ordoliberalism

Ordoliberalism, austrian school, neoliberalism and social market economy are nothing new from an economic point of view. All this lines of thinking are based on the classical and neoclassical theory. In other words, the basics assumptions concerning fundamental economic causal chaines of the classical and neoclassical theory are accepted. To be more precise: All these lines of thinking accept the classical / neoclassical concepts about 'capital', interest rates, savings and money. In other words, all these lines of thinking refute the keynesian theory or, to be more precise, they just disregard it.

The underlying theory of these lines of thinking can be summarized in a few sentences. Prices signals scarcity allowing and obliging people therefore to allocate their resources the most profitable way possible, see natural price / market price and homo oeconomicus. The remuneration of the productive factors, most of all capital and labour, depends on their (monetary) marginal output, that means, that any interference of the government aiming to improve social balance is only possible at the expense of efficiency.

However there are differences between these lines of thinking, although it is not possible to demarcate exactly one line of thinking from another because there are no differences in the fundamental economic concepts.

Neoliberalism and the austrian school emphasize on personal freedom. The market is not only any more a guarantor of efficiency, but for freedom. That means, that there is little space for a democratic decision making process, because everything that should be steered, is already steered by the market and what cannot be steered by the market, shouldn't be steered at all. The general refutation of any kind of government intervention leads to a different evaluation of anti-trust laws and similar measures as well. Keeping the intensity of competition high enough is the main function of the government in the ordoliberalism. Neoliberalism has a more cautious attitude toward this issue. Under the pretext to reestablish competition the government can abuse its power.

Ordoliberalism focuses on a problem already mentioned by Adam Smith. Market economies can only work if the intensity of competition is high enough. However the companies and entrepreneurs are better off, if they avoid competition through price agreements and similar measures aiming to reduce competition and in the long run, if the government doesn't intervene, competition will be restricted. It is doubtful whether in modern economies, where competition happens at a global level, governmental intervention is actually needed. Most monopolistic structures are the result of governmental intervention. Competition would increase for instance if all customer duties were eliminated. Beside that the ordoliberalism is nothing new. Anti-trust laws exists everywehre and existed long before the term ordoliberalism was coined.

The social market economy puts a special emphasize on social stability. The idea is simple. The government doesn't intervene concerning the question who produces what, how and for whom, but redistributes the national income. That is an attempt to conciliate the market efficiency with possibly very high differences in income and fortune that menace social stability. However this is nothing new either. Any industrialised country has similar systems and these systems were built up long before the term social market economy was in use.

The austrian school and neoliberalism are very similar concerning their insistance on personal freedom, but there are differences in detail. For the austrian school the menace to freedom is due to a 'philosophy', a political mouvement, an ideology, espcially 'socialism'. Neoliberalism is more about bureaucracies. A bureaucracy doesn't have an ideology, but they have a self interest and will therefore try to enlarge its competences. Beside that the austrian school, especially Friedrich Hayek, is more 'philosophical', in other words, there is a lot of gossip. Milton Friedman is very concrete and applies general principles to concrete issues and we can't really say, that he is always wrong.

From an economic perspective, there are fundamental differences between Friedrich Hayek and Milton Friedman. Milton Friedman argues with keynesian monetary transfer mechanisms, although he assumes special conditions and get this way to the same results as the classical theory. Friedrich Hayek sticks to the classical theory and produces this way a lot of nonsense.

The above characterisations are somehow rough. We can find in the writing of Walter Eucken sentences that seemed to be copied from Friedrich Hayek, but the focus is different.

Eine gut funktionierende Wettbewerbsordnung vermag den Menschen nicht bloß vor wirtschaftlicher Not zu bewahren. Sie allein schützt ihn vor der Gefahr des Totalitarismus.

Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen 2007, Seite 318

A well functionning competion order cannot only protect the people from economic distress but from the danger of totalitarism as well.

We don't know if Walter Eucken himself believed what he wrote down, but this sentence is obviously nonsense. If all economic distress what disappear if we only keep the intensity of competition high enough, we wouldn't had any problem. Unfortunately life is not as simple.

The idea that the free market economy protects from totalitarism is an idea he copied from Friedrich Hayek. The idea is, that totalitarian regimes get and stay in power because they controll the economy. The truth is, that totalitarian regimes stay in power because they control the police, the military and the mass media. The fact that they can stay in power is not due to the fact that they dominate the economy, but the result of the fact that they got to power.

In the same direction goes the argumentation of Milton Friedman. He argues that in totalitarian regimes opposition is impossible, because it depends economically from the government. The truth is, that the economic dependance from the government is a minor problem in this kind of regime. The real problem is, that opposition can be physically eliminated.

