence of

power in market relations (cf. Van Horn 2009). Ordoliberalism seems more aware of the

limits of the market mechanisms and competition and of the legitimacy of other

ordering principles that may coexist in other areas of a society. Competition and market

forces were thus not seen as a universal, absolute principle, but as one that had to be

confined within a given economic order. According to Wilhelm Röpke, another major

figure in 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; our translation; emphasis added).

9

In academic terms, this also implies that ordoliberalism is – in this respect at least –

closer to classical economics than neo-classical ones, in its openness to

interdisiciplinarity and a willingness to understand national economic systems as a

complex whole – or a national business system – with many interdependent parts, rather

than focusing merely on questions regarding the understanding of individual behaviours

and utility calculations.4

As regards its political impact, it is frequently said that ordoliberalism has influenced

the European Economic Community (now EU), in particular in terms of its approach to

competition law. According to Nölke (2011, 14), while ‘the overall influence of German

ordoliberal scholars in other economic regulatory policies has waned since the 1960s, it

continued to have a remarkable stronghold in EU competition policy for several

decades’ (similar Willks 2009; but see also Akman and Kassim 2010). However,

internationally, ordoliberalism has increasingly been pushed into the background by the

rise of the US neoliberal doctrines and in particular the Chicago School of law and

economics. The Chicago School has not only been politically tremendously influential,

notably through the international financial institutions based in Washington D.C., but

has also acquired a status of undisputed dominance in neoliberal theory. Ptak (2009:

126) claims that even in the area of competition policy the Freiburg School has quickly

converged with US neoliberal theory. The appointment of Friedrich von Hayek in 1962

to a chair at the University of Freiburg after an eight year spell in Chicago is seen as a

symbol of this convergence (also Foucault 2004). The dominance of US neoliberalism

may hence have obliterated somewhat the differences between ordoliberalism and other

neoliberalisms. By the 1980s Thatcher’s bon mot that ‘there is no alternative’ may

hence hold some truth at least in terms of relative dominance of one stream of

neoliberalism over the others.

As contributors in Mirowski and Plehwe (2009) show, neoliberalism from its inception

has evolved as a transnational intellectual project (also Peck 2010). Different schools

4 It is interesting to note that the idea of ‘interdependence’ seems quite close to, or at least compatible

with, the idea of complementarities between the institutional spheres of a national business system, which

has recently gained prominence in the comparative analysis of capitalism in political economy (cf. Hall &

Soskice 2001).

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have hence influenced each other notably by means of exchanges through the Mont

Pèlerin Society. However, it is still important to distinguish ordoliberalism as a coherent

and distinct political philosophy and economic theory. As such, ordoliberalism may

have achieved its most distinct and complete form during the first post-war years when

its theoretical premises were fully developed and when it was at the height of its

political influence. It is this version of ordoliberalism of the 1950s, which we use as

benchmark in the next section to compare it with the US neoliberalism.

ORDOLIBERALISM VS. US NEOLIBERALISMS

From the outset, neoliberalism was an international intellectual movement that was

initiated at the Walter Lippman Colloquium in Paris in 1938, which united neoliberal

thinkers from the US, France and Germany. It was then mainly purported by the Mont

Pèlerin Society founded by Friedrich von Hayek in 1947. This led to a situation where

neoliberals of different brands communicated and exchanged ideas on a regular basis.

Contrary to a wide-spread view that ordoliberalism is a purely European school of

thought, the founding fathers of ordoliberalism were strongly influenced by US

(neo)liberals. For example, Eucken was strongly influenced by the view of classical

liberal Henry Simons, professor at Chicago, and agreed with him that monopoly in all

its forms, including large corporations, are ‘the great enemy of democracy’ (Van Horn

2009, 204, 209). Therefore drawing the distinction between ordoliberals and US

neoliberals too starkly would be erroneous in particular in the immediate post-war

years. There were clearly points of agreement. In this section we further explore the

relationship between ordoliberalism and different brands of US neoliberalism, which

have arguably become the politically most influential versions.

