ORDO - Volume 60 - 2009

The ORDO yearbook is still being published after sixty years. On this occasion the author reminds one of the general principles, to which the editors are committed, by resisting a centrally planned administration of the economy on the one side and a policy of unrestricted Laissez-faire on the other. The reform of the economic system in West Germany in 1948 against the international mainstream is taken as an example of the long lasting power of well-designed new ideas against the tide of shortsighted interests of all kinds. These include scientific trends, which deny or at least minimize the relevance of institutional foundations for the economy and try to destroy research and teaching in this field. Misunderstandings about methods used in economics are also treated, together with some special German tendencies to deny the importance not only of economic policy but also of political problems in general.

Our article addresses the question whether ‘liberty’ is appropriately conceptualised as ‘negative liberty’. Based on a comparison of the ideas of Friedrich August von Hayek and Isaiah Berlin we outline how the idea of a negative concept of liberty did emerge as the dominant paradigm in the twentieth century. Against this background we develop the thesis that it is necessary to understand the complex interdependence between positive and negative aspects of freedom in order to arrive at a holistic, active understanding of the dynamic nature of freedom and the concepts used to define it.

In the current debate about the program of Freiburg School increasing attention is paid to Walter Eucken’s life and the origins of his work. Despite of all efforts to clarify these origins, Eucken’s way to liberal economic and political views is still almost unknown. To show Eucken’s development from the early conservative biographical and intellectual environment to liberal positions this contribution presents and analyzes new material on Walter Eucken from his literary estate and from the literary estates of his father Rudolf Eucken and of Alexander Rüstow. After an introduction (I) with a review about the literature on Eucken we analyze Eucken’s political an economic views during World War I and the first years of Weimar Republic (II). In (III) we give an overview of Eucken’s contributions to the philosophical, ideological, political and economic debates of the Weimar Republic (1922-1931). In the next chapter (IV) we analyze some of Eucken’s papers from 1932. In these papers Eucken opposes totalitarian right-wing ideologies and defends liberal economic and political positions. Then (V) we present and analyze some examples of Eucken’s liberal opposition against the Nazi-ideology in 1933/34.

The rationality of decentral orders and their governing principles inform the institutions that are necessary conditions of free societies. These institutions are: Rules of just conduct in civil society; the division of labour as a product of freedom of occupation and freedom of contract; competition. These institutions are the result of human action but not of human design (Von Hayek, Ferguson). They are not a product of chance but of experience permitting insight into principles that are compatible with free and just societies.

The crisis in German economics after the First World War led to the attempt, initiated by Alexander Rüstow in 1926, to unify all the German economic theorists in a ‘closed front’ against the Historical School. The so called „Ricardians” should be ready to attack, as Rüstow wrote to Walter Eucken in 1927, the „ruins of the Historical School”. This development, in which we see the first blossoming of later Ordoliberalism, was neglected for a long time and its significance in the history of German economic thought not appreciated. Our paper based on an evaluation of the correspondence of Rüstow with his later emigrated socialist friends Adolf Löwe (in US known as Adolph Lowe) and Eduard Heimann on the one side and his liberal companions Walter Eucken and Wilhelm Röpke on the other side.

The new discipline of behavioral economics relies on psychological findings that humans show systematic deviations from rationality – they act altruistically and are concerned about fairness, they behave in a time-inconsistent manner and they don`t have an unlimited capacity for information processing and storage. Based on these findings – the most important ones being described in this paper –, psychologists propose new ideas for politics in various fields: social policy, regulation of financial markets, finance, tax policy, volunteering, promoting reforms and consumer protection – all these fields may benefit from the insights of the new discipline of behavioral economics. The most important application in this field is the idea of a liberal paternalism: In contrast to traditional heavy-handed approaches to paternalism, liberal paternalism aims to improve individual choice without restricting it by making use of some of those behavioral biases. This policy seems to be very smart; nonetheless it brings several problems with it which are being addressed in this paper.