We will see in the following chapters that it is a little bit complicated to discuss about the thesis of Hayek, Müller-Armack and Walter Eucken, because the concepts their theories are based on are not explicetely explained, the terms used vague and their interpretations of historical events bizzare.

For all these lines of thinking the opposite of what they want is 'socialisme' and socialisme is a kind of 'collectivisme'. Both terms are undefined. All these lines of thinking assumes that 'socialism' means automatically planned economy, however there is actually no political party in the western world, nor now nor 150 years ago, with 'social' in their name, the spanish PSOE, the french PS, the german SPD etc. who advocates in favour of central planning. It is therefore very unclear what they are talking about.

Socialism is kind of collectivism, but the term collectivism is still less defined than the first term. We assume that they understand by collectivism the opposite of individualism, but individualism is not only menaced by the government, but by public opinions as well, see John Stuart Mill, On Liberty.

[Actually neoliberalism has little to du with the classical liberalism of John Stuart Mill. It is unclear who coined the term, but ecoliberalism would fit better.]

[The terms socialism, collectivisme and totalitarism are used in these lines of thinking as synonyms and the nationalsocialisme is only a variation of socialism. These lines of thinking assumes that any kind of governmental intervention, especially centrall planning, leads to socialism, collectivism, nationalsocialism or totalitarism. One may wonder why they use four different terms for the same thing, but there is no way to find that out. Nowadays we understand by totalitarism a regime that controlls the individual in any spheres of social live, economy, education, art, mass media etc.. In totalitarian regime the individual is required to support the system actively and showing in his behaviour, his uniform, the way he greets other people, the membership in organisation loyal to the system that he identifies himself with the regime. A passive toleration or not to oppose, as in a mere authoritarian regime, is not enough. In this sense only the nazi Germany and the Soviet Union of Stalin were totalitarian regimes. Perhaps we can say that some countries of the islamic world are totalitarian regimes.]

There is a big difference between modern macroeconomic and microeconomic and lines of thinking of the type of Walter Eucken, Friedrich Hayek, Alfred Müller-Armack, Milton Friedman and Karl Popper. Modern macroeconomics tends to model economic issues. We have criticised this approach extensively, see methodological approach. A model supposes a decision concerning the variables taken into acount in the model and only quantitavily measurable variables can be part of an economic model. This becomes a little bit crazy if the quantitative changes are triggered by qualitative changes. To illustrate it with an example: We find in any textbook about microeconomics funny sentences like "if the production decreases due to a technological advance, the supply curve moves to the right" and things like that. We see indeed in the model the impact of two quantitatively measurable variables, price and amount, if the supply curve moves to the right. The problem is, that we are more interested in knowing WHAT triggered the technological advance and what can be done to promote technological advance.

Economics is often criticised for this methodological approach considered autistic. However the strange mix of sociology, history, economics, politics, philosophy, psychology presented by the ordoliberalism and similar line of thinking is not really better, especially if the author is a dilettant in all these topics, a problem we have already seen in Wealth of Nations, see an economic perspective.

The first problem is that arguing with historical situations is similar to arguing with statistics. As well as we can prove 'scientifically' with statistics that the more people use airplanes the lower the birth rate, we can prove with historic examples that all socialists are actually fascists (that's the theory of Hayek) or the opposite.

Normally economics is considered a nomothetic science and history an idiographic science. This is already doubtful. But if an economic theses is illustrated with a specific historical situation, the author assumes that history is a nomothetic science too and that from a specific historical situation can be drawn general and overall valid conclusions. The truth is, that a specific historical situation is the coincidence of incidental circumstances and no conclusions at all can be drawn from this specifique situations, but there is a strong tendency to underpin personal opinions by arbitraliy chosen examples. This is an issue we will discuss very often in the following chapters.

The next problem with all this kind of thinking is their concept about democracy. Normally democracy is considered as the opponent of authoritarian or totalitarian regimes, but they consider the free market as the best protection against authoritarian or totalitarian regimes. There are two reason for that. First of all, the basic argumentation is wrong. Friedrich Hayek et alter assumes that it is possible that democratic elected parties abolish democracies once get to power. This is true, but a different story. In this case it is not a democracy any more. Furthermore he assumes that in democracies the majority dominates the minorities. This is only a theoretical option, because something like a 'majority' doesn't exist, see a variation of a totalitarian theory. Furthermore what happens in reality is the opposite. Small and well organised pressure groups have more influence than the generally badly organised majority. The last problem is more relevant in practice than the first problem.

Ordoliberalism and similar lines of thinking focus on spontaneous order, see for instance this video Hayek on Individualism and Spontaneous Order.