The differences are starkest with the most extreme form of neoliberalism, i.e.

libertarianism of the Rothbartian anarcho-capitalist vintage (Rothbart 1978). Roger

Scruton (1982) defines libertarianism broadly as a radical form of laisser-faire

liberalism. One characteristic of such schools is that in the name of individual freedom,

they ‘wage war on all institutions’, including not only the state, but even marriage and

social institutions like the family (cf. Gamble 1996, 108).

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To be sure, only extreme forms of libertarianism such as the ones advocated by

Rothbart (1978) and, to a lesser extent, Nozick (1974) would go as far as rejecting any

kind of social norms as a constraint of individual liberty. But the rejection of state-made

institutions and of the legitimacy of the state’s tax monopoly and monopoly of

legitimate violence are but the US (and Austrian) neo-liberalism’s ‘principled anti-

statism’ (Peck 2010: 54) pushed to the extreme. Indeed, it is certainly more than a

coincidence that Rothbart was once Ludwig von Mises’s PhD student at New York

University. The ‘market-first’ (Peck 2010: 65) approach of Chicago and its belief in

markets as self-healing natural orders, made neo-liberal thinkers and politicians

increasingly receptive to even the most utopian forms of anti-state libertarianism.

Rothbart’s rejection of the state’s monopoly of legitimate force for instance can be seen

at work in the privatisation of penitentiary institutions and the rise of private security

firms. To be sure, in many instances, such movements of ‘rolling back the state’ had

soon to be complemented by movements towards neo-liberal re-regulation, simply

because markets turned out not to be able to play the role they were supposed to play in

theory (Peck 2010). Yet, the fact remains that despite the neoliberals’ early agreement

that the state had to play a positive role in the economy that goes beyond the night-

watchman state of the nineteenth century, had increasingly been forgotten in the US.

Since the 1950s even mainstream Chicago School economists and lawyers have

increasingly embraced a more optimistic view of the play of markets and an increasing

suspiciousness of state intervention to correct market failures. Conversely, ordoliberals

– while broadly adopting the ‘equilibrium theory’ of neo-classic economics (Ptak 2009)

– remain much closer to the Austrian school of economics regarding its focus on the

‘rational irrationality’ of capitalism (cf. Schumpeter’s ‘creative destruction’). Indeed,

ordoliberalism acknowledges the destructive tendencies of markets and sees state action

as a necessary correction to these tendencies.

The US neoliberals’ view on the illegitimacy and damaging effect of, even the most

basic, state intervention in the economy and indeed society, is a fundamental difference

between ordoliberalism and US neoliberalism and relates to the above-mentioned belief

12

that markets are ‘natural orders’ rather than a man-made social construct. The market

and not the state is the ‘state of nature’ and state intervention is a corruption of this

natural order and a constraint on individual liberty. The implication of this is a radical

anti-government rhetoric, which is not limited to far-right libertarians, but has also

influenced the policy choices made in the US (and elsewhere) since the 1980s. A

striking example is Ronald Reagan’s one-liner: ‘Government is not the solution to our

problem; Government is the problem’. From this perspective, the effective functioning

of markets was best assured by ‘rolling back the state’ (or reducing it to a protector of

property rights)5 in order to make way for market mechanisms, theorised to be inherent

in any human society.

As mentioned above, this difference between US neoliberals and ordoliberals was not

present from the outset, but emerged increasingly since the 1950s. Since then US

neoliberalism seems to have increasingly evolved backwards into some form of ‘retro-

liberalism’, or what ordoliberals used to call ‘paleoliberalism’ of the nineteenth century

anarcho-capitalist brand (cf. Peck 2010, 17).

