What is global ordoliberalism? This is my brand of economic theory which applies the ideas of Germany’s Walter Eucken on the global level. I am Uwe Hermanns, an independent researcher, putting forward my point of view. Global ordoliberalism is a website reviewing what works in the field of economics. Please note: This page will be set up step by step.
Walter Eucken’s unique contribution was not only to develop a coherent framework for the economy and its interconnections, but also to include the idea of order and values into the system. It was self-evident for him that we must defend democracy and social values and he explains why markets are important in both respects. More on this see Walter Eucken.
I would like to introduce a dynamic and global variant of an ordoliberal economic theory, inspired by Walter Eucken and other authors, using a coherent set of causal factors, in order to better understand the dynamics of globalization, including free knowledge diffusion, risk and the role of the state in social-, industrial- and competition policy.
Dynamic approaches are not new and my contribution is to tie a new package up, based upon the ordoliberal tradition and relying on research about current developments.
I am especially indebted to the concept of technological capabilities introduced and empirically applied by Sanyaja Lall (I call technological capabilities adaptability) and to the early work of Ha Joon Chang ‘The Political Economy of Industrial Policy (1984), who had the idea that an economic order can reduce risk while not abolishing risks. Richard Nelson’s and Sidney G. Winter’s dynamic scenarios in their ‘Evolutionary Theory of Economic Change’ (1982) show that a number of adaptable companies may create a structure which remains stable for a certain amout of time, and an even longer amount of time, if knowledge is freely available. In developmental economics the work of Bela Balassa, Hollis B. Chenery and, of course, Dani Rodrik’s, is very relevant, while the contributions of neoclassical thinkers like Jagdish Bhagwati and Anne O. Krueger are always an inspiration. In the field of industrial economics and the theory of competition policy, I would like to specifically mention Frederic M. Scherer, Herbert Hovenkamp and Doris Hildebrand.
Most basically dynamic ordoliberal theory assumes that successful companies are adaptable. Being adaptable is a quality companies have, on the one hand, because of the current cost structures and their market- and organization related abilities, their expert employees and their monetary capital, on the other hand, being adaptable derives from the special design of the laws and regulations of the Western democracies in the last fifty years, which made it possible that more companies maintained their adaptibility, while competition prevailed, compared to a different scenario. More on this on page dynamism.
Doubtlessly, the most difficult hurdle to get ordoliberalism’s ideas across is its curious name and its, allegedly, home-grown German origin. I can’t change the name, which is well-known in Germany. What I can do, see the Walter Eucken page of this website, is to rebut the notion of the home-grown origin. In fact, ordoliberalism is very much influenced by American ideas, some of the most important stemming from directly from Franklin D. Roosevelt and his team and some do originate from the lively American discussion in those years. More on this on page Franklin D. Roosevelt.
In my view, the very open discussion in economics which recently started because of the economic crisis will continue to exist. Furthermore, to deal with the challenges of the 21 century one needs to incorporate values into economics (again). Equally important, a realistic, empirically-informed and common sense way to talk about the economy should be (again) available for everybody.
Paul A. Samuelson’s famous Economics, An Introductory Analysis, First Edition, 1948, most naturally used common sense and dynamism in his explanations. He defined the most important task of economic analysis as “aid in control and improvement” of the economy describing America’s experience of famine amidst abundance and a war which improved living standards and asked: “How can the business cycle can be diminished? How can economic progress be furthered? How can standards of living be made more equitable?” (p. 7).
Neoclassical economics does not provide for this approach. It allows for interesting discussions on high levels of abstraction and even deviations from its own basic models, but it consistently falls back into its standard microeconomic claim that only ‘free’ markets devoid of any interference from the outside are efficient. These claims are wrong in several respects. Most importantly the term efficiency does only make sense in those models. The common sense uses it differently: What we mean by it is dynamic efficiency, that is, growth over time, cost reductions by innovation and economies of scale, rising prices but also living standards. Neoclassicism calls the decision between bread and water utility maximization and it pretends to be able to give guidance to production decisions. The latter pretension led professionals who really have to decide about company strategies to create the sub-field of production economics. The former logic justifies developmental economics in a short and convincing manner.