[We have no intention to correct all the errors of Hayek. The assumptions for instance that language is a spontaneous order is nonsense. There is a strong evidence that the basic structures of how the world is presented verbally is innate. The concept of Hayek is completely refuted by professional linguists as Noam Chomsky, see Language acquisition device. The problem with these people is that they were universal dilettants.]

Spontaneous order is opposed to planned order. We will get for instance a spontaneous order if we throw a stone into the water we will get a certain pattern. A least in nature it is not going to pe possible to predict exactly the form of the pattern, but it is possible to predict the pattern. When it comes to organise complex social systems the spontaneous order is more efficient than the planned order. In the spontaneous order, for instance in a market economy, the knowledge is distributed among hundred of millions of interacting people. None of them knows as much as all of them together, but if each individuum reacts based on his information and knowledge, the whole available knowledge is used. That's sound very intelligent and complicated, but is nothing else than Adam Smith, see natural price / market price.

The planned order is the opposite of a spontaneous order. Planned order is only possible, at least if efficiency is an issue, if the knowledge needed is reduced. A single company for instance has a planned order. People are ordered what they have to do and how they have to do it. The second point is that in planned orders we can't assume that the individual intereste fits with the interest of the entity the individual is acting in. An employee in a company doesn't have necessarily the same interests as the whole company. He is paid to serve the company and not himself.

[However the difference between spontaneous order and planned order is not really clear. The traffic for instance is planned order. The rules are actually arbitrary, we can conduce on the left or on the right, we can stop when the traffic light are red or green, but in any case there will be an order. This order doesn't allow us to predict where the people go, but it allows to predict how they go there. The order however is not a spontaneous order, but in contrary a planned and imposed one. It is therefore questionable if the order in the sense of the ordoliberalism is a planned order or a spontaneous order. If we stick to the basic idea, everyone acts based on his partial information and knowledge, it is a spontaneous order, at least if the rules imposed gives enough liberty to the market players.]

That's nice to know, but irrelevant in practice. The question is not whether the order is spontaneous or planned, the question is, whether the individual interest fits the general interest. In nature we have a spontaneous order, the stronger animal kills and devores the weaker animal. We can even say, that this leads to a pattern, perhaps useful in nature, otherwise we would have perhaps too much of one species. In a human society we would perhaps a similar 'spontaneous' order. Competitors would be very spontaneously eliminated by brute force. The crucial point is therefore another one. The incentives given have to guarantee that the personal interest and the general interest are congruent. This is the crucial point, see homo oeconomicus. The spontaneous order is very, very irrelevant.

The problem with bureaucracies for instance is not the fact that they are not the result of a spontaneous order, the problem is, that the interests of burocrats are not the same as the interests of the society, see Milton Friedman: The Problem of Bureaucracy.

Concerning ordoliberalism and similar lines of thinking we have a lot of pseudophilosophical overhead, in other words gossip. The only exception is Milton Friedman.

If we put aside all that pseudophilosophical and pseudointellectual gossip Walter Eucken & Company just want to tell us that the free market economy is the best economic order. The arguments put forward to underpin that thesis are correct, but older than the green hills of Africa. Ordoliberalism is Adam Smith with a lot of pseudointellectual gossip.

Hayek & Company emphasizes the role played by a market system in producing knowledge by trial and error and the production of new know how. That as well is good to know, but very irrelevant. When it comes to improve the production and spreading of knowledge, applying knowledge to new problems etc.. the statement that free markets promote that is not helpful, it is even unclear what Hayek & Company want to tell us. Should we just sit and wait until the 'spontaneous' order improves the situation?

Actually we have the same problem with the ordoliberalism as with the neoclassical theory. The first one tells us that everything is fine, if only the intenstity of competition is high enough and the last one takes the intensity of competition for granted. Ordoliberalism it therefore nothing else than neoclassical theory. If the government succeds in keeping intensity of competition high enough, we are in the perfect world of equlibriums.

The really important questions are not addressed. In order to resolve concrete problems we need to know how EXACTLY we can improve the education system, how we can equalize the existing global differences in know how, how we can improve the transfer from scientific know how to marketable products, the role played institutional investors and whether they are able or not to detect profitable investments etc..

The simple statement that any attempt to give concrete answers to these question is fatal conceit and hinders the spontaneous order of a free market economy to be effective would lead to different conclusions as the ones assumed by economists. If the spontaneous order of a market economy is the best solution for all problems, we don't need economists. The only job left for them is to explain again and again that the best economic order is the free market economy. They can explain that again and again, but actually we already know that. Concernig the statement that the market economy lead to the optimal allocation of resources nobody has any doubt that this is true. This is explained, illustraded and proved by examples in the work of Adam Smith. No further need to talk about that. The logical consequence of all that would be to shut down all the "scientific" research intitutions, because if all problems are already resolved, we don't need them.