In the late 1940s when neoliberal thinking was boosted by the establishment at the

University of Chicago of a new research programme on Free Market Studies (FMS),

established by von Hayek and financed by the William Volker Fund (Van Horn 2009

and 2011), differences with German neoliberalism started to increase. While the

academics working on this programme (Aaron Director, Edward Levi, Milton Friedman

etc.) first defended ideas close to Simons’ more classical liberalism, during the early

1950s they started to depart from classical liberalism. In particular, the question of

monopoly power, market dominance by ever larger corporations and competition law,

led the academics of the ‘Second Chicago School’ to defend increasingly non-interven-

tionist laisser faire policies that contrasted starkly with classical liberals’ concern not

just with concentration of political-, but also economic power. The leniency with which

the Chicago School started to look on big business was the crucial difference to the

ordoliberals. While the ordoliberals attempted during the same period in Germany to

establish a competition law, which would rigorously fight economic power

5 See Cioffi 2009, 243 (‘The legal liberalism underlying the American market model relies on an

enforceable framework of legal rights and obligations that facilitate and inform market transactions.’).

13

concentration and thus support production in small and medium-sized (SME)

companies (see above), the Chicago neoliberals increasingly turned their attention away

from the concentration of economic power towards the (supposedly) increasing state

power in the US, but also abroad.

The diverging paths that the two streams of neoliberalism started to take after the

Second World War can at least partially be attributed to the differences in the historical

context. On the one hand, the role of neoliberalism in Germany was one of contributing

to a massive exercise of ‘state building’ after the fall of the Nazi dictatorship. The new

Bundesrepublik’s legitimacy – established in 1949 – was closely intertwined with the

precept of a liberal economic order to whose establishment the ordoliberals contributed

directly. In such a situation a radical anti-statism did not make any sense. The goal was,

on the contrary, to establish new state institutions, which would draw their legitimacy

on the guarantee of individual political and economic liberty (Lemke 2001; Foucault

2004).

In the US, on the other hand, the neoliberals’ main adversary became increasingly the

welfare state, which was expanding with Roosevelt’s New Deal policies. The fear of

‘collectivism’ and ‘socialism’ was further spurred by the Cold War and the international

situation where the US became the main power opposing the Soviet Union and the

diffusion of communism. It is no coincidence that the radicalisation of the Chicago

School and its increasing anti-government ideas coincided roughly with the rise of

McCarthyism (late 1940s, early 1950s) in which the suspiciousness of any form of

‘collectivism’ – including the welfare state – reached its apex. In other words, while the

task of building a strong and functioning state on the ruins of the Third Reich prevented

the German ordoliberals from adopting anti-state views, the US neoliberals were

certainly encouraged by the public debates during the 1950s to increasingly see

collectivism and the state – and not private economic power – as the main enemy of a

liberal society.

In the process, US neoliberals also came to increasingly accept ‘big business’ as a

legitimate form of economic organisation, something which classical liberals contested

14

and even neoliberals doubted as late as the 1940s. Friedman is on record as having

proposed to the FMS measures that would eliminate the separation of ownership and

control in modern corporations by transforming directors into owners. According to him

this would ‘eliminate holding companies’, it ‘would 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). Similarly, Aaron Director, in his presidential address

to the Mont Pèlerin Society in 1947 stated that

…[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).

These radical liberal anti-concentration arguments seem astounding in the light of the

approach to competition policy that the Chicago School developed starting in the 1950s.

In particular in relation with the follow-up research programme to the FMS – the

Antitrust Project – Chicago neoliberals increasingly defended the view that private

monopoly power was merely a transitory phenomenon, which will ultimately be eroded

by market forces. By considering that in face of a monopoly competition would still

play and ultimately erode the monopoly, the Chicago school moved from a stance

opposed to the concentration of economic power to a hands-off, laisser faire approach

towards markets characterised by an unswerving belief in the self-healing powers of

markets. In other words, the Chicago School started to embrace during the 1950s a ‘the-

market-can-do-no-wrong’ ideology based on the neo-classical belief that markets tend

towards competition not monopoly if left to their own device. In some sense, the maxim

‘in dubio pro libertate’ has increasingly been confused with the maxim ‘in dubio pro

foro’, implying that the market per se – not the competition it creates if functioning –

constitutes the ordering principle, which maximises individual liberty. Monopolies, it

was held, could resist the competitive forces of markets only where governments openly

supported them (Friedman 1951: 17).

