The Strength of Ordoliberalism (2)

Ordoliberalism was a German development in the interwar period as a means of dealing with the results of hyperinflation in the Weimar Republic  during the early years of the 1920s, followed by the 1929 Wall Street Crash. The Crash and especially the rise of fascism and Nazism in Europe and most especially in Germany, was problematic (to say the least) and accompanied the unregulated market. Many of the ordoliberals fled to Switzerland after Hitler came to power. Most Swiss cantons were German-speaking and this made it easier for Ordoliberals to obtain chairs in such cantons. I have discussed all  this in earlier posts, especially in the 22 July 2013 post, the 2 July 2013 post, and in Back to the wild falls of laissez-faire.

So what are the similarities and differences between ordoliberalism and the work of Karl Polanyi? Both Ordoliberals and Polanyi worked in the interwar period, both understood the importance of the rise of fascism and Nazism not just in Germany but in Italy (Mussolini), Spain (Franco) and Portugal (Salazar). The rise of fascism in Europe was widespread. Britain had its Blackshirts under Oswald Mosley, Hungary, Sweden, Austria. Most, if not all, countries were affected.

Beyond this, the comparison begins to be unbalanced and differences emerge. The ordoliberals were several while Polanyi was one author who researched his topic thoroughly. Polanyi never returned to his homeland, while Ordoliberals returned to Germany after the war and were active in advising Ludwig Erhard and his ministers, so played a key role in the Wirtschaftswunder.

The ordoliberals were very practically minded. Their solutions were directed to facilitating deep-seated changes that minimised the concentration and centralisation of market power to produce conglomerate companies that threatened to become too big to fail. This applies especially to banks in the neoliberal economies of the world:

“Bank size, complexity, and interconnectedness with other banks may inhibit the ability of the government to resolve (wind-down) the bank without significant disruption to the financial system or economy, as occurred with the Lehman Brothers bankruptcy in September 2008. This risk of “too big to fail” entities increases the likelihood of a government bailout using taxpayer dollars.” http://en.wikipedia.org/wiki/Too_big_to_fail

The concentration in the economy continues after the bailouts. The text above continues:

“This concentration continued despite the subprime mortgage crisis and its aftermath. During March 2008, JP Morgan Chase acquired investment bank Bear-Stearns. Bank of America acquired investment bank Merrill Lynch in September 2008. Wells Fargo acquired Wachovia in January 2009. Investment banks Goldman-Sachs and Morgan-Stanley obtained depository bank holding company charters, which gave them access to additional Federal Reserve credit lines.”

This is called an implicit guarantee subsidy, in effect encouraging the growth of “too big to fail” by reducing the fear of bankruptcy. See also The Shadow Banking System:

“The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. Former Federal Reserve Chair Ben Bernanke provided a definition in April 2012: “Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions–but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies.” Shadow banking has grown in importance to rival traditional depository banking and was a primary factor in the subprime mortgage crisis of 2007-2008 and global recession that followed.” 

The point here is that in a market based on laissez-faire as neoliberalism is, there will always be ways of circumventing government intent. This is why the Swiss, German and Austrian system of cantonal or länder banks is so successful. And no doubt the ordoliberals who lived and worked in Switzerland during the period of Hitler’s dominance (1933-45) learned about this during their exile.

Applying the principle to all businesses by keeping them small and numerous becomes impossible in a global neoliberal market. Once the process of big companies buying up small businesses and cartel-building is allowed to continue without restraint this leads to the end of the ordoliberal concept of marktkonform (market-conforming). This can take place quickly as we can see in the case of banking. For my discussion of this see From Public Housing to the Social Market (Routledge, 1995, Part II Case Studies).

My argument then was that Sweden needs to return to ordoliberalism and not to slide more and more into neoliberalism. Twenty years later this has not happened and with Sweden’s banking sector made up of just a handful of dominant banks too big to fail, government intervention has taken the form of subsidising banks directly or indirectly by subsidising house prices via subsidies just as happens in Britain and the USA. See the Swedish bank crises of 1992 and 2008+.

The next housing bubble will end in the same way next time round, whenever that happens. Sweden is better placed than most, because of its ordoliberal inheritance, which even as it shrinks and becomes less potent is still, many decades later, providing a shield against neoliberal storms. A small country like Sweden with a heavy dependence on exports needs it.