More useful is a concrete analysis based of concrete issues applying the abstract principles. This is what Milton Friedman does in the serie 'Free to chose'. See as well preliminaries.

The fatal conceit has become kind of a corny joke. The statement that any proposition for resolving a social problem is not very helpful, if other people really do nothing because they have actually no clue. If we want to put the whole theory about the 'fatal conceit' on its feet, we can say that people tend to take greater risks, if they don't have to bear personally the consequences of their errors. That is the advantage of a market economy: People will put more effort in getting the needed information for a rational decision, if they have to bear the consequences of a wrong decision.

We not even have to assume that people only pursue their own happiness in order to get the system working. Even if people are motivated by altruistic motives, they has to allocate the resources in the most efficient way, but a market economy works as well if people only pursue their personal happiness.

[However in general they only pursue their own happiness. That's why programs to promote economic activities by any kind of subsidizes in general fail. Public financing leads to an underestimation of the risks. We take all more risks, if a third person, in this case the tax payer, pays the bill in case of failure.]

However the basic idea of ordoliberalism that the market is a learning process through 'trial and error' is only half of the true. In an atmosphere of generalised insecurity there will be no trial and error. Companies will simply not invest at all. There is no fatal conceit, but fatal preference for safety. This is the problem addressed by the keynesian theory, see Keynes. In a situation of a fatal preference for safety the government have more changes to lead the economy back on track than a private investor. We can even say, that a private investor has no chance at all. He can invest, create jobs and purchasing power, but if the rest of the economy has a fatal preference for savety and does nothing, he will go down in history as a lonesome but bankrupt hero.

Ordoliberalism as well as neoliberalism abstract completely from everything beyond economics. They assume therefore, that is a general error in thinking of economics, that the economy can be explained abstracting from technological advances, social organisation, cultural changes, education system etc.. But if all this qualitative changes have an impact on the economy or is even decisive, they don't explain economic development, because the really relevant changes are disregarded.

There is no empirical evidence, that the spontaneous order produces a lot of knowledge, although Hayek assumes the opposite. All fundamental technological advances, at least in the last 70 years, are based on government subsidized research and development, see research and development.

Beside the fact that some basic assumption of the ordoliberalism and similar lines of thinking, escpecially their concepts about 'capital', interest rates, savings and money are wrong, there is actually no explanation how economic growth can go beyond equilibrium. If the technology, the know how, the organisational structure, the intensity of competition is given, optimal allocation leads to an equilibrium, but nothing more.

There is a lot of gossip about 'learning systems', trial and error and things like that, but nothing concrete about how this is going to happen. In this case we would say that a government who promotes knowledge and focus idle resources in strategically important sectors is perhaps 'fatal conceit', but much better than Hayek who just sits in the corner waiting, because he has no clue what to do. If Hayek & company can't explain us the impact of the qualitative changes in the non economic sphere on the economy and how this qualitative changes will happen triggered by the 'spontaneous' order, we would say that his fatal conceit is simply fatal ignorance.

The basic problem of economics is the methodological approach. If we put aside the pseudophilosophical gossip à la Hayek, Eucken and Müller-Armack there are a certain amount of variables considered relevant and these variable alone explains the economic development. This is in a certain sense normal. When biology for instance established itself as a science, it consisted only of botanic and zoology and the focus was set on describing the phenomenon. When it becames clear that the appearance is only the effect of a cause, the interest shifts to the causes, in this case to genetics. Economics is still on the botanic level. The causes of the phenomenon are still disregarded.

A pure description of equilibriums, that's what microeconomics is about, is always true. In the democracy of Athen 300 years before Jesus Christ, in China at the time of Konfuzius, in Bolivia, in Germany and everywhere. But nobody would say that the living conditions were and are the same everywhere. The very detailed description of equilibriums we find in any modern textbook doesn't explain the differences between Greece 300 year before Jesus Christ and France in 2015, although both countries were free market economies. An extreme example for this is the equilibrium of Pareto. This is even true on the Mars provided that something or someone is living there, see Vilfredo Pareto.

There is actually little spontanity in the spontaneous order of Hayek and company. Spontanity is more assumed than explained. Hayek and Company assumes that if everybody reacts base on what he knows, there will be plenty of new ideas, creativity and innovations. The author would say, that without a well trained population there are no new ideas, creativity and innovations. The author would say that it is easily imaginable that a small elite knows much more that 4 millions analphabets and that in some cases a planned economy can be more efficient than his 'spontaneous' order. Archaic societies can have a 'spontaneous' order, but with no economic development at all. To keep it short: If nobody knows anything, the 'spontaneous' order will not lead to a situation where the knowledge of millions of people is aggregrated, because the addition of zeros is zero. In archaic societies the 'spontaneous' order will reproduce an archaic society. Not because the people prefer the archaic society, but because it is the only thing they know.