15

All three main proponents of the Chicago programme published articles during the

1950s with diametrically opposed views on the danger of economic power

concentrations and monopolies from their views expressed during the 1940s (Director

1951; Friedman 1951; Director & Levi 1956). This radical departure from classical

liberalism is considered as the birth hour of the US neoliberalism and constitutes a

crucial break with the German ordoliberalism (cf. Van Horn 2009: 216ff). It was at that

historical juncture that US neoliberals – paralleling the evolution of US public discourse

that reached its apogee in McCarthyism – started to see the government as the problem,

not the solution allowing the maintenance of a competitive market economy.

This volte face regarding the role of the state also implies a reversal of liberal positions

vis-à-vis de concentration of economic power. ‘Big business’ is not just accepted as

inevitability in a modern economy, something that thinkers of the left such as Galbraith

(1967) and German communists (cf. the idea of STAMOKAP, or state monopoly

capitalism) but also rather right-leaning intellectuals have observed for a long time

(Schumpeter 2003[1943]). Large companies have come to be seen as the basis for

economic efficiency (economies of scales) and US economic power abroad

(international competition in increasingly liberalised markets). This would ultimately

contribute to the vulnerability of the US variety of liberalism. Indeed, the leniency with

which concentration of economic power in the financial industry was accepted

constitutes arguably one of the major causes of the Global Financial Crisis of 2008-11

in that it allowed banks to grow ‘too big to fail’ (see also Siems and Schnyder 2011).

Without overstressing the influence that such academic debates had on concrete

policies, it is no small irony of history that the robustly anti-concentration draft proposal

for the first German Antitrust Law (the Josten proposal of 1949, which was strongly

influenced by Böhm’s view; see above), was watered down during the 1950s not just

because of business opposition, but also because of the US occupation authorities

preference for an oligopolistic market structure. This preference was apparently also

related to a concern of creating strong capitalist companies in an era of communist

threat to the capitalist economic world order (Quack and Djelic 2005, 259). This may

not directly have been a consequence of the new developments in Chicago, but it is

16

striking to see that in 1956 – a year before the German competition law was finally

adopted – Director and Levi had published a book summarising the Chicago School’s

new doctrine on antitrust, which advocated the use of a ‘rule of reason’ by judges (as

opposed to applying automatically fixed rules) to monopoly situations and stating that

industries dominated by just three or four companies could no longer be considered as

necessarily being a case of excessive concentration (Director and Levi 1956: 287).

Indeed, oligopolistic industries were now considered to be a characteristic of a new era

of capitalism and splitting up oligopolies would mean punishing companies for the

successful and efficient pursuit of economies of scale (cf. Van Horn 2009: 224). In other

words, monopolies were no longer considered as being necessarily the result of abusive

and coercive exclusionary practices, but could result from successful internal growth

strategies aimed at increasing efficiency (ibid, 1956: 290). Given that monopoly power

did not stem from exclusionary practices and was not enhanced by such practices, they

were hence not to be considered as illegal per se.

