handelsblatt explains Ordoliberalism and the alleged aberration of German economics

German economics is often said to have decoupled from the mainstream in other Western countries. The prime suspect is an intellectual tradition called Ordoliberalism. A primer.

The German economics mainstream is “self-satisfied with its situation and living in its own intellectual universe.” This is how Paul Krugman, America’s best-known living economist, put it in 2016. Others, especially English speakers and southern Europeans, agree. Mario Draghi, the Italian president of the European Central Bank (ECB), has called German economics “a branch of moral philosophy”. Christopher Smart, an American who worked in the Obama administration, recalls being puzzled by German officials assuming “that debts and imbalances are prima facie evidence of political virtue and vice”.

These impressions rhyme with a stereotype: that Germans resemble dour schoolmasters, obsessed with rules and given to lecturing. In this caricature, Germans are forever insisting that debt is bad and saving is good, a prescription known as “austerity”. But among economists, critics blame more than just culture. They believe instead that German economics has diverged from the Western mainstream, and that this aberration emerged out of an intellectual tradition called Ordoliberalism.

Ordoliberalism developed in the 1930s and had its heyday in the 1950s during Germany’s postwar “economic miracle”. Centered on a group of economists around Walter Eucken at the University of Freiburg in southwestern Germany, it is also called the Freiburg School. Obscure outside of Germany, it has left a lasting mark on German thought. On Walter Eucken’s 125th birthday in 2016, Chancellor Angela Merkel in an address at the Walter Eucken Institute, averred that “the Ordoliberal principles of the Freiburg School have lost nothing in currency and importance.”

And yet, Germany’s leading economists are increasingly wary of their reputation. They are a cosmopolitan bunch, fluent in English and completely plugged into international conference circuits and research pipelines. So they bristle at perceptions abroad, such as Mr. Krugman’s, that German economics is weird. They are annoyed when foreigners blame Ordoliberalism for Germany’s trade surplus (the world’s largest), its hawkish stance in the Euro crisis or other controversies. Their frustration has even inspired a new e-book -- “Ordoliberalism: A German Oddity?” -- in which economists go to the mat.

The Ordoliberals themselves initially called themselves “Neoliberals”. Gathering during the 1930s, they had two failures in mind: first, that of the Weimar Republic and its cartel-dominated economy; and second, that of 19th-century laissez-faire economics with its brutal booms and busts. Hence their aspiration to provide a new-and-improved liberalism as an alternative to the Nazi and Socialist ideologies that surrounded them.

The goal of the Ordoliberals was to create a constitutional order (ordo, in Latin) that would guarantee economic freedom (hence “liberal”). This led Eucken and his group to several axioms. Prices had to be free (not obvious, in an era of price controls). Contracts had to be freely entered into and then observed (hardly controversial today). Cartels had to be busted ruthlessly. The value of money had to be kept stable.

The Ordoliberals also made much of a German concept called Haftung, which can mean both liability in the legal sense and accountability in the wider economic context. The idea is that liability and control must always be aligned: if you might profit from a transaction you should also bear the risk of losing. “Any measure limiting accountability or responsibility and promising some sort of contingent rescue would create destructive incentives producing [...] unfulfillable expectations on behalf of the economic actors, and unfulfillable liabilities on the part of the government as the ultimate insurer,” according to Harold James, an expert on German economics at Princeton University. Ordoliberals even frowned on limited-liability companies; they deemed un-limited liability the proper way to hold managers accountable.

Intellectually and personally, the Germans of the Freiburg School were close to the “Austrian School”. Better known in the US, this tradition sprang from the Austrian-American economist Ludwig von Mises and his student Friedrich Hayek. Hayek also spent time in Freiburg but is associated more with the University of Chicago, where he helped spawn several generations of arch-conservative economists (called the “Chicago School” or “freshwater economics”).

From the Austrian School to German Ordoliberals, Keynesians and Merkel
Walter Eucken - Founder of the Freiburg School
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Walter Eucken was a German economist and anti-Nazi who spent much of his career at the University of Freiburg. He is considered the partriarch of the tradition called "Ordoliberalism". He emphasized stable money, tough antitrust policies, and above all the alignment at all times of control and liability.

(Source: picture alliance)
Alexander Rüstow - The Sociologist
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Alexander Rüstow was not only an economist but also a sociologist, and always thought about the social aspect of Ordoliberalism. He was also the one who, at a colloquium of intellectuals in Paris in 1938, coined the original term of the movement: "Neoliberalism". He wanted to distinguish the new ideas from classical liberalism, or laissez-faire.

(Source: picture alliance)
Wilhelm Röpke - The refugee
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Wilhelm Röpke was also in the group of original Ordoliberals. Horrified by the Nazis, he emigrated to Turkey in 1933, and later to Switzerland. But his ideas became influential in the postwar policy of West Germany.

(Source: dpa - picture alliance)
Ludwig von Mises - The Austrian
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The largely southern-German Ordoliberals were very close, intellectually and personally, to the so-called Austrian School of liberalism. Its founder was Ludwig von Mises, who also fled the Nazis, first from Austria to Switzerland and in 1940 to the US. Von Mises would later inspire generations of libertarians and economic conservatives.