Wikipedia is kind of 'sponateneous' order and nobody doubts that this is very, but very efficient. The knowlegde of millions of people is aggregated and this millions of people know much more than any encyclopedia with an editorial team, but that only works with some languages. With other languages a small and competent team would be more efficient.

Basic infrastructures like schooling were imposed by small elites and even the ideas of Hayek and company, must be imposed by elites and sometimes by brute force. That's why Hayek was a great fan of Augusto Pinochet.

The only attempt to explain the dynamic of market economies and something was done by Joseph Schumpeter. Schumpeter put the principal actor of a market economy in the center of his writing, the entrepreneur. This is much more concrete than the simple statement that a 'spontaneous' order automatically will lead to innovations, creativity and technological advance. Price signals work for the optimal allocation of resources in the case of a given production structure. Price signals are not enough to trigger fundamental changes in this structure. If people react on price structure, the result is clear. The market gives a clear message what is to be done. Concerning fundamental changes, there are no price signals, because there are no prices for new and then unknown products.

The description given by Joseph Schumpeter of the entrepreneur, the creative - destructive entrepreneur may be nonsense, but puts the right question on the agenda. If we have a lack of business start-ups the question rises what can be done to reverse the situation. What cultural changes are needed. If we assume for instance that a market economy is a learning process steered by trial and error, as Hayek and companies does, we need to accept that errors, concretely bankrupt, is part of the system and we have to change our attitude towards failed entrepreneurs. Furthermore the we need academic studies focusing on entrepreneurship.

[The auther doesn't mean by that the gossip taught in business studies. The author means by that starting REAL projects. See preliminaries.]

Inisde the lines of thinking that are more or less related to ordoliberalism like the austrian school, neoliberalism or social market economy, most of these authors were member of the Pèlerin Society, there are differences concerning the emphasize put on social goals. Neoliberalism, the austrian school is about personal freedom, ordoliberalism is about the economic order and the social market economy about social balance. There is no real difference on the assumed economic causal chaines, that is actually nothing else than Adam Smith, but there are differences on the importance given to these social values.

However none of the statements concerning social balance is precise enough to be of any use in practice.

Doch auch diese Verteilungswirkungen lässt Fragen offen, und sie bedarf der Korrektur. Es bilden sich erhebliche Unterschiede in der Verteilung der Kaufkraft, und daraus ergibt sich die Hinlenkung der Produktion auf die Deckelung relativ unbedeutender Bedürfnisse, während dringende Bedürfnisse anderer Einkommensbezieher noch nicht befriedigt sind. Die Ungleichheit der Einkommen führt dahin, dass die Produktion von Luxusprodukten bereits erfolgt, wenn dringendere Bedürfnisse von Haushalten mit geringem Einkommen noch Befriedigung verlangen. Hier also bedarf die Verteilung, die sich in der Wettbewerbsordnung vollzieht, der Korrektur.

Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen 2007, Seite 300

But the effects on distribution rises questions and corrections are needed. Big differences in the distribution of purchase power are possible and as a result the use of resources for relatively weak needs before the urgent needs of other income groups have been satisfied. The unequal distribution will lead to a situation where the production of luxury goods starts, before the more urgent needs of households with a lower income are satisfied. In this case the distribution as a result of the free market economy needs to be corrected.

The idea is as simple as wrong and most of all doesn't fit with the empirical data. He assumes that in case that the income is very unequally distributed, the resources will be used to produce luxury cars, parfums, designer clothes and so on and that therefore the more urgent needs, bread, simple clothes, public transport etc. will not be offered in a sufficient amount. Viewed from a simple empiric perspective that is wrong. Developed countries has no problems to produce luxury goods and daily goods at the same time in a sufficient quantity.

The basic error in this statement is his concept of 'capital'. Actually the misleading ideas about 'capital' produced an infinite number of errors in thinking, see interest rates.

What is actually true is this: Luxury goods have a higher profit margin than daily goods and in general we can say that a higher qualification is needed to produce them. If the demand for these products is high, the luxury sector has to pay hay wages, because the needed qualifications became scarce. If full employment is reached this way, daily goods perhaps are expensive, but nevertheless affordable, because people earn a lot of money. That is the situation we have in industrialised country. Daily goods are very cheap in comparison to what people earn.

If the resources, most of all labour, are not fully employed, because the demand for luxury goods is not high enough, wages will be lower, but daily goods will be cheaper as well. The actual living standard depends on productivity. As long as the demand is infinitive, workers will get to a situation where labour is scarce and if labour is scarce, they are paid with the (monetary) marginal output. The level of this (monetary) marginal output depends on productivity.