To sum up, most contemporary schools of neoliberalism go back to the effort of the

interwar period to revive liberal theory in order to ‘save’ the crisis ridden capitalist

market economies from socialism and collectivism. At the outset, they shared common

goals and many common precepts. To be sure, many commentators, notably on

ordoliberalism, may underestimate the communalities and overdraw the differences

between different schools (e.g. Foucault 2004). Ptak (2009, 99) states that

‘ordoliberalism is substantially less different from other streams of neoliberal thought

than many have thought’.6 However, there are clear indications that different streams of

neoliberalism have indeed specific features and the meetings of the Mont Pèlerin

Society – the ‘peak organisation of world neoliberalism’ of sorts – were often

characterised by very strong conflicts and heated debates, notably over the role of the

state (Peck 2010). It is telling that it never managed to formulate a ‘manifesto’ defining

what neoliberalism is and what role the state should play, despite attempts to do so

during the first meeting in 1947 (Peck 2010; Plehwe 2009). The minimal common

6 See also Lai 2011, 7 (‘Friedman won his Nobel Prize in the age of nuclear deterrence not because of his

libertarian pro-market views, but because his policy proposal for tight control of money supply in an era

of double-digit inflation. It is said that Friedman’s policy perspective is similar to ‘ordoliberalism’

developed by the German economists Eucken and other’).

17

denominator which the Mont Pèlerin Society did manage to define was a six-point

document formulated in terms of areas of need for further research (Plehwe 2009).

Tensions continued to a stage where Hunold, a Swiss businessman and ordoliberal, and

Röpke finally left the society in the early 1960s over a dispute with von Hayek.

Therefore, while ordoliberalism certainly cannot be understood as a theory completely

independent and distinct from other neoliberalisms, it still seems sufficiently different

from other streams to create considerable space for debate and diversity. It goes beyond

the scope of this chapter to show how these differences mattered in terms of their

impact on concrete policies. Yet, the struggle over the first German competition law

after World War II, shows that such seemingly academic debates, may very well have

had considerable influence on economic outcomes (Quack and Djelic 2005).

The next section explores the modernity within ordoliberal theory by pointing out

similarities that it held with newer institutional approaches in economics.

ORDOLIBERALISM AND INSTITUTIONAL APPROACHES TO

ECONOMICS

Ptak (2009: 126) sees ordoliberalism as an ‘embryonic neo-institutionalist doctrine

avant la letter’. Indeed, it seems to have some affinities with the recent resurgent

‘institutional approaches’ to economics, which tend to come back to a more socially

grounded understanding of economics than the narrow, non-sociological form

economics has increasingly taken since the ‘marginalist revolution’. The ideas of Walter

Eucken and colleagues are also sometimes referred to as ‘German Institutional

Economics’ (Richter 1999) or the ‘Freiburg School of Law and Economics’ (Vanberg

1998). Such terminology is not surprising, given that ordoliberalism is interested in the

relationship between state law and markets, addressing both the constitutive principles

of the market economy and regulatory principles that make it function smoothly (see

Aßländer 2011, 43-4). It is therefore worth exploring how ordoliberalism is related to

other institutional approaches to economics.

18

Even classical economics did not ignore the role of institutions. Yet, it was usually

taken for granted that institutions are available to guarantee the enforcement of contracts

(Kirstein 2006). More specifically, David Hume can be regarded as a predecessor of

both institutional economics and ordoliberalism. Hume highlighted the general role of a

supportive government in order ‘to promote the conventions of justice and virtue, and

embed them in institutions’ (Dow 2009). In particular, Hume suggested that the

economic constitution of the state should be based on principles of private property,

freedom of contract and personal liability, similar to ordoliberalism (Richter 2011).

A more direct predecessor of ordoliberalism can be seen in the old institutional

economics of the early 20th century, the most prominent proponents being Thorstein

Veblen, John R. Commons and Wesley Mitchell. Of course, the views of old

institutionalism were not homogenous, and Veblen’s critical attitude towards capitalism

was not shared by ordoliberals such as Eucken and Böhm.7 Still, at a general level,

institutional economics and ordoliberalism share the endeavour to understand

institutions more precisely, in particular in the way they interact and influence human

behaviour. Vatiero (2010, 691) also identifies similarities in their approach to

competition policy:

Many connections between OI [Old Institutional economics] and OL [Ordo

Liberalism] can be stated. Both of them had been dominant paradigms, and above

all they share the common idea that a legal system does not lead necessarily to a

restriction of ‘human interaction’ as in Douglass North’s definition of institutions.

