Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 22 January 2014

Ordoliberalism, Neoliberalism and Economics

Everyone has heard of neoliberalism, but not many outside Germany have heard of Ordoliberalism. I’m hardly an expert on either, and in particular I know very little about the particular thinkers involved and the many varieties of each concept. However as an economist it seems to me that ordoliberalism is much closer to economics than neoliberalism.

The clear difference between the two ideologies involves the role of the state. Neoliberalism wants to minimise the role of government, and in particular is naturally against all forms of state interference in markets. Its attitude to markets is essentially laissez-faire: leave market participants alone. In contrast Ordoliberalism sees a vital role for the state, in ensuring that markets stay close to some notion of an ideal market. In particular, ordoliberals believe that without a strong government powerful private interests would undermine competition. This view is often credited with inspiring strong competition laws in Germany, and perhaps also in the European Union (see this paper by Gerhard Schnyder and Mathias Siems). In this respect, Ed Miliband’s proposals for UK banking discussed by Chris Dillow are rather ordoliberal.

Ordoliberalism therefore seems much closer to the attitude an economist would naturally take. There is a clear sense in which perfect competition is an ideal in certain situations, but no clear reason why this ideal should obtain naturally. There are plenty of reasons why imperfect competition may persist, and only a few may be the consequence of government ‘interference’. There is therefore an obvious role for government to counteract anti-competitive behaviour by ‘big business’.

From this economics perspective (with apologies to John Kay), there is no reason to limit the role of the state to preventing anti-competitive behaviour. There are many other market imperfections that can be eliminated or reduced through government action. For example externalities can be tackled using particular types of taxation. The very use of the term ‘market imperfection’ seems to match the ordoliberal perspective. Whether this broader view of market failure and a role for state intervention is taken on board in ordoliberal thought is less clear. This is rather important for reasons that I’ll come to.

Once you see the state as necessary to achieve a market ideal, you need to worry about how you get the right sort of state. Ordoliberal thought sees the same danger of vested interests subverting the ‘proper’ functioning of the state just as they see in big business subverting perfect competition. There seems to be limited faith in democracy ensuring this does not happen (perhaps for obvious historical reasons), and instead a focus on rules and independent institutions. This would include, for example, an independent central bank: again there are parallels with current economic ideas. You can perhaps also see this focus on rules in the Eurozone’s fiscal compact.

There are of course many respects in which ordoliberal and neoliberal views are similar. One is an antagonism to Keynesian ideas, as I have noted before. Yet even here I think there is a potential difference. The neoliberal rejection of Keynesian demand management, even at the zero lower bound (or within a monetary union), is straightforward - it is a form of government intervention in the market. However it is less clear whether the rather limited Keynesian policies advocated by New Keynesians have to be incompatible with basic ordoliberal ideology. If you see the friction generated by sticky prices as something that generates externalities, then you can see a role for the state in limiting the impact of these externalities. Most of the time (or at the level of the monetary union), this intervention could be handled by monetary policy, but at the zero lower bound or within a monetary union countercyclical fiscal policy could play a role. In other words, while it is clear to me why a neoliberal would be anti-Keynesian, it is not so clear why an Ordoliberal has to be.

So to summarise, I think any economist - if they are open minded - can see the problems with neoliberalism. You might say that neoliberalism borrows from economics only in the sense that astrology borrows from astronomy. Ordoliberalism, because it admits the possibility of market imperfections and a role for the state in correcting them, seems - to adapt a phrase from Margaret Thatcher - more like an ideology that economists can do business with.


  1. Which neoliberalism, though? Philip Mirowski (in 'Never let a serious crisis go to waste') argues that the neolibs centred around the Mont Pelerin society (Hayek et al.) very deliberately produced public and private presentations. Publicly they'd damn and blast the state to hell. Privately they'd seek to take control of it. Laissez faire for everyone else, ruthless central planning for themselves.

    In Mirowski's telling ordoliberalism is the German wing of the general neoliberal family. It certainly has some differences but it's part of the same general movement (indeed the national variants were connected through various societies and think-tank type things in the early to mid 20th century). The ordoliberals maybe just lacked the duplicity of their US-based equivalents.

  2. The focus on rules that characterizes Ordoliberalism is at odds with economics. Indeed, one of the main objectives of economists is to imagine, based on theory, evidence and intuition, the best monetary and budgetary reactions to particular situations (liquidity traps, supply shocks...). An economist is a bit like a doctor in this sense. And I guess that an Ordoliberal doctor (always sticking to the same remedies for any situation) would kill many patients with his orthodox prescriptions.

