An Ordoliberalism Primer on Project Syndicate

On Project Syndicate, Lars Feld, Peter Jungen, and Ludger Schuknecht have a long article on Ordoliberalism and its enduring influence. The article is important, not least because two of the authors, Feld and Schuknecht, had important responsibilities in the recent past: Schuknecht was chief economist of the German Ministry of Finance, Feld was until the end of February chairman of the German Council of Economic Experts. I am not sure that either of them actually had much responsibility in shaping public policies, but their appointments certainly signaled, if not a real commitment, at least a degree of respect for the Ordoliberal tradition by Mrs Merkel’s Christian Democratic Party.

The article is rich in information and gives, for once, a sensible definition of what the label “social market economy” stands for:

The “social” element of the social market economy, then, is not about state ownership or state direction, as under socialism. Instead, it refers to a rules-based economy in which social interests are properly accounted for.

The authors argue that though Ordoliberalism originated in specific circumstances and the German “social market economy” was built “under unique conditions – namely, out of the ruins of the most devastating and destructive period in human history- “it is well suited for any country that is committed to pursuing patient, secure economic development.” To provide readers with a glimpse of the kind of choices that were made after WWII, the authors use an anecdote that Larry White also quotes in his The Clash of Economic Ideas:

The postwar German Wirtschaftswunder (economic miracle) was born. By unleashing the market to revitalize a moribund economy, German policymakers pursued a course that may seem obvious today but certainly didn’t at the time.
Ironically, those who were most skeptical of the ordoliberal reforms included representatives of the US, the world’s leading market economy. Though what is apocryphal and real are now impossible to reconstruct, there is an anecdote that General Lucius D. Clay, the military governor of the US-controlled zone, summoned Erhard and told him that he must not alter the rules of price administration:
“Mr. General, I have not altered the rules, I have lifted them,” Erhard replied.
“Professor Erhard, all my advisers tell me that a market economy in Germany will never work.”
“Don’t worry,” Erhard assured him, “all my advisers are telling me the same.”

The article ends with some examples of the lasting influence exerted by Ordoliberalism over public policy:

Ordoliberal thinking has also strongly influenced what one might call Europe’s “financial constitution.” It was the German Bundesbank that provided the model for the European Central Bank and other independent central banks across the Union. Likewise, the Maastricht deficit and debt rules that laid the foundation for the euro were a clear reflection of ordoliberal thinking. And the same can be said of the German deficit rule – the “debt brake” that allowed Germany to reduce its public debt after the global financial crisis and thus be well prepared to handle the fiscal challenges of the pandemic.
Ordoliberalism’s central tenets also underpin the European Stability Mechanism – which adheres to the IMF’s principle of conditional financial support to ensure solidarity within the EU – and the EU Treaty’s requirement of “subsidiarity,” or decentralized decision-making.

(…) policymaking in Germany is not a perfect incarnation of ordoliberalism. Political compromises have had to be made in the face of diverging interests. The state’s continued ownership stake in Volkswagen and a few other companies comes to mind. But these examples are exceptions to an otherwise private-sector-driven growth and innovation model.
Germany thus stands in stark contrast to countries that have engaged in “industrial policy,” aiming to identify the most promising industries to promote. This reflects the conviction that successful innovation policy does not pretend to know what the future will bring. Instead, it maintains institutional openness to ideas that no one today could even imagine. Indeed, no government could have foreseen that mRNA technology developed by a German startup (BioNTech) to fight cancer would be used to create a vaccine against the coronavirus in record-breaking time.
Finally, in fostering more green innovation, Europe has deployed rules- and market-based emissions trading schemes as the foundation of its decarbonization strategy. This, too, represents another win for ordoliberal thinking. It shows that the social market economy remains the framework for tackling our most pressing challenges today.
The social market economy model endures because it supports consumer interests before those of producers, just as it positions citizens, rather than the state, as the true sovereigns. At its heart is a commitment to constitutional and system-level thinking, not piecemeal, discretionary policymaking.

I wonder how much of this is holding in the Covid19 world. I suspect that Feld, Jungen and Schuknecht would agree that monetary policy in the Eurozone is no longer sticking with a “monetary constitution”-like approach. It seems to me that fostering green innovation requires precisely some kind of “industrial policy”, wherever it is happening, with some pretty strong convictions about what successful innovation policy should hold in store. The “debt brake” in Germany is gone because of the pandemic: will it ever be back?

Feld, Jungen, and Schuknecht’s piece is a good antidote against the prevailing rhetoric. We certainly need a better, more widespread understanding of the success of Ordoliberalism. But we also need some ideas to go back to rules, after all the discretionary measures taken because of the pandemic.


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It’s Not Just Christmas Today, but EVERYDAY!

Christmas is not only a time for rejoicing and celebration, but also a time of gratitude for what we have. In times such as these, in which all of us have been affected by the circumstances related to COVID-19, this is all the more important. It’s for this reason I would like to point out that it’s not only Christmas today, but every day. What do I mean by this? To answer this question, I’ll provide a lesson from my mother.

My mother was born in a town called Carini, in the Province of Palermo, Sicily. She was born and grew up in a home with no car, no television, and no air conditioning. After she migrated to the United States in 1971, see never thought of returning to her hometown, and always reminded us how wonderful life in America is.

It was 30 years today that she imparted on me a lesson, one that I will never forget and that I only fully appreciate now. It was an important lesson of economic development and the blessings of a free society that she taught me, even though my mom never made it to high school. She would reflect on her own childhood, telling us that the smell of oranges would remind her of Christmas.

What’s baffling about this story is that, even before my mom was born and to the present day, Sicily remains the largest producer of oranges in Italy, and a major producer of oranges and other citrus fruits worldwide. You’d think, in spite of the poverty within which she was raised, she would enjoy oranges on a more regular basis. Yet, today, most us enjoy (or can enjoy at little cost) and take for granted what had been a luxury that was consumed during Christmas, even amongst those residing in a part of the world where they were grown in relative abundance.

My intention here is neither to secularize nor undermine how special and joyous the Christmas season is. Rather, it is to express gratitude and place in perspective what the beneficial consequences of economic development are, and not to take for granted how new in the history of humankind our way of life is, even during times as hard as this. The point here is that one of the fruits of economic development, and the institutional preconditions that facilitate it, namely private property and freedom of contract under the rule of law, not only provide the framework to practice religious freedom, but also allows the masses of the population to get just not a smell, but a taste of Christmas every day.


Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University






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