The law could liberate individuals’ opportunities and activities and extend

freedoms. In particular, the institutionalist Robert Lee Hale advocated ‘freedom

through law’, which is also the title of his most important book. Similarly, OL

relies on (competition) law being seen as a liberation rather than a constraint.8

7 It is also worth noting that in the book on economic policy by Eucken (1990) which can be seen as the

clearest description of ordoliberal views, there are no references to any proponents of the (old)

institutional economics. 8

Note also the similarity of the OI and OL conception of institutions with recent developments in

institutional theory in political science and political economy, which argues – contrary to North – that

institutions are not just constraints, but can also be resources for actors (Jackson 2010).

19

Interestingly, Vatiero contrasts this similarity with a different view of New Institutional

Economics, referring to North (1990). Though New Institutional Economics too is a

conglomerate of different approaches, some more historical some more conceptual, in

general, it is more neo-classical than the old institutional economics and ordoliberalism

in embracing the use of mathematical and econometric methods (see Kirchgässner

2009).

However, frequently, the literature also highlights similarities between ordoliberalism

and the New Institutional Economics. According to Cesaratto and Stirati (2011, 18)

both subscribe to the idea that, while ‘the market economy is the best instrument to

achieve social welfare’, there remains to be ‘the role of the state in establishing and

protecting pro-market institutions’. Kuhner (2006) observes that due to these

commonalities ordoliberalism attracts growing attention in the English-speaking world.

More specifically, Richter (2011) discusses similarities between ordoliberalism and

Williamson’s transaction cost economics: though Walter Eucken and others did not

explicitly use the term of transaction costs, their ‘ideal typical description and ordering

of institutional frameworks by way of ‘isolating abstraction’’ (ibid, 1), is seen as akin to

Williamson’s approach (for the latter see e.g. Williamson 1985).

In the last few decades, a number of additional theories, schools and concepts have been

developed which are related to ideas of both institutional economics and ordoliberalism.

Explicit parallels have been drawn between ordoliberalism and Buchanan’s

Constitutional Economics, both being interested in the foundations needed for a

functioning market economy (Richter 1999).

The concept of Regulatory Capitalism has been linked to New Institutional Economics

(Levi-Faur, 2005, 17). It argues that it is mistaken to regard the current economy as

being purely ‘neoliberal’ but rather that ‘(t)he corporatisation of the world is (…) a

product of regulation and the key driver of regulatory growth, indeed of state growth

more generally’ (Braithwaite 2005). Thus, it can also be said that it shares with

ordoliberalism an interest in the regulatory framework underpinning national and global

economies. An alternative interpretation is offered by Peck (2010): he interprets the rise

20

of ‘the regulatory state’ and the re-regulation of policy areas from which the state had

previously retreated, as reaction to the failure of anti-state liberalism not as a logical

complement to it. Re-regulation is seen as a pragmatic – and theoretically

fundamentally inconsistent – reaction to the failure of the laisser faire system put in

place following neoliberal precepts.

Finally, it is worth noting the interdisciplinary scope of ordoliberalism, integrating law

and economics, in order ‘to give the economic process the desired legal form’ (Meijer

2007, 183). Thus, ordoliberalism is linked to contemporary law and economics, as there

is an overlap between the New Institutional Economics and law and economics (Posner

1993). Of course, there are differences as well: at its core, ordoliberalism is an approach

to political economy, while it also has wider ramifications which bring it close to a

‘political philosophy’, a social theory or even a Weltanschauung. NIE on the other hand

is more narrowly an economic theory, and law and economics the application of

economic methods to law. There are also aspects of law and economics, in particular its

empirical extension to law and finance (see Siems and Deakin 2010), which are more

market libertarian than ordoliberal thinking.