  3. Agree with Philip, a very useful account of the emergence of different strands in neoliberal thought, including ordoliberalism, to be found in Mirowski & Plewhe 'The Road from Mont Pelerin'

  4. Ordoliberalism sounds a lot like classical economics to me. It was rejected by the US after 1945 for good reasons - the gold standard and its orthodox rules was seen as connected to the problems of the interwar period that led up to 1939. Independent central banking is really for those who do not trust democracy. Neo-liberalism is a division of Idealism (as opposed to realism/neo realism and Marxism). It is connected to the Truman Project of the immediate post WWII period. It connects (contentiously) individual rights with free markets and democracy. This was done in the context of the Cold War. An odd thing that has happened in the economics of today is that it has many realist micro foundations (ie unlimited wants, limited resources, people basically acting out of self-interest and greed) yet macro POLICY has gone for large scale government intervention to counter deflation and forcing the central bank to allow it.

  5. The newly unified Germany's economic problem up to WW1 was finance-capitalism, in which bankers sat on industrial boards and thereby made cartels.

    The Austrian economics of Schumpeter and Hayek and Menger and so on ended up being a way of using the marginal revolution to attack German statism, which also had ratcheted up the protectionism first suggested by List in 1841.

    You can see the interplay between French 18th laissez-faire thinking and German Kulturnation resistance to it, with a point of political stress on the bigger and smaller Germany and the Austro-Hungarian empire.

    I still see today's Germans obsessed with the idea that the hyperinflation in 1923 created the Nazi regime, because it allows them to ignore WW1.

    I expect this may be a theme we return to this year.

  6. “You might say that neoliberalism borrows from economics only in the sense that astrology borrows from astronomy. Ordoliberalism, because it admits the possibility of market imperfections and a role for the state in correcting them, seems - to adapt a phrase from Margaret Thatcher - more like an ideology that economists can do business with.”

    That'd be like astronomers saying that although Hellenic astrology is pseudoscientific nonsense they can probably do business with Ptolemaic or Hindu astrology. Other scientists would laugh and call astronomy the dismal physics. Isn't it about time economists like yourself just told the knuckle dragging ideologues - of whatever colour and salinity - to fuck off?

    1. Who is an economist who is not an ideologue?

  7. Who are these self identifying neoliberals?

    I think there is another more obvious reason for your not being an 'expert' on their work, other than being a shirker.

    Either a bogey or a straw man. Take your pick.

    1. Well the Economist is pretty damn neoliberal, Janan Ganesh, Alan Greenspan, possibly Greg Mankiw. There are also a good few strands of neoliberal thought in what Sir Nicolas Macpherson says here..

    2. And how many of these self identify as neoliberal?


      It is just a 6th former's label for people you don't like.

      Laissez-faire meant something. Neo-liberal doesn't mean anything accept abuse.

    3. Hugo, do you have any other goal in posting here beyond trolling this comment thread? Because you really are adding little to the actual discussion.

      In bringing up the definition you are asking a pointless question as the label is used by it's critics so very self identifiers are few and far between. If I was to break down the term into less offensive more specific policy ideas then I'd put forward low inflation, low taxes, limited government, free trade, free movement of capital and labour and low levels of regulation

      I think we kind a good number of politicians, political parties and quite a few economists who support a number of those policy ideas.

    4. Andreas Paterson,

      "If I was to break down the term into less offensive more specific policy ideas then I'd put forward low inflation, low taxes, limited government, free trade, free movement of capital and labour and low levels of regulation"

      - which is different from-

      "Neoliberalism wants to minimise the role of government, and in particular is naturally against all forms of state interference in markets. Its attitude to markets is essentially laissez-faire: leave market participants alone."

      People on the right sometimes describe any view to the left of them as 'socialist', so that one sometimes hears very stupid sentences like "Hayek/Friedman/Mises was a socialist". Though this practice is obviously detrimental to clear thinking, it is not as detrimental as using a term that barely anyone uses without a negative emotional connotation. At least SOME people are proud socialists, after all.

      Note that the ideas you mention aren't at all in conflict with ordoliberalism, though at least they would secur Greg Mankiw as a neoliberal. On Wren-Lewis's conception, Mankiw plainly is not a neoliberal, since you can't read through Mankiw's "Principles of Economics" without reading about market imperfections. In fact, the flaws of the market as so important to Mankiw that he puts them in his "Seven Principles of Economics"...