Neoclassical economics had the important task to defend markets in the years after the Second World War. Today markets are well established and responsible critics unambiguous reject socialism. Indeed, Walter Eucken did actively fought socialism, because it will neither provide welfare nor respect values.
In 1900 world population numbers were at 1.5 billion and in 2050 there will be 9 billion people on this planet. Presently markets are spreading, everything is changing and seems to get more intense every day. Nevertheless, neoclassical policy recommendations, even for the populous countries, which need economic development to lift their people out of poverty, but which may suffer a lot from fully opening up, remain the same: Free markets, free trade, rule of law and not much government involvement.
Neoclassical economists said this in the past and seem to even know the future in advance. They are convinced that every step towards free trade will increase welfare. Surely, in the decades to come, microeconomic models, Pareto’s Edgeworth Box and the theory of comparative advantage of Ricardo, for instance, will stay and carry the same meaning. This is remarkable, and comes close to wizardry, because, if things change much, at least the common sense would expect that at least some views of economists must change, too.
Happily, we know in advance, too, that the protagonists of neoclassical economics will always argue like this. Hence we have the chance to ignore them and fully concentrate on what detailed and case study economic research has to say in terms of new data and fresh stories of economic dynamism.
- a large number of recent general equilibrium country studies show - sometimes very large – negative effects on parts of the manufacturing or the agricultural sector, while the positive effects are based on unrealistic assumptions, like completely free trade in agricultural products. Or complex future processes are taken for granted, like productivity increases, or a devaluation of the currency, to pay for more imports and which serves as an export incentive, see studies on Russia.
- in many successes stories of trade liberalization, liberalization was progressive and the country was well prepared for it, for example, by successful labor-intense sectors, high overall investment levels and the fact that some capital intense sectors were already available, in short: they possessed adaptable companies
- China is inmidst of a huge and difficult process to strengthen a certain number of their manufacturing companies to dispose of some internationally competitive companies
- certain other countries, India and Brazil, still use tariffs to protect their industries, which is partially not competitive on a global scale, which might be justifiable
- a large set of weaker countries find it difficult to create successfull companies, at least it is not enough to really boost growth, while feeling the pressure of imports
The question in dispute is to what degree free trade and other precriptions of neoclassical analysis really and truly work?
Admittedly, mankind finds ultimate aims attractive. This seems to be one reason, why it is so difficult to release oneself from the idea of ‘free’ markets and ‘free’ trade as a final aim.
However, one may ask, if there is something deeper which lies behind the idea of ‘free’ markets and ‘free’ trade? My suggestion (which provides a worthwhile and attractive ultimate aim, too) is: Competition and functioning markets.
Consider for a moment that in the history of mankind free trade might be never fully achieved. Every now and then, governments will interfere and provide some support to some companies to let the countries not completely lag behind, while even selectively raising tariffs – does this mean that economics lost its ultimate aims and orientation?
I don’t think so, because selective interference may not disrupt what is at the core of welfare creation, namely competition and functioning markets. Selective interference is not the same as outright protectionism. As long as markets remain open in general, as long as the overwhelming degree of world trade is free, selective industrial policies might even increase competition and provide for more price discipline.
Thus one has to substitute ‘free’ trade with competition and functioning markets, only to realize that not much has changed. Certainly one thing has not changed at all, broad-based protection makes no sense. What has changed, though, is that it is not really desirable that trade leads to a situation where, for instance, three countries have ‘won’ competition and produce everything the world market needs. The world market should provide opportunities to increase welfare to a certain degree for all countries. This implies that countries need some adaptable enterprises who are able to survive competition.
To establish and preserve competition on the world market and on national markets is the core welfare producing mechanism of capitalism. On national markets competition lets only the adaptable and productive companies survive, which leads to a higher level of output. In a slightly different manner the Ricardo-model of international trade promises that the relatively more productive enterprises in a specific country survives and all resources are concentrated on it. Be that as it may, the basic process goes like this: Some adaptable and productive enterprises take over, others produce less or go bankrupt. This static change leads to increased output. More on this on page globalization.
