Is Ordoliberalism cyclical?

The taking over of what was originally an ordoliberal meeting place –  the Mont Pelerin Society – by laissez-faire proponents (such as Friedman and Hayek) was an immediate post-war reaction to ordoliberalism. Ordoliberalism was worked out in detail during the 1920s and 1930s, designed as a way to avoid the extremes of laissez-faire, Nazism and state socialism. The Mont Pelerin Society also has its own website and is today even more actively free-market in the wake of the rise of the Soviet Union after the collapse of Big Three Unity at the Yalta Conference of 1945.

The picture of Churchill, Roosevelt and Stalin is very revealing, showing Churchill and Roosevelt seemingly in a good-humoured exchange while Stalin looks the other way, glowering. This neatly iconises the end of the wartime alliance, replaced by the postwar Cold War, the era in which the European Union was conceived. Neoliberalism was re-born under President Reagan and Reaganomics and Thatcherism in the early 1980s and since the collapse of the USSR in 1990 the marketisation process has intensified with the Treaty of Lisbon.

That the EU should be constituted as a political and military complement to NATO keeps the EU tied to US apron strings in which the proposed free trade area between both the US and EU is a standard gesture of solidarity.

Here I want to examine the relationship between ordoliberalism and neoliberalism in the light of the work of Karl Polanyi, understanding the return of the laissez-faire ideology since the 1930s. See also The Karl Polanyi Institute of Political Economy.

The problem is that it is neoliberals who live in cloud cuckoo land, not ordoliberals. Laissez-faire is fine in theory but unworkable in practice. Free competition leads to the emergence of oligopoly, which leads to the state using tax receipts to bail out banks and other risk capital ventures. This public fix only increases the dependency on tax subsidies and if anything makes banks and risk capital investors more not less likely to risk public taxes that are so readily available to support the risk-taking. There is more about this on a very good web page from New Zealand which summarises an article on Karl Polanyi on the Utopia of the “Self-Regulating Market”. This is a quote from that website, the first three paragraphs of the piece by Keith Rankin (14 October 1998):

“In the later years of World War 2, a number of important works on social philosophy were published. A number of them might broadly be classed as “anti-socialist” – eg Hayek’s Road to Serfdom, Popper’s Open Society and its Enemies, Schumpeter’s Capitalism, Socialism and Democracy. Others were clearly social democratic, such as Full Employment in a Free Society: a Report, by William H. Beveridge (the Beveridge Report) which was a blueprint for the modern British welfare state), and John Maynard Keynes’ proposals submitted to the 1944 economic conference at Bretton Woods.

Possibly the most significant of these works today is that by the social anthropologist and economic historian, Karl Polanyi: The Great Transformation. Polanyi’s writing is attracting more attention in the 1990s than in earlier decades. Not easy to categorise, his best known work is both conservative and socialist in outlook. It is about the dichotomy of modern industrial capitalism: the clash between the politically imposed machinery of “the self-regulating market economy” and the spontaneous forces of “national and social protection”. Polanyi’s central insight is that governments have been pro-active in both initiating and seeking to perpetuate the pure market system.

For Polanyi, economic liberals (ie neoliberals in today’s terminology), by definition, worship at the altar of the pure market economy. Economic liberals are not simply pro-market. They have a simple utopian vision that has no place for any organising principle other than competitive markets. Market society is the outcome of an economic machine that they liken to clockwork.”

The whole process is like a see-saw that works something like this:

The dream of the self-regulating market and the withdrawal of state “interference” in the market results in policies that try to allow the market to function independently.

When it does not work, disillusion spreads through its supporters.

Some try to argue for more state involvement as a solution. The compromise leads to increasing public bureaucracy as ways of stimulating the market.

When this fails, and when more and more neoliberal ideas are discredited the interest in the free market declines and eventually fizzles out. At the same time there is a growing realisation that the free market cannot operate without a modicum of laws, order and regulation.

In the current European crisis we see how time and again the countries with even just minimal residues of ordoliberal policies –  Germany, Switzerland, Austria, Denmark, Sweden, Finland, The Netherlands – do better than laissez-faire countries like Britain and the USA. Ex-Warsaw Pact countries are even more exposed to the temptation to use bank credit to consume, consume, consume. The next big crash is already being predicted. We have been in what Wilhelm Röpke once termed the wild falls of laissez-faire almost continuously since the end of the Second World War with, if anything, more crises at shorter intervals and of deepening intensity, the further along we go. We have the tiger by the tail and can’t let go, at least until this wave of neoliberalism ends.