  8. Classical English Political Economy was also one that believed in the efficiency of markets, but also, somewhat paradoxically, believed in rules. Hence its advocacy of the gold standard and independent ,rule based, central banking.

  9. "Ordoliberalism, because it admits the possibility of market imperfections and a role for the state in correcting them, seems - to adapt a phrase from Margaret Thatcher - more like an ideology that economists can do business with."

    Given the the fact that the source of aggregate demand deficiency in the advanced world today can be traced primarily to Frankfurt, this stikes me as extraordinary wishful thinking.

    Ordoliberalism was developed as a reaction to the consequences of unregulated markets in the early twentieth century and subsequent Nazi fiscal and monetary interventionism. A central tenet of Ordoliberalism is that governments should regulate markets in such a way that market outcomes approximate the theoretical outcome in perfectly competitive markets. In particular, according to Ordoliberalism inflation distorts valuable price signals which leads to high economic costs.

    So yes, Ordoliberalism differs from Neoliberalism in that it places a greater emphasis on state intervention in order to approximate the theoretical perfectly competitive ideal. But in its fierce committment to price stability it maintains a near pathological opposition to what it perceives as "activist" monetary and fiscal policies.

    In particular, the followers of Ordoliberalism believe that the Great Depression was caused not by a deficiency of aggregate demand, but by activist policies that led to a breakdown of market order. While Keynes was deeply concerned by the inability of the private economy to attain a desirable macroequilibrium, Ordoliberals came to believe that it was important for coordination to be secured from within the private sector itself, through the activities of powerful industry and employer associations and large commercial banks.

    In short, while Neoliberalism is open to the need for state intervention to maintain aggregate demand, at least through the application of monetary policy, Ordoliberalism does not even admit of the possibility of a deficiency in aggregate demand, and instead postulates the source of such problems lies precisely in excessive government interventionism.

    1. I think a key question here is whether ideologies can adapt. As my post says, ordoliberalism is anti-Keynesian, but does it need to be, and does it make sense to be? I would regard 'demand denial' as anti-scientific, so an ideology that has that belief will either change or wither away. My argument is that because it focuses on an ideal market rather than any market, it has the capacity to change and acknowledge other market imperfections besides monopoly.

    2. There is an additional problem: Much of Ordoliberalism seems quite able to convince itself that Keynesianism is something it can do business with, but at the cost of turning this "Keynesianism" into something completely unrecognisable.

      There is one country in Europe that is pretty much Ordoliberal through and through, and was Ordoliberal throughout the post-war golden age of Keynesianism, even more so than Germany. This is my own country – Finland.

      Because of its association with social democracy in social policy, Finland often seems to be viewed in the English-speaking world as a model Keynesian country in economic policy. But it has never been Keynesian in the least, and in the main stream of policymaking, Keynesianism has always been rejected in quite shrill and emotive terms for basically Ordoliberal reasons. Even before Finland's membership in the EU and the euro, Finland's central bank had been perhaps the most independent in the world. Even if Finnish politicians had gone to their own state-owned central bank to request money for Keynesian purposes, the bank would have turned them down.

      (Even the depression and banking crisis of the early 1990s, which caused far more damage in Finland than in neighbouring Sweden, due to Finland's rejection of Sweden's Keynesianism, did not change anything in this respect.)

      Now the problem is that when it comes to the pinch, Ordoliberalism is quite ready to pay lip service to Keynesianism, because it so to say sets the pain threshold for classifying policy as "activist" so absurdly low. In its purist aversion to "activist" policies, it has painted itself into such a tiny corner that almost any departure from this purist ideal is viewed as "Keynesian" and "activist".

      Thus, it is for instance common to claim in public debate that Finland too is Keynesian and that criticisms of its hostility to Keynesianism are unfair – because Finland has currently ceased to pay off its national debt for the time being. That in itself is already such a huge "concession to Keynesianism" from a hysterically debt- and inflation-averse nation that it makes Finland largely Keynesian.

      But there is an even more extreme version of this, which comes to the surface occasionally. According to this, the mere fact that Finland has any national debt at all is already such a magnanimous concession to "Keynesian stimulus spending" that is should shut up all those insatiable Keynesians who mean by "stimulus" something like public works, helicopter money, or indeed anything countercyclical at all. I'm not even an economist, but when I have written newspaper columns vaguely defending a more or less Keynesian outlook, some of the feedback from readers has taken this view in complete and utter seriousness.