Broad-based protection is certainly not a good idea, because this would trigger a reversal of these output increases. In a dynamic scenario the associated cost are even more visible. A reversal of globalization and an inward-looking production would force the companies not only to decrease output, but also to abandon scale economies, which will lead to huge decreases in profits, rewards to innovation and distributable income. This is quite the contrary of what a dynamic point of view would expect from companies who should thrive for a long period of time and be able to increase their prices moderately, in order to initiate a dynamic process during which they can improve their adaptive capabilities in general. Considering the huge company structures today this process can not work without a world market, which provides for structural change and new opportunities for expanding output. Still, it is also true, that today’s welfare levels provide for many adaptable companies to survive and it is not a catastrophe if a new challenger appears in a wide or narrow oligopoly (12-3 companies), even if industrial policy is responsible for this.
Industrial countries with their very adaptable companies must remain at least to 80 % open (that means 80 % of the value-added or the sectors of the economy, non-tradable services and other essential services excluded – this it not easy to measure, surely, percentages of tariff lines are not a useful measurement). This is plausible since labor costs are not very relevant for advantages. Machines substitute labor and wages (and taxes) can be lowered even in industrialized countries, see the United States and Germany, and are combined with very productive workplaces. Empirical studies would be interesting in this respect, which prove the opposite, that developing countries do have a production cost advantage even in capital intense sectors. More on this on page globalization debate.
Small and weak developing countries must be at least to 60 % open, because small markets do not support growth of domestic companies and companies, which produce for the international market, must not be disadvantaged by not being able to buy input goods from the world market (all over the world companies need roughly 1/3 or 1/2 of their turnover inputs from other companies). To be sure, export-oriented polities have to be employed, in order to give incentives for adaptable companies to grow. Nevertheless, it might make sense to protect a certain parts of the economy, although its productivity may be low, to conserve employment.
Large developing countries with high population numbers have more options to reserve their domestic market for domestic companies, in order to let them grow. In order to supply a bigger market firms have to at least develop a moderate level of adaptability which might enable them to export at a later stage. Countries like India have to bear large social outlays in their budget, and it has many public enterprises which are very costly to modernize and to restructure. A modern capital goods industry is being built, like steel, which has been partially modernized. This country should use trade liberalization step-by-step or ‘trail-and-error’, because otherwise too many public and private companies would collapse – and even if the country would completely open up to foreign investment they would not be able to absorb all the newly unemployed. Consequently, foreign direct investment must be lured into the country step-by-step as well which has the disadvantage of not leading to a boom, like in China. Without boom the terms of negotiating technology transfer in a joint venture are not as good as in China. I am of the opinion that these countries need massive help from outside, because it is a case of markets failure if a large and populous countries with a potentially huge market does not grow. One should not forget that India was as big as North-Rhine Westfalia around 2000 and has nowadays passed this German state by only by 3.2. North-Rhine Westfalia 568 Bill. (Population 17,8 Mill.), India 1848 Bill. (Population: 1,2 Bill.). Populous countries in Africa need foreign investment, among others, in the manufacturing sector, to generate exports. Exports are needed to fight foreign exchange shortages to let companies work and source inputs more freely. In quite a few sectors the state could use public enterprises or could support private enterprises which use modern technology, for example, in the food processing sector. I suggest a fluctuating openness of 40-60 % for populous countries. More on Africa on page Africa and India on page India.
In addition, these processes of transition show that it may make sense to use creative ideas and unconventional, non-Western style institutions. The example of China shows that in a society in which property rights were not well established, home-grown institutions could play a role to build transitional system of property rights. The Township Village Enterprises in China provided a local, communal investment investment option, protected by the local party bureau. This led to private investment in small and medium-size companies and protected these investments, while not allowing for developments like in Russia where the sudden introduction of property rights led to the fact that private individuals bought the whole country. More on Dani Rodrik’s interpretation of this case on page Dani Rodrik, more on Township Village Enterprises and China on page China.
In sum, the dynamic theory provides for even more reasons to fight for relatively open markets, but the ultimate aim is to ensure competition among adaptable companies and functioning markets. Global ordoliberal theory is no longer glued to the idée fixe of free markets and free trade. Still, it is bound and determined to preserve a very high level of free trade, at minimum on a level which can be found right now, and it decidedly fights against broad-based protectionism and for a stable, international economic order, like the one established at the moment by the WTO.