Only if we assume that 'capital' is scarce, in other words if we remain in the classical / neoclassical world, we can get to a situation like the one described by Walter Eucken. If capital is scarce, it is possible that the whole capital is used to produce luxury goods and all the unemployed labour is worth nothing because without 'capital' we don't get them to do something productive. The problem is, that 'capital' is never scarce, because it is actually money and if money is the problem the central banks will print and 'sell' it for a very cheap price, see interest rates.

[One of the most important 'daily good' is housing and instead of discussion about redistribution of the national income it would be more useful to discuss about the interest rates and amortization period of investments in housing. If the amortization period lasts as long as the time of use of the houses and the interest rates covers only the administration costs of the banks and the risk the rents can be reduced drastically, see Alfred Müller - Armack.]

The problem is not, that some people buy luxury goods and no resources are left for the production of daily goods. The problem is, that there are rational reasons for not spending money at all, see the little book about Keynes downloadable from the startsite of this website.

If we put aside some isolated remarks the difference between ordoliberalism and social market economy at one hand and neoliberalism / austrian school on the other hand is that the first ones discusses the (assumed) dichotomy between planned economy <=> personal freedom and the last ones the (assumed) dichotomy between market economy <=> social balance.

From a marketing point of view neoliberalism is much better. Concerning the dichotomy market economy <=> social balance a compromise is hard to find, but the problem is obvious. The somehow nebulous affirmation that a market economy is the guarantor for personal freedom needs not really to be proved, because it is vague enough. Only in concrete historical situations, for instance after the fall of the wall in Berlin in 1989, it becomes quickly obvious that there is a problem. After the fall of the wall East-Germans were free, but freedom is nothing without money and without massive social transfers, the system would had collapsed, whatever Milton Friedman tells us.

Beside all that his thesis or the assumed situation is strange, at least under the supposition of the classical / neoclassical theory. Luxury goods will be produced if the profit rate is higher in this sector than in the sector of the daily products. In a situation of competition the marginal profit will be the same in all sectors of the economy. That is at least the case in the classical / neoclassical theory. In the equilibrium the (monetary) marginal output of a productive factor is the same everywhere, see natural price / market price. The question is not whether the rich have the money to buy luxury goods, the question is whether the profit is higher in this sector and that is doubtfull. The author assumes that the producers of juices have the same profit rate as the producers of luxury watches and the latter is much more risky, because very susceptible to changes in fashion.

[The only reason why luxury goods can yield a higher profit than daily goods and competition will not reduce the profit to a 'normal' profit is the ability to establish a luxury good as a prestigious brand. In this case the brand is in a situation that can be compared to a monopoly. However this is a risky strategy, because the whole business is based on marketing and in the long run, the profits in the luxury sector is not higher than in the sector of the daily consumer products. The richtes family in Germany for instance is the Albrecht family, the owner of Aldi, who focused on cheap food.]

The only possible scenario that fits with the assumed situation of Walter Eucken is the impossibility to produce daily goods at a price people can afford. Something like that can happen in certain sectors of the labour market, where the demand is limited and the people able to do the job exceeds the number of the people required (cleaning services for instance). In this case the workers have no power and the wage doesn't correspond to the (monetary) marginal output of labor, something that is only the case if labour is scarce, but to the subsistence level. In other words, we have a ricardian scenario and not a neoclassical scenario.

(In this case, if we stick to the ricardian theory, something we have no intention to do, the workers who don't find a job at all will disappear in the long run, because they don't get even the minimum needed to survive.)

What is actually possible and more realistic is that: In some sectors of the labour market the qualification and therefore the productivity is very low, with the result, that wages are very low as well. In other sectors of the labour market where more sophisticated products and services are produced, for instance medical care, labour is scarce and therefore expensive. That can lead to a situation where the poor can't afford to pay for these services. However a redistribution of income wouldn't resolve the problem. This would only lead to a situation where these services become still more expansive, because demand would increase, but supply is fixed. The only way to resolve this problem is to train more people for these jobs.

[This problems happen especially if the access to certain professions is restricted by limitided study places, licences or other measures. The problem is described here: Milton Friedman - Health Care in a Free Market, although the author would put it more simple. Medical associations have an interest to keep the study places for medecine low, arguing that the costs of this study is very high, the study very demanding and so on and therefore only few people should be allowed to study medicine. We have no intention to discuss this topic in detail, but the author would say that a study in medecine costs something like 60 000 dollars and not 140 000 dollars and more as we can read everywhere. The reason why the author say that, is the simple fact that private universitie in Hungary can due it for 60 000 dollars having a good profit and the studies are internationally recognized and at a high level.]