CONCLUSION

This chapter has shown that ordoliberal concepts are not isolated phenomena but that

they are related to institutional economic ideas under different names. Such ‘ordo-

institutional’ perspectives have gained in appeal in the context of the current financial

crisis, because they seem to attenuate extreme views of market libertarianism, while still

accommodating broadly neo-liberal, anti-Keynesian and anti-socialist ideas. We have

also explained that there have always been different liberal theories not all of which

support the simplistic ‘government is the problem’ idea (cf. Plehwe 2009). Indeed,

ordoliberalism constitutes such an alternative to Chicago School neoliberalism.

Ordoliberalism should not, however, be seen as a theory that will remedy all of

neoliberalism’s weaknesses since both share some basic assumptions. A look at the

history of this school of thought shows that ordoliberalism has coevolved with other

neoliberalisms in a consciously coordinated process of academic exchange in which von

Hayek played an important role (see Gamble 1996; Kolev 2010). Yet, there are also

21

fundamental points on which ordoliberalism is distinct from US neoliberalism, and has

increasingly grown distinct during the early post war decades.

Ordoliberalism may hold some lessons for present-time policy makers in order to

prevent the possibility of a recurrence of a financial and economic disaster like the one

the world witnessed since 2008. The weakness of the left in most industrial countries

and the framing of the crisis as a result of state- and not of market failure seem to

indicate that the post-crisis economics will not be a simple return to Keynesianism, but

will continue to largely rely on neoliberal policies. In such a context, ordoliberalism

may be an important source to inform policy makers in order to at least avoid the

libertarian excesses of previous decades (for details see Siems and Schnyder 2011).

It is an interesting thought experiment to speculate about what a neoliberal economic

system would have looked like that took its inspiration from ordoliberalism rather than

from the anti-state neoliberal ideologies that were declared during the 1980s to be the

only way out of the crisis of Fordism. Ordoliberal theory reminds us, for instance, that

any economic order has necessarily to be embedded in a sound society where a certain

living standard and security is guaranteed for all members of society. Ordoliberals never

aimed to install a generous, universal welfare state or pursue egalitarian goals but still

put the individual’s emotional, economic and cultural wellbeing at the centre of a

functioning market economy. This neo-Kantian concern for ‘human dignity’ seems

worthwhile considering when devising strategies out of the current crisis since ‘broken

societies’ are not a fertile ground for economic activity, entrepreneurship and growth.

Ordoliberalism also shows that in a functioning democracy, classical liberal aversion

towards the state may seem absurd given that the fundamental idea is one of a

government by the people for the people. US neoliberals, in their decades-long struggle

against socialism and soviet communism, have come to equate the democratic state with

the authoritarian regimes against which the classical liberals developed their theories.

This leaves modern societies with a lack of means to govern and restrain ever more

global and powerful economic interests (see Soros 2008). The more optimistic view of

22

the role of the state in ordoliberalism opens up new ways of thinking about how the

state might contribute to the development of a sustainable economic order.

In this context, the most important lesson that this theory may have for policy makers

after the Global Financial Crisis of 2008-11 is to remind us that the concentration of

economic power in private hands and the emergence of dominant corporations was once

considered by liberals of all brands as a major threat to any economic order and

democratic society. This knowledge has been lost in the post-war decades among

adherents to the Chicago School who embraced a rather blue-eyed believe in the self-

correcting forces of markets. This historical shift away from a traditional suspicion of

large organisations may have contributed to the emergence of an unsustainable banking

system with many financial institutions growing too big to fail. Ordoliberalism also

points out that such economic power is not just an economic, but also a political

problem, thus breaking with another tenet of the Chicago School, which argues that

‘politics’ and ‘power’ do not matter (cf. Director 1951). Thus, the ordoliberal openness

to a multifaceted understanding of economic phenomena and multidisciplinary analysis

may provide us with intellectual tools to work towards a sounder basis for financial and

economic regulation.

23

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