Consider for a moment some ‘free’ agricultural markets in Africa (which were liberalized in the 1990s by IMF/World Bank). From the point of view of neoclassical theory, they provide first-best efficiency and they even conform to the condition that a large number of market participants compete. What if they are not functioning in a dynamic sense, due to low and fluctuating prices, due to small lots, credit market failures because of communal land ownership and insufficient fertilizer or plant material to provide nutrients, leading to low levels of output from the very beginning? What options do you have? As a neoclassicist you can print a Pareto-Model on the first page of a book and claim that these markets are efficient (and even fair on some minimum-level). As someone who realistically thinks about how to improve welfare creation, you could think about way to improve the functioning of markets to let them provide at least some degree of increase in welfare (agricultural markets are a special case, which might be visibly and easily improved by certain forms of state intervention). This was acknowledge by the World Bank it her report on agriculture in 2008. More on this on page Africa agriculture.
African agriculture shows that surprisingly, even national markets are not efficient, seen from a dynamic, common sense perspective. This is difficult for people from industrialized countries to understand, because the markets they know are very dynamic and efficient. Still, I argue, that this has certain reasons and a certain framework of rules and institutions helped to achieve this. Furthermore, this makes one think and it is a good reason for more research on global common goods (which may increase welfare) and more research on poverty and innovative strategies to reduce poverty.
In sum, what has to be preserved is not ‘free’ markets and ‘free’ trade but ‘competition’ and ‘functioning markets’ on a world wide scale, while acknowledging that the state could in some case improve the functioning of markets by providing a general regulatory framework or – economically justified – more direct interventions, which help companies to be adaptable.
In addition, global ordoliberalism stresses the question of order and integrates moral values into economics. Walter Eucken persuasively argues that markets are justified by social values, because they help to achieve them. Social policies are only needed if markets fail with this task. Furthermore, the separation between markets and politics has to be defended, to let politics not transgress into markets in order to build Socialism and, vice versa, to let private companies not to take over politics in order to build cartels and monopoly-like structures deciding about prices, quantities, territories, R&D expenses etc. in secret meetings.
What happens, if the market cannot fulfil its task to provide enough welfare or if it is not able to spread welfare broad enough?
Then social policy is justifiable. For the future a relevant debate is how to design appropriate social policies if lesser and lesser people have access to full-time work and how global social policy should look like (and global environmental and health policy). More on this on page global social protection. Walter Eucken already knew the environmental policy is a must. A second relevant debate for the future is how to adjust the dynamic economy to climate change. More on this see climate change. Lastly, a very relevant debate is how to implement a patent- und competition policy which preserves incentives to innovation, while allowing for much free knowledge diffusion, in order to keep industry structures more stable then it would otherwise be the case and which would help to delay processes of concentration. More on this on page competition policy.
The WTO would be even more important in a world which does not aim at free trade, with fluctuating situations of selectively higher tariffs, because this will mean that one has to readjust the bargains from time to time and Members have to take care that competition will remain intense. Admittedly, there will be cases in which industrial policy may hurt companies, and the subsidy rules of the WTO may force a state to pay compensation for this, which might entail the withdrawal of market access commitments. On the other hand, industrial policy could lead to an overall expansion of markets, while markets access is not affected. Such a policy could even lead to an intensification of competition on world wide scale which all negotiators might consider desirable. In a global economy with big international companies and certain number of narrow oligopolies the WTO inevitably is the place where government representatives should get accustomed to decide not only in the national interest but also on policies which further the world’s commonweal.
From an global (dynamic) ordoliberal view the WTO should be furthermore the place, which allows and not further restricts free knowledge distribution (i.e. limited time periods for patents, which, objectively, even now could be shortened to 15 years, which is enough to recover R&D costs). Importantly, some moderately higher tariff levels for certain emerging and developing countries and some more protection for very weak countries, leeways for selective industrial policies and time for adjustments should be still possible, even in 50 years. More on the topic of antidumping and safeguards on page World Trade Organization.
Lastly, I believe that global dynamic ordoliberalism is the instrument of choice for political science, because it can give answers on two very important sets of questions:
- Fairness in international negotiations. For instance, neoclassical economists will call China ‘unfair’ as long as one price is touched by a tariff or by state intervention. A dynamic approach is able to more objectively look into history, it can separate interventions based on market failures from policies which belong to China’s globalization bargain negotiated with other countries. The question is not, if China is ‘unfair’, but to study what policies could be called like this and what extend this has and if this is really a reason for international tensions.