This article defends the position that the basic problem to be solved by competition law is of a “reciprocal nature” (Coase). Giving more freedom to one party (extending the scope of its property rights) necessarily means less freedom to another party. Thus, the design of property rights is a zero-sum game that cannot be solved by using freedom as a guideline but by reference to economic efficiency. The article takes issue with a criticism of this position put forward by Mestmäcker in this journal 2008.

One of the results of the global financial and economic crisis is the fact that in all parts of society believers in “big government” are in the ascendancy. At the same time, inside the free-market camp the differences between the “ordoliberal” and the libertarian school of thought have become more distinctive. This article opposes the view that non-intervention would have been the best medicine against the crisis. Although government bears a significant part of the blame for the crisis, it still has to play a central role as an emergency helper in extraordinary times of need. Moreover, the free-market camp cannot simply wash its hands of its responsibility. The key question for all who support a system based on freedom will be how to prevent or at least alleviate the many undesirable long-term consequences of the anti-crisis measures. Market-oriented economic policy now means playing the role of the physician who takes life-saving emergency measures, knowing that they can lead to long-term damage or at least to a dependence on prescription drugs. In a democracy, a healthy mix of realism and selfcriticism is more beneficial to the credibility and thus the influence of free-market economic policies than a dogmatic anti-interventionist position.

In the first six month of 2009 the worldwide economic situation is characterised by a double burden: On the one hand the financial crisis is still on-going with limit signs of any recovery. The crisis which arose in the subprime segment of the US mortgage market extended due to the international integration of financial markets. On the other hand signs of increasing inflation, with the potential for more to come in the USA since middle of 2004 and later in Europe and Asia, have forced central banks to introduce a phase of very restrictive monetary policy. With time lags the monetary policy has caused significant negative real economic effects. Both developments overlap. In this paper the different escalation stages of the financial crises are initially indicated and – against the background criteria of a functioning financial system - are followed by an analysis of the ordinal-political and process-political undesirable developments in the financial markets over the past decades. They are identified as the most important causes of the monetary and real economic undesirable trends: Varied state regulations have created deficits of the basic regulatory framework of the finance markets by which competitive processes were hindered and ineffective evasive reactions of the participants at the financial markets were rewarded. Moreover wrong liability rules of the decision makers in the financial institution have substantially contributed to these behaviours. The financial policy of many countries and in particular short-term process interventions of the monetary policy of central banks have put massive false incentive in place for the market participants and have caused mismatching within the loan market players. In a critical analysis numerous proposals are suggested for overcoming the current financial crisis and possible options for the improvement of the long-term regulatory framework are indicated. Whilst they cannot fully remove the risks of future financial crisis, they can help reduce them.

In this paper, we propose a method for a bail-out of the banking system without expenses to the taxpayer. This is done by applying an instrument that has been twice proven to work successful. On two occasions, after the end of the Third Reich in World War II and after German Reunification in 1990, so called “Ausgleichsforderungen” (compensation bonds) were assigned to banks because the turmoil of war and peaceful revolution respectively had rendered worthless a great part of banks’ assets. These compensation bonds were designed to agree the balance after an asymmetric conversion of outstanding accounts and liabilities during currency reform, which would have left most financial institutions in a state of over-indebtedness. These bonds were none fungible, bore interest and were in the course of time slowly redeemed by the German government. Contrary to this past approach, we suggest that in the current crisis the toxic assets should be exchanged by zero bonds rather than by interest bearing bonds. The key idea is to spread the hidden balance risks over time and thus, ultimately, make the banks themselves pay for the costs without forcing them into crisis induced insolvency. As will be outlined, this course of action is from an ordoliberal point of view superior to existing solution. Not only will zero bonds save taxpayer`s money, but also uphold the market principle of liability for one’s actions, thereby avoiding to set incentives for inefficient risk-prone behavior during the next bubble.