      Olli Rehn is perhaps the paradigmatic contemporary Finnish Ordoliberal. (The bizarre elements of his views are largely explained by the cultural background of Finnish Ordoliberalism, which is just totally unknown overseas.) But even Rehn continues to view himself as a Keynesian, and proudly identifies himself as one. In local public debate in Finland, Rehn has repeatedly criticised local neoliberals as a self-styled Keynesian, not as a self-styled Ordoliberal. (The term "Ordoliberalism" is never used in Finland, because there is no need for any separate name for what is viewed as mere common sense.)

      So, my experience on the basis of Finland is that if a Keynesian goes to an Ordoliberal offering to do business together, he's likely to rebound from the bizarre self-image of the Ordoliberal. The latter views himself as already Keynesian inasmuch as he is forced to depart at all from his purist Ordoliberal ideal, and expects gratitude from fellow Keynesians for his "Keynesianism".

    3. "Even the depression and banking crisis of the early 1990s, which caused far more damage in Finland than in neighbouring Sweden, due to Finland's rejection of Sweden's Keynesianism, did not change anything in this respect."

      This isn't quite true, Finland chose to stimulate the economy with additional spending at the beginning of this current crisis, and it's arguable this choice was directly informed by the chain of events in the 1990s. To me it was an agreeable surprise considering that Keynesian fiscal policies are otherwise marked by their conspicuous absence in Finnish economic history.

      Speaking of Bank of Finland, it's certainly one of the more conservative institutions in Finland. You can see it in their constant exhortation to balance the budget and engage in structural reforms. Just the other day they painted a terrible scenario for 2030, resorting to peddling myths like Finland's population being the fastest-aging in Europe (it's as if Eastern and Central Europe didn't exist on their maps, nor Italy, nor Germany... etc etc). Torture the statistics enough and you can "prove" anything.

    4. Yes, I did give a partly misleading picture in this one respect. The present crisis has indeed seen the first conscious stimulus spending in Finnish history.

      But it is worth noting how it has been done largely on the sly, due to the strength and depth of the stimulus-adverse tradition in Finnish political culture. Leading politicians of the government parties, including Prime Minister Katainen, have continued to claim to disown the whole idea of stimulus.

  10. I appreciate the explication of this term "ordoliberalism." I really do - it could be very useful.

    On the other hand, I fear the train may have left the station on the word "neoliberalism." The term is very often used in the way Simon Wren-Lewis uses it in the post, so no criticism there. But as another commenter asked "which neoliberalism, though?"

    There's a very common usage, for example, applied to people like Matthew Yglesias and Dylan Matthews by those to their left in the left-liberal blogosphere debates over the last few years. Even international trade being conducted in the context of unequal safety standards is often referred to as a characteristic of a neoliberal era. The thing is, tragedies like the one last year in Bangladesh would happen even with more tolerance for Industrial Policy and Capital Controls, and less for IMF imposed austerity, which are all defining characteristics of one common usage of "neoliberalism." So what counts as neoliberal sometimes gets fuzzy.

    The specific rap on Yglesias and Matthews pretty much boils down to the importance of attitude towards organized labor. Yglesias, for example, is not known for having any beef with the things Wren-Lewis suggests are desirable in ordoliberalism. He's a Keynesian, isn't for "Washington Consensus" IMF policy, is against austerity, etc. The argument between Yglesias and those to his left usually works its way around to either or both sides using Denmark as an example in their favor. And Denmark has been described as introducing "neoliberal" labor market reforms more than a few times. The left side in the left-liberal debates asserts that the way agreement was reached in Denmark was through heavy unionization rates. That, along with high levels of social spending, created the conditions for the policies Yglesias and Matthews find salutary, says the left. So the fact that "left-neoliberals" neglect the potent ability of unions to mobilize in ways that end up enacting progressive reform, and because left-neoliberals are generally more likely to see back end redistribution as being interchangeable with front end intervention, they're deemed insufficiently leftist.

    So, one can be committed to all the things Simon Wren-Lewis cited as examples of ordoliberalism, as still be labeled a neoliberal. My comment could be nitpicky if these are just different uses of words in different contexts, but my suspicion is that the uses overlap significantly, and that the word neoliberal is so rhetorically potent people can't resist using it in the ways I sketched above.

    Still, count me in for ordoliberalism!