- International relations theory needs a dynamic economic theory to understand, how important international institutions like the WTO are. International relations theory needs to learn that questions of the international economic order and security questions are closely related. Not many international relations scholars know that the current international economic order, created by Franklin D. Roosevelt and his team, was deliberately build to reduce tensions between countries, in as far as all countries were enabled to buy essential goods on the world market. The international economic order was not designed to let dominating power to push through their interests, but to integrate many countries into a flexible, but economically rational order. More on this on page security matters.
Samuelson 1948: Samuelson, Paul A. Economics. An Introductory Analysis. New York: McGraw Hill, 1948.
Nordrhein-Westfalen Bruttosozialprodukt (2011): http://www.statistik-portal.de/statistik-portal/de_jb27_jahrtab65.asp – Retrieved 2012-11-25.
Indien Bruttosozialprodukt (2011): http://data.worldbank.org/country/india – Retrieved 2012-11-25.
My sources of inspiration (among many others, which will be meticulously mentioned on other pages of this website):
Bhagwati 1991: Bhagwati, Jagdish. The World Trading System at Risk. New York et al.: Harvester Wheatsheaf, 1991.
Balassa 1967: Balassa, Bela. Trade Liberalization among Industrial Countries. New York, Toronto, London, Sydney: McGraw-Hill, 1967.
Chang 1994: Chang, Ha-Joon. The Political Economy of Industrial Policy. New York: St. Martin’s Press, 1994.
Chenery et al. 1986: Chenery, Hollis, Robinson, Sherman, Syrquin, Moshe. Industrialization and Growth. A Comparative Study. Washington: Oxford University Press (Published for World Bank), 1986.
Hildebrand 2002: Hildebrand, Doris. The Role of Economic Analysis in the EC Competition Rules. The Hague: Kluwer, 2002.
Hovenkamp 1999: Hovenkamp, Herbert. Federal Antitrust Policy. The Law of Competition and Its Practice. St. Paul, Minn.: West Group, 1999.
Krueger 1997: Krueger, Anne O. Trade Policy and Economic Development: How We Learn. In: The American Economic Review, Vol. 87, No. 1, March 1997.
Lall 1987: Lall, Sanjaya. Learning to Industrialize. The Acquisition of Technological Capability by India. London: Macmillan, 1987.
Lall 1990: Lall, Sanjaya. Building Industrial Competitiveness in Developing Countries. Paris: OECD, 1990.
Lall 1995: Lall, Sanjaya. Malaysia: Industrial Success and the Role of Government. In: Journal of International Development, Vol. 7, No. 5, 1995. S. 759-773.
Lall 2000: Lall, Sanjaya. The Technological Structure and Performance of Developing Country Manufactured Exports, 1985-98. In: Oxford Development Studies, Vol. 28, No. 3, 2000.
Lall/Wignaraja 1996: Lall, Sanjaya, Wignaraja, Ganeshan. Skills and Capabilities in Ghana’s Competitiveness. In: Lall, Sanjaya. Learning from the Asian Tigers. London: Macmillan, 1996.
Lall 2005: Lall, Sanjaya. Rethinking Industrial Strategy: The Role of the State in the Face of Globalization. In: Gallagher, Kevin P. Putting Development First. London, New York: Zed Books, 2005.
Nelson/Winter 1982: Nelson, Richard R., Winter, Sidney G. An Evolutionary Theory of Economic Change. Cambdrige, Mass.: The Belknap Press of Harvard University Press, 1982.
Rodrik 2007: Rodrik, Dani. One Economics Many Recipes. Globalization, Institutions and Economic Growth. Princeton, Oxford: Princeton University Press, 2007.
Rodrik 2011: Rodrik, Dani. Das Globalisierungs-Paradox: Demokratie und die Zukunft der Weltwirtschaft. Bonn: Bundeszentrale für politische Bildung, 2011.
Scherer 1980: Scherer, Frederic M. Industrial market structure and economic performance. Second Edition. Chicago: Rand McNally, 1980.
Scherer 1992: Scherer, Frederic M. International High-Technology Competition. Cambridge: Harvard University Press, 1992.
Scherer et al. 1975: Frederic M. Scherer, et al. The Economics of Multi-Plant Operation. Harvard: Harvard University Press, 1975.