Thursday, February 16, 2012

Germany and Ordoliberalism

Germany has by far the healthiest economy in Europe. It has been claimed that Germany could have chosen to avoid the current economic crisis in the Eurozone by simply buying up the outstanding Greek debt. It chose to not do that. Since that time the euro-countries have been careening from one crisis stage to another. Is this a sign of collective inadequacy? Or is it a stubbornly orchestrated plan by Germany to force other countries to play by its rules or suffer the consequences?

Jan-Werner Müller has attempted to explain Germany’s intentions in an article in the London Review of Books: What Do Germans Think About When They Think of Europe? He provides this summary of Germany’s perspective:

"There is a new German ambivalence about Europe, but that’s because, after paying dearly for unification and suffering a decade of wage restraint and benefit cuts, the last thing Germans want is a ‘transfer union’ in which they have to finance a load of supposedly lazy southerners. The Germans also worry about inflation: selective memory no doubt, but not completely irrational."

There is not much new to be learned from that statement, but Müller then adds:

"Germany differs from the other member states of the EU in the particular economic ideology that holds sway there, and is supported by the country’s elites – not just those on the right. Ordoliberalism isn’t exactly the same as Anglo-American neoliberalism – it sees more of a role for the state. Many Germans believe it was responsible for the economic miracle of the 1950s (as well as the mini-miracle of the last two years). Ordoliberalism is what Angela Merkel wants for the Eurozone as a whole: rigid rules and legal frameworks beyond the reach of democratic decision-making."

There is this comment on the differences between ordoliberalism and neoliberalism:

"The German establishment – not just on the right – has long subscribed to the theory of ordoliberalism, which was first elaborated in the 1930s and 1940s and underpinned Germany’s ‘social market economy’ in the 1950s. Ordoliberals thought of themselves as the true neoliberals: they alone had learned from the failures of laissez-faire in the 1920s; they alone had formulated a new vision of liberalism in which a strong state provided the framework for economic competition (and price stability), as well as a social safety net (to prevent socialism). In their eyes, other so-called neoliberals, from the Austrian School or the Chicago School, were really ‘paleoliberals’ stuck in 19th-century orthodoxies about self-correcting markets."

Paleoliberals! One should save that term to have it available the next time one gets into an argument about economics. But what exactly is ordoliberalism?

Lawrence H. White has provided The Postwar German "Wonder Economy" and Ordoliberalism. This is a chapter from a book: The Clash of Economic Ideas. White provides historical background and insight into the philosophy behind ordoliberalism.

This economic philosophy developed in Germany in the 1930s as an attempt to derive a free market concept that could compete with Hitler’s National Socialism. One of the students of this evolving philosophy was Ludwig Erhard. It was Erhard who was in a position to implement free market ideas under the allied occupation after the war. Against all advice, he removed price controls, allocation decrees, rationing directives, and wage controls. The result was an economy that bloomed and grew faster than any other in Europe, thus the term "wonder economy." It is not surprising that Erhard’s concepts acquired a considerable amount of credibility within the German community.

The term "ordoliberalism" become popular with the founding in 1948 of a journal of economics named Ordo.

Ordoliberals fashioned their beliefs in observing the collapse of the Weimar Republic in 1933. They blamed the collapse on the hyperinflation that occurred, and on the "prevalence of industrial cartels, legally sanctioned confederations among major firms that quashed competition." This explains why Germany has been rather obsessive on the subject of inflation over the years. But more importantly, they learned the lesson, first hand, that a perfectly free market will eventually cause economic disaster unless it is controlled.

White quotes one of the economists of the period:

"[Our program] consists of measures and institutions which impart to competition the framework, rules, and machinery of impartial supervision which a competitive system needs as much as any game or match if it is not to degenerate into a vulgar brawl. A genuine, equitable, and smoothly functioning competitive system can not in fact survive without a judicious moral and legal framework and without regular supervision of the conditions under which competition can take place pursuant to real efficiency principles. This presupposes mature economic discernment on the part of all responsible bodies and individuals and a strong impartial state."

Imagine, an economic philosophy that demands a "judicious moral....framework." This is rather interesting.

The ordoliberals favored a strong central bank to deal with monetary matters, and sought an aggressive antitrust policy. The critical theme of their agenda was the need for government to play the role of the referee in the economic scrum, and the considerate parent for society as a whole.

"Like earlier classical liberals, they supported free trade as a means to promote competition. But in monetary and antitrust policy they assigned a larger economic roll to the government than laissez-faire classical liberals did. They also supported a more extensive government safety net (state pensions, unemployment insurance, and other transfer payments). Erhard campaigned for the entire bundle of policies under the label of the ‘Social Market Economy" and the slogan ‘Prosperity for All’."

Ordoliberals also feared the corruption of the government by what we would refer to as lobbyists for special interests. They emphasized the need for the constraints to be exercised on the free market economy to be canonized as a part of the constitution so that they could not be subverted by easily-influenced legislators. This explains Müller’s comment:

"Ordoliberalism is what Angela Merkel wants for the Eurozone as a whole: rigid rules and legal frameworks beyond the reach of democratic decision-making."

So if the Germans sometimes appear a little self-righteous and arrogant, it is because they believe they have demonstrated that they occupy the moral high ground. And they may be right. History would seem to justify their approach. It is hard to argue with success.


Lets Talk Books And Politics - Blogged