(Source: picture alliance)
Friedrich von Hayek - Evangelist of freedom
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Another Viennese-born emigre was Friedrich von Hayek, a student of Ludwig von Mises'. He would be associated with the University of Freiburg (like the Ordoliberals), as well as the London School of Economics and the University of Chicago. There he spawned the Chicago School, which later produced many "freshwater economists": thinkers at universities around the Great Lakes who were anti-Keynesian and believed that rational people made efficient markets.

(Source: picture alliance)
Alfred Müller-Armack - Coining the "Social Market Economy"
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Unlike most of the other Ordoliberals, who were anti-Nazi, Alfred Müller-Armack in 1933 wrote a book in praise of the Nazis. But he later came around to Ordoliberalism and coined the term "social market economy". As an adviser to West Germany's postwar economics minister, Ludwig Erhard, he helped make the social market economy the reigning economic model of Germany to this day.

(Source: dpa - picture alliance)
Ludwig Erhard - Daddy of the "economic miracle"
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Influenced by the Ordoliberals, Ludwig Erhard was West Germany's first economics minister. Against initial Allied opposition, he freed prices and busted cartels. As the postwar economy boomed during the 1950s, many West Germans gave him credit for this "economic miracle". But when Erhard succeeded Konrad Adenauer as chancellor in 1963, he lost the support of his party and was out by 1966.

(Source: picture alliance / dpa / dpa)

The main difference between the German Ordoliberals and the “Austrians” was their view of the state. The Austrians saw government as the greatest potential threat to freedom, and therefore wanted to keep it out of the economy. Power formations in the private sector, such as cartels, would eventually break down “spontaneously”, they thought. In that sense, they have been called “market fundamentalists”. The Germans, by contrast, wanted a “strong” state (though not a large one) that would step in as referee and break up cartels.

But beyond these disagreements, the two strands of thought had much more in common. Above all, they both favored clear and strict rules over policy discretion. Keynesianism, by contrast, implies a discretionary macroeconomic policy (in the form of fiscal “pump-priming”, for example). This is one reason why the “Austrians” and “freshwater” schools opposed it. Eucken, who died in 1950, never explicitly discussed Keynes, but is also considered anti-Keynesian.

The influence of Ordoliberalism on actual German policy was greatest in the 1950s under economics minister Ludwig Erhard and his adviser, Alfred Müller-Armack, an Ordoliberal. (Disclosure: Erhard was my great-uncle.) It was then that postwar Germany adopted its notoriously tough antitrust policies. Ordoliberalism then waned in the 1960s and 70s with the rise of Keynesianism. And yet an Ordoliberal flame always remained lit inside the Bundesbank, Germany’s central bank, which became famous for its hawkish monetary policy. Jens Weidmann, the current president of the Bundesbank, habitually quotes Eucken in his speeches even today.

Germany has also bequeathed some of its Ordoliberal tradition to EU institutions. It shows up in the design of the ECB, not coincidentally located in Frankfurt, with its single focus on price stability (defined as inflation below two percent), to the exclusion of employment. It also shapes EU competition policy, which is tougher than America’s. It has also seeped into European treaties such as the Stability and Growth Pact, which limits the budget deficits and debts that member states can run up (and thus constrains their fiscal “discretion” with “rules”).

Ordoliberalism also provided intellectual firepower during the euro crisis to those Germans who rejected “southern” demands for “solidarity” in the form of debt mutualization. The idea behind such “euro bonds” was that Germany and other countries would guarantee the debts of Greece. This structure would clash with the “no-bailout” rule in the European treaties, many Germans pointed out. It would also have severed the link between control and liability that Eucken considered so important. (Greeks would have retained fiscal control, but Germans would have shared liability.)

Invoking the same principle of Haftung, Germans also oppose ideas about a common European deposit insurance for banks. It could mean that Germans pay for a failed bank in Italy, rather as Texans in theory might have to vouch for Californian depositors.

But there are also many examples of German policy straying from the Ordoliberal tradition. Germany is happy to break rules when convenient. It did so in 2003, when Germany ran a budget deficit larger than the European limit. During the Great Recession of 2008-09, Germany bailed out its banks (violating the Haftung principle) and spent money in a big fiscal stimulus package (a case of Keynesian discretion).

In the euro crisis, despite its rejection of euro bonds, Germany did participate in three consecutive bailouts of Greece. “It is neither true that ‘ordoliberal’ thought prevails in German macroeconomic policy today nor that it is responsible for Germany’s policy stance during the crisis in the euro zone,” according to Lars Feld, one of Germany’s leading economists and the director of the Walter Eucken Institute.

There might indeed be a simpler explanation for actual Germany policy. Instead of following “some obscure economic religion or sect,” argues Michael Burda, an American economics professor who has spent decades in Germany, “German economics is nothing more than a reflection of German national interests, for better or worse.” Thus Germans who have probably never even heard of Walter Eucken nonetheless worry about bailing out southern countries. They do so because, within Germany, rich Bavarians are already fed up with bailing out indebted Berliners, and Germans don’t want to replicate this “transfer union” in the EU.

Mr. Burda concludes that “there is nothing special about German economics.” From a pragmatic Anglo-American point of view, that would be reassuring. After all, what’s more universal than making policy for your own interests?

Andreas Kluth is Editor-in-Chief of Handelsblatt Global. To contact the author: [email protected]