Is ordoliberalism cyclical? If as Karl Polanyi argues, the turn to laissez-faire is cyclical with periods in which politics turns to the (so-called) free market, then ordoliberalism can also be subjected to such turns. The generation of German researchers who developed it is no longer alive, but its legacy lives on. The works of Wilhelm Röpke can be downloaded from the Wikipedia page for this, the most prolific ordoliberal. See the earlier post on this. There are nine book-length studies each in pdf form that can be downloaded from the above webpage under On-line Works and reading and analysing his work must be a major task in the renaissance of ordoliberalism. I have done a first read of all of them and there is much to digest.

Most of the ordoliberals fled Germany once Hitler came to power and quite a high proportion obtained chairs at Swiss Universities. Many moved back to Germany after the war to contribute to policy under the first Chancellor of West Germany, Konrad Adenauer, and his Finance Minister Ludwig Erhard, who proved useful to Adenauer in the early years when Ordoliberalism was building up its practical reputation and when Germany needed reconstruction, but an espousal of ordoliberalism  which Adenauer did not support, and increasingly opposed. Adenauer tried to stop Erhard from becoming his successor but failed. Switzerland was, in a sense the obvious haven from Hitler for ordoliberals to choose. Switzerland has Cantonal Banks equivalents of German länder banks. Philippe Thalmann was the best ordoliberal in the group of researchers I brought together. He may know the answer to this and many other issues.

A word of warning here. There is a Konrad Adenauer Foundation which is a CDU-sponsored Trust and that  talks about the social market. But there is nothing in its material that focuses on ordoliberalism! Rather, it is deeply involved in sponsoring the EU as a superstate:

“Similar to other German political foundations, the Konrad Adenauer Foundation is largely financed by federal and land government funds.”

There are numerous websites around the world which are about what is called Ordoliberalism, in different language, all from the same CDU Foundation. I first came across one in Rumania: This sub-page is about Barosso talking about “Our Europe”. There are numerous offices – in Europe and worldwide.

It would appear that certain limited aspects of ordoliberalism are being focused on as part of a German attempt to create a United States of Europe under German hegemony. I personally do not believe that this strategy can work. The cultural differences are too great, especially in Club Med. See this post by John Ward:

The idea of a bail-in, instead of a bail-out, is one that shifts the burden of propping up banks from the bank’s shareholders to the bank’s customers!

It’s as Bo Bengtsson and other political scientists have said, including Fritz Scharpf. They have used different concepts and theories but the conclusions are essentially the same. Concepts like path dependencyjoint decision trap and non-decision-making leave the way open for wild market speculation that ultimately the tax-payer has to subsidise. The proponents of neoliberalism have nothing to say about this: a disgraceful silence reigns, as if not to notice is to wish it away.

Modern Ordoliberalism: There are already signs of an ordoliberal revival. Here I want to look briefly at two of these, both in English and both in the form of pdf files that can be downloaded.

One is an article by Victor J. Vanberg, dated April 2011 “The Freiburg School: Walter Eucken and Ordoliberalism” (A Freiburg Discussion Paper on Constitutional Economics).

“The phrase Constitutional Economics is important in this context. For ordoliberals have always argued that economics must be understood within its specific political framework, and that political frameworks vary greatly, but the more extreme forms of dictatorships of both the left (Communism) and the right (Nazism) are not appropriate for the proper functioning of ordoliberal ideas. Note also the combination of ordo with liberalism.”

The other article is by Werner Bonefeld:

“Freedom, Crisis and the Strong State: On German Ordoliberalism”

Werner Bonefeld


“The ordo-liberals espousal of the free economy does not entail a weak night-watchman state. The ordo-liberals declare for the strong state. They argue that economic freedom needs to be ordered so that freedom is not misused, as prices can be fixed, markets carved up, and competitive adjustment avoided by means of protectionism and manipulation of monetary policy; and workers can strike, the masses can revolt, and a proletarianised mass society can force the state to concede welfare. Just as the Hobbesian man requires the Leviathan to sustain her fundamental sociability, full competition requires strong state authority to assure the orderly conduct of self-interested entrepreneurs. Economic freedom is not unlimited. It is based on order, and exists only by means of order, and freedom is effective only as ordered freedom. Indeed, laissez-faire is “a highly ambiguous and misleading description of the principles on which a liberal policy is based” (Hayek, 1944, p. 84).” (p. 5)

Links to other recent discussions of Ordoliberalism:

Jörgen Habermas sharp critique of Merkel in Der Spiegel

Links to Karl Polanyi:

The Karl Polanyi Institute of Political Economy has an archive of Polanyi’s papers and writings, the Karl Polanyi Archive.

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