The problem Walter Eucken describes can happen if we take into account the fact, that luxury goods are bought from foreign countries and 'capital', not consumed income of the past, is needed for investments. In this case and under the assumption that capital in the classic meaning is actually needed, we would have two problems. First there would be a lack of demand and therefore fewer jobs and second there would be a lack of capital for investments. The lack of capital is not the problem, because in contrary to the believe of the classical theory, investments are financed with money and the amount of money disposable doesn't depend on savings, but on the monetary policy of the respective central bank, see interest rates. The problem is, that any expansive monetary policy is doomed to failure, if a large part of the triggered demand is satisfied in foreign countries. If a country follows an expansive monetary policy, it has to stop the import by putting high custumer duties on imports, because otherwise the benefit goes to foreign countries and its debt burden increases, see beggar thy neighour policy.

As illustrated in the next paragraph there is only one difference between neoclassical theory and the general equilibrium, see Léon Walras, or, easier to understand, natural price and market price, assumed by the classical / neoclassical theory. The neoclassical theory assumes that there is no hindrance for optimal allocation and shows that under these conditions, no government intervention, perfect transparency, perfect competition all the markets will reach the equilibrium and equilibrium means that the resources are allocated in the most efficient way. There is therefore no differences in the goals and the definition of the optimum. The only difference is that the ordoliberalism assumes that without governmental intervention the intensity of competition is not high enough.

Lang anhaltende Gleichgewichtsstörungen lassen immer darauf schließen, dass das allgemeine Gleichgewichtssystem versagt. Hier aber gilt der Grundsatz: Allgemeine Gleichgewichtsstörungen lassen sich nur durch Beseitigung ihrer Ursachen beheben. Sie lassen sich nur durch Herstellung eines Lenkungssystem überwinden, das geeignet ist, den Wirtschaftsprozess einem allgemeinen Gleichgewicht zuzuführen.

Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen 2007, Seite 166

Long lasting impaired balances alwaysindicate that the general equilibrium system fails and these imbalances can only be eliminated by eliminating the causes. Only with the implementation of a steering system that is suited to bring back the economic process to equilibrium the equilibrium can be reached again.

If we put aside Milton Friedman, Walter Eucken & company, in other words all the authors belonging to ordoliberalism or similar lines of thinking, is just gossip and the terms he uses are poorly defined and mostly not defined at all. With poorly defined terms and concepts we gt to contradictory results. In the paragraph before he explains us that redistribution of income is needed, although he doesn't explain us how this should happen concretely.

However the idea of equilibrium is that the optimal allocation is reached without any governmental intervention and the remuneration of productive factors is a result of the market process. Beside that the (monnetary) marginal output of labour is overall the same, therefore there is no incentive to produce luxury goods and most of all, there is no need for redistribution.

The author doesn't believe in the neoclassical theory, that's not the point. The point is, that if a theory is based on neoclassical assumptions, as it is the case with the thesis of Walter Eucken & company, the argumentation has to remain inside the logic of the neoclassical theory.

Furthermore it is hard to discuss about his thesis, because we can have equilibriums or imbalances on different markets: the market for goods and services, the market for capital, the market for money and the labour market. The term imbalances is therefore meaningless. Imbalance on which market?

The term steering system is meaningless. It is well possible for instance, that strong unions can impose wages higher than what is needed for full employment, but it is unclear, how the government should intervene. The last time the government intervened in collective bargaining was in the years 1933 - 1945. Governmental interfering in collective bargaining for very evident reasons is strictly forbidden in Germany and in most countries, if Walter Eucken means that, it is impossible. Apart from that, the worker unions impose a wage above the wage of full employment, it is hard to imagine how wages could be too high. A single worker is to weak to impose a wage beyond the (monetary) marginal output of labour.

We don't know what Walter Eucken actually means by 'impared balances', because he never defines the term. In the neoclassical theory an impared balance is a situation where the consumer and the producer surplus is inferior as it could be in the equilibrium, see cardinal measurement of utitlity. In other words, equilibrium or not is a question of efficiency.

It is indeed true that at least in the long run the resources will be allocated in a way that the (monetary) marginal output is the same in any use and therefore a better allocation is not possible. However this describes only a static economy in other words an economy where production structure, the technology, the size of the market, the organisation etc.. doesn't change. In this case year after year the economy produces the same things, the same way. People now the prices and to little changes in the preferences or to light changes in the production structure people will adapt themselves by reacting on changes of the price signals.

However this is nothing that characterises a dynamic economy. For an economy in equilibrium, we don't need human decision making, because there is very little to decide, see equilibrium in the short run and equilibrium in the long run.

Under steering system Walter Eucken understands an economy that is steered by the price signals, see natural price / market price. At least that is what we have to assume, because he never explains what he understands by 'steering system'. However there are no prices for innovations. If there are prices, there is no risk and the problems are trivial. In the real world there is trial and error and success and bankrupcy.

