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Re-visiting the Ordoliberal Case

for Economic Regulation

or …?

Mathias Siems (Durham) & Gerhard

Schnyder (KCL)

Mathias M. Siems

What do they have in common?

Mathias M. Siems 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”

Sahra Wagenknecht

(…) ordoliberalism for reconciling market economy with public interest, in particular for limiting the power of big corporations.

Basis for “innovative socialism”.

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Overview of paper

• Brief explanation of ordoliberalism and related concepts (Chicago school, institutional economics etc) – more details in accompanying paper, at http://ssrn.com/abstract=2142529

• Relevance of ordoliberalism in practice until financial crisis of 2008 (e.g., in the EEC/EC/EU)

• Ordoliberalism in the context of the financial crisis: e.g., more influence over markets and would have had a firmer stance towards large financial institutions

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Core features of ordoliberalism

• Developed in 1930-60s, mainly, but not only at University of Freiburg, Germany (see also next slide)

• Positive role of the state: “ordo”, ie not only (!) invisible hand of the market; but against ad-hoc interventionism; focus on rules

• Market economy embedded in society: “interdependence of orders” (Eucken 1932); role of social policy

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• 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)

Impact on competition law in Germany and Europe post WWII

• Interdependencies call for interdisciplinary approaches to economic research (ie economics, politics, law, sociology etc.).

Core features of ordoliberalism

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Related approaches

• Chicago-neoliberalism: common origins with ordoliberalism (e.g., MPS 1947), but former more optimistic view of market forces; shift in anti-trust policy: “big business” can be basis for economic efficiency

• Ordoliberalism also called “German Institutional Economics” (or the “Freiburg School of Law and Economics”)

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Ordoliberalism and related approaches

• (Old) institutional economics: more critical towards capitalism but both “freedom through law” (Hale); plurality of methods.

• New Institutional Economics: both emphasise “role of the state in establishing and protecting pro-market institutions”

• Further parallels with Constitutional Economics, Regulatory Capitalism, Law & Economics, Law & Finance?

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Ordoliberalism and the financial crisis

Not a new topics for ordoliberalism: back-ground: Great Crash of 1929

Aim of this part to show how ordoliberalism can be applied to matters raised by the 2008-11 financial crisis

Quiz: how radical is ordoliberalism?

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Ordoliberalism and crisis

(1) Structured products and other “risky instru-ments” 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

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Ordoliberalism and crisis

“(…) banks, hedge funds, special purpose vehicles, investment funds and real-estate

financers were allowed to conduct their business with only tiny amounts of equity capital. Without equity, there is no liability, and without liability, people gamble. They hunt for risks wherever

they can find them because they can privatise profits and socialise the losses. Now the jungle is

burning, and no one knows how to put out the fire. (…) Only strict regulations can create the

confidence in the markets that capitalism needs to continue to increase the prosperity of the masses. America needs Walter Eucken, the

father of ordoliberalism.” (Sinn 2009)

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Ordoliberalism and crisis

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Ordoliberalism and crisis

(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?)

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Ordoliberalism and crisis

(3) Bail-outs of “too big too fail” banks; seen as necessary to prevent wider financial collapse

• Would ordoliberals be self-righteous since they would not allow dominant players? but not certain whether “too big too fail” always leads to market power

• Ordoliberalism against ad-hoc interventionism; problem of moral hazard (see also next slide) intervention violates principle of liability

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Ordoliberalism and crisis

• 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)?

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Ordoliberalism and crisis

(4) Global dimension of crisis due to inter-connectedness and regulatory arbitrage

• Ordoliberals would not restrict free movement of capital, but: “global rules for global mar-kets”, i.e. international economic constitution

• Today: G20 summits, FSB, Basel III etc. but feasibility not entirely clear

• Eurozone crisis: but here too against ad-hoc interventionism (details in paper) – though not every “German” action being ordoliberal

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Ordoliberalism and crisis

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Conclusion

• Relevance and topicality of ordoliberalism -though often rhetorical use (Ferguson and Wagenknecht & in Eurozone crisis)

• Attractiveness of ordoliberal ideas today due to dangers of large scale capitalism and limitations of market

• Also: ordoliberalism already embraced more sociological understanding of the economy; need for heterodoxy in economic research

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MAINSTREAM