The financial crisis is not due to distorted market incentives but to error and government failure. A comparison of risk premia in the US mortgage and corporate bond markets reveals that the crisis was not caused by low risk aversion; rather, the market underestimated the risk. The same factors which explain US regulatory failure in, and prior to, the crisis also throw doubt on current proposals to give regulators more discretionary powers. The regulations which are now to be introduced at the EU level would not have prevented the crisis. Since each country has a sufficient incentive to maintain the stability of its financial system, the crisis is not due to a lack of international cooperation, and there is no need for international regulation in the future. However, the exchange of information may be improved. The paper demonstrates that the economic forecasts of international organisations like the International Monetary Fund are less reliable than those of private and national institutions. Governments should not subsidise solvent banks, nor should they contribute to their capital. Banks which declare bankruptcy, however, should be taken over, restructured and resold by a public agency. Capital requirements ought to be raised and vary with the business cycle. There is also a case for rules requiring more transparency.

In Germany as well as in most of Continental Europe capitalism has never been popular. At first, prosperity and the welfare state, then globalization and the financial crisis contributed to this lack of legitimacy. For some time government and the state will gain in legitimacy because of the financial and economic crisis, although the financial crisis has been caused by government failure more than by market failure. Monetary policy, distorted incentives in American real estate markets and regulatory deficits contributed to the crisis. By poorly understood innovations in capital markets bankers contributed to the crisis, too. The errors committed by politicians and bankers should remind one of the fallibility of human beings. Principal-agent-problems add another layer of complexity. Transferring ever more tasks from the private economy to government implies hopes for the wisdom of governmental decisions, for the altruism and paternalism of politicians which are likely to overburden them. Professional economists deliver only disputed and contradictory recommendations. Moreover, even where professional advice is unambiguous, politicians find it hard to heed it.

The purpose of this paper is to draw some early lessons from the recent financial crisis, particularly with regard to the crisis resolution and the prevention of future crises. In order to stabilize the financial system, government activities are essential even though success is uncertain. Nevertheless, there is rising concern of possible negative side effects such as a softening of the government’s budget constraint caused by government activities or distortions of competition in the financial sector. The reduction of these side effects remains a main challenge for the government. The judging of the government in the future will jointly depend on the dealing with crisis resolution and the causing or rather prevention of negative side effects. Due to the enormous output loss caused by the financial crisis, crisis prevention is gaining a high priority. However, thinking that the possibility of future financial turmoil can be eliminated by implementing new regulation frameworks is not realistic. The reason is that risk as a crisis potential is inseparably involved in financial transactions. Phenomena such as a declining risk awareness and a widespread herd instinct, which have caused the unsustainable accumulation of risks in the current crisis in the first place, will still be at work in the future. This cannot be completely suppressed by regulating the financial markets. Even a more ambitious regulation of the financial system, which is on the way as a reaction to the crisis, must give room for risk taking, otherwise it would undermine the efficiency of the allocation of capital.

The international credit crisis, which began in the summer of 2007 in the US market for low-rated mortgages („subprime“), is not a failure of capitalism: it gives evidence of the failure of interventionism. At its core, the crisis is the direct outcome of a plannedeconomy style monetary system in which state-owned central banks hold the money supply monopoly and increase the money stock through credit which is not backed by real savings. The privatisation of the monetary system (“free banking”) is the way out of a vicious cycle of boom-and-bust, provoked by government money, which seriously threatens societal freedom.

There is a remarkable phenomenon: the recurrence of financial crisis in the economic life of the states. This article starts with the idea that financial innovations could be main elements of the set of sufficent conditions for this phenomenon. In order to illustrate this assumption this article describes some historical and some modern cases of financial crisis. In modern times there are smaller and greater financial accidents, so to speak. These are less relevant for political action than the big ones of today. This article argues that there are three causal elements that might come close to the complete set of sufficient conditions for todays financial crisis. Among them are the MBS and CDOs, remarkable inventions of the financial industry. This article briefly deals with some recent proposals for the improvement of the financial system. They are selected because they seem to be in accordance with critical liberalism, a view which is due to the philosopher Hans Albert.