  11. Keynes' mistake, in the eyes of ordoliberals was that he said that policy responses depend on the circumstances. Discretionary spending... monetary policy... those are all actions suspect to ordoliberals and their ideal of order. Yes, ordoliberals are not anti-government per se, but they also try to reduce the role of government to a minimum. Bascially, the government should work to make itself redundant - which isn't necessarily bad, but then Europe is currently experiencing the downside of this ideology. Trying to force ordoliberal policies onto Keynesian/Neoclassical economies will lead to disaster. Germany has the automatic stabilizers (and the mentality and political culture) to endure an economic crisis, but Spain and other countries do not.

  12. Perhaps tangential to your post, but desperately important - ordoliberalism is an set of theories for a "Small Open Economy" - the theories clearly break down when that condition changes. However, the Germans don't want to face up to that - and are enabled because the structure of the Eurozone allows them to the push the costs of breakdown onto other nations.

  13. You're confusing strong competition laws with actual competition. To suggest that markets in EU or Germany are more competitive than in the US is just too funny.

  14. The notion that imperfect competition, externalities and asymmetric information constitute market failures is inherently modern. The ordoliberal thinkers which influenced post-WW2 Germany only focused on competition and in the meantime Keynesian thinking à la Samuelson did not focus upon the actual market failures that lead to underemployment equilibrium but only dealt with how to alleviate the results.

    So your hope that you can convince ordoliberals that recessions are severe market failures is in vain. Furthermore based on my experiences in my home country contemporary ordoliberals cannot be compared to the historical ordoliberals from the Freiburg school, they are basically neoliberals or even worse Austrian/libertarian folks (there was one ordoliberal professor on my university and he advocated "currency competition", i.e. that the currency issues by the state should not be legal tender anymore and also advocated to abolish "one man one vote" in favour of "more wealth/income, more votes" which is obviously totally undemocratic). If you take a guy like former Bundesbank president Axel Weber it becomes clear that behind an ordoliberal mask there is the usual neoliberal face.

  15. ordoliberalism is about prevention. If you prevent the shocks caused by neoliberalism, you also don't need the shock therapy of fiscal and unconventional monetary policy.

  16. Dear Prof. Wren-Lewis,
    here's an article, in German, unfortunately, describing how German Finance Minister Schaeuble prefers to employ jurists over economists in his department:
    Now, people with a legal education probably prefer rule-based policies which means that the power of Keynesian economics, with its discretionary measures, is very much diminished now. The piece goes on to explain that Mr. Schaeuble dislikes how economists frequently can't make up their minds about possible policy effects. I guess it's because there are internal conflicts between Keynesians, Ordoliberals and Neo-classicals. Also, the standing of economics has sunk in the wake of the Financial Crisis, so Mr. Schaeuble has come to disregard their opinions.
    If I had to guess I'd say that the professionally educated economists there are Keynesians or Neo-Classicals, while the jurists represent Ordoliberalism. The current policy preferences of a balanced budget, extremely low inflation, and a fixed debt/GDP ratio are very much rule-based policies that completely rule out discretionary measures in the times when they're needed the most.

  17. Werent Keynes' proposals at Bretton Woods essentially Ordoliberal?

    Keynes didn't get his way at Bretton Woods. Instead the USA got its wish list and we all know what eventually happened.

    What Keynes wanted was a system that promoted growth (unlike the economic straitjacket of the Gold Standard) but which also punished consistent surplus runners as well as deficit runners. A system of rules and institutions were to be introduced to promote growth but also to rule out the likelihood of wild fluctuations in exchange rates and capital flows etc. Keynes recognised that the market would not achieve efficient outcomes so prescribed rules and institutions (not direct intervention) to achieve better outcomes.

    Rules and institutions = Ordoliberalism, no? Or at the very least it is an example of where Keynes and Ordoliberalism are very compatible. I suppose Ordoliberalism might oppose any move to discourage consistent surplus generation, but surely any sensible analysis of the credit crisis and eurozone crisis would concede that excessive surpluses necessitated the financing of others' deficits?

    Also, given the Ordoliberal opposition to monopolies and cartels, is there not some kind of contradiction in the German attitude to the eurozone crisis - in the sense that Germany essentially monopolised trade surpluses in the eurozone. Ordoliberalism can't say some market dominance is good when every other market dominance is bad, or can it?

    Thoughts appreciated.

  18. Hi,

    If anyone is interested, there's an excellent book which offers an overview on the rhetorical strategies German economists and German jurists used to pitch the idea of a post-WWII Social Market Economy based on ordoliberalism.

    The book is by Christian L. Glossner, and the title is The Making of the German Post-War Economy: Political Communication And Public Reception of The Social Market Economy After World War Two.


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