The recent financial and economic crisis raises the questions of how to conduct an appropriate diagnosis of the causes for the crisis as well as how to develop remedies not only to deal with the current crisis but also to prevent the development of crises in the future. In order to facilitate a systematic analysis of the two key questions posed above, this article initially provides a comparison of the differences between the institutional economic and the interventionist approach. Subsequently, the article explores the consequences of the solutions proposed by the two different approaches for the likelihood of the development of new crises and the risk of international contagion, the effectiveness of means to combat the current crisis, and, in particular, the opportunity to prevent future crises.

Economists have devoted increasing attention to potentials of corporations as agents for fighting poverty in the developing world. This paper shows commonalities, differences, and complementarities of Walter Eucken’s “Ordoliberalismus” and the Capability Approach in order to conceptually identify the scope of these corporate potentials. First, Eucken’s perception of an optimal social policy and the underlying social questions are sketched out. All three major social questions classified by Eucken are highly relevant in the developing world. Then, these challenges are positioned within a Capability framework, followed by a discussion why corporate contributions against poverty will go well beyond income and commodity impacts. It is argued that modern development economics should devote more attention to traditional German “Ordoliberalismus” analyses of the interdependencies of economic and social order. This is necessary to establish a freedom-oriented concept of corporate potentials in the fight against poverty.

The Capability Approach as well as the Conditions-of-Life-Approach view poverty as a multidimensional phenomenon that is not only characterised by lows levels of achievement in the various dimensions but also by a restricted opportunity to choose among from a set of different ways of life. The approaches thus put a lot of emphasis on (limited) freedom of choice as a crucial aspect of poverty. If poverty is seen in this way there are two ways to improve the situation of the poor: by broadening the set of opportunities open to them or by strengthening their ability to choose. The paper concentrates on the latter. The paper arrives at three general conclusions: first, the market is an institution that trains the ability to choose if certain preconditions are met which are necessary in order to ensure the functioning of the market (namely freedom from interference and absence of externalities). Secondly, democracy is a political institution that demands people’s ability to choose and, thus, strengthens this ability, too. Thirdly, education can and should play an important role in encouraging and training the ability to choose. These general findings are rather abstract and quite a lot has still to be done in order to fill the gap between theoretical findings and their actual application in the process of poverty alleviation.

Using the rational-choice-approach of “ordonomics” this paper seeks to establish a conceptual link between two strands of literature that seem to focus on two distinct and apparently incommensurable research questions: on the one hand, the literature on Social Entrepreneurship literature that focuses on personal management issues; and on the other hand, the ordoliberal tradition of institutional economics (“Ordnungspolitik”). The key argument claims that social (rule) entrepreneurs can contribute positively to improving the institutional and political framework of society if they succeed in organizing new and mutually beneficial commitment arrangements for themselves and other stakeholders. From that perspective, social entrepreneurs engage as real societal change agents and can assume – complementary to traditional state functions – genuine ‘regulatory’ tasks. The article advances this argument by discussing the historical example of Krupp's welfare program.

We consider an argument that it might be helpful to combat poverty in developing countries indirectly by enlisting firms‘ help (as „corporate citizens“) in reducing corruption. It turns out that this argument crucially depends on a fair number of premises, including (a) a common interest of firms in reducing bribes, (b) the absence of positive effects of corruption on society at large and (c) the cost-effectiveness of formal institutions designed to combat corruption. In all three regards, we explain a number of reservations, both theoretical and empirical. Some tentative institutional policy recommendations ensue.

Efficiency and equality, economic reasoning and the ethics of policy are often conceptualized as if they were in natural, unavoidable conflict with each other. This makes political problem solving difficult in practice. This article discusses how economic reasoning can – and how it cannot – help clarifying ethical problems. To this end, a contractual approach to social obligation is developed that could contribute to overcome such presupposed incommensurability between economics and ethics and thereby help identifying mutually beneficial solutions. The approach is illustrated by a number of examples. Among them are gasoline rationing, public rent control, minimum-wage laws, health insurance, the standard mileage method, family benefits, and airport safety.