Walter Eucken & company has no working experience and no clue what is really happening in the real world. Walter Eucken advocates for instance that the limited liability for corporation is abolished, because that induces people to take to much risks. The problem is, that in a dynamic market economy someone has to take risks, otherwise it doesn't work.

The basic problem of an market economy is not the steering system. The basic problem is insecurity and the fact that people cannot only consum or invest their money, both things create demand and jobs, but as well investing their money on the stock market. Something almost as liquid and therefore sure as money, but without any impact on the real economy. We will return on this issue in the chapter about Keynes.

We don't know what Walter Eucken exactly means and we can't discuss about vague gossip, but if he states that "Long lasting impaired balances ALWAYS indicate that the general equilibrium system fails and these imbalances can only be eliminated by eliminating the causes" and if wants to say by that the market mechanism resolves all problems, we would say that he has no clue. It is crystal clear that the price mechanism is helpful, because it induces people to adapt themselves to a changing productive structure, but this is only possible if the formal or informal education system allows this adaptation. The price signals can only have an impact if there is a real chance to react on these changes of prices and in any case this adaptation takes time.

In developed countries the price signals are actually in many cases enough to induce people to adapt themselves to changes and due to the existing complexity of the economy 'learning by doing' works. In underdeveloped countries it doesn't work and some planning of the know how transfer is needed.

Beside that there is more fundamental problem, addressed by keynesian theory. The classical and neoclassical theory, that is the basis of the ordoliberalism and similiar lines of thinking, assumes to things: First, that 'capital', not consumed income of the past, is needed for investments, more people can only be employed with 'capital', and second that all the income is either consumed or invested.

Both assumptions are fundamentally wrong. First, more workers can be employed with money whose availability depends on the politics of the monetary authorities and second there is no guarantee at all that the whole national income is either consumed or invested. The equations we find in any textbook about macrocenonmics, Y = C + I and Y = C + S are wrong. Even if Y, the national income, is completely consumed, investments are possible, see dynamic economy.

The problem is not at all the steering mechanism through prices. Although the price mechanism is a fundamental pillar of the market economy, the mechanisms are trivial and not questioned by nobody. However if there are price mechanisms, there is no insecurity and economics is trivial. In case of insecurity, in contrary to what the classical and neoclassical theory assumes, there is an alternative to consumption or investment: speculation on the stock market and this doesn't create any demand and therefore any work and no increase of the real GPD.

Insecurity on the other hand is a lack of information or an incapacity to get either access to the needed information or the inability to process the information. We can assume, given the high differences in the technological and organisationa infrastructre in the different countries of the world that there are a lot of profitable and sure investments, but investors are unable to detect them. This is the real problem. This is perhaps an error in keynesian thinking. He takes insecurity for a given fact. Perhaps there is a possibility to reduce it.

If he means by impaired balances that the bureaucracy is a hindrance for start ups and creating jobs, it would be better to adress this issue directly and discuss it. That's what Milton Friedman does, see Milton Friedman The Problem With Large Bureaucracy. This kind of discussion, a discussion about concrete issues, is very useful and if it were stell more useful, if the performance of concrete people inside the bureaucracy were discussed. An abstract discussion about vaguely defined 'impaired balances' is of no help.

To put it short: Ordoliberalism and similar lines of thinking, if we put aside Milton Friedman, are useless gossip. There is nothing new in these lines of thinking and still less any concrete proposition able to resolve a concrete problem.

In the next paragraph the equilibrium is the guarantor for justice as well as for efficiency, but concerning the first point, this statement is completely unclear. 'Justice' has a very clear definition in a market economy, although it is not sure that we all agree with this definition. The distribution of income in a market economy is either the result of power, if the competition between the workers is so high, that the wages don't exceed the subsistence level, this is the David Ricardo version, or workers are paid with the (monetary) marginal output, this is the neoclassical version.

The equilibrium doesn't make any affirmation about justice, if we understand by justice something else than a remuneration that depends on the scarcity of a production factor.

In practice, on this idea for instance is based the tax system, it is considered just if the marginal decrease of utility is the same for every one. This means that taxe rates increase the more someone earns, because the marginal utility of money decreases. For someone who earns
15 000 dollar a month paying 2000 dollars of taxes can be the same as 100 dollars for someone who just earns 1000 dollars a month.

At the other hand efficiency is a criterium to be taken into account. A complete levelling of income, by fixing the wages or by redistribution, would abolish any incentive to adapt oneself to a change of the production structure. Nobody would undergo any arduos training if at the end he wouldn't be better off than someone who did anything. In this case the efficiency would decrease so much, that there would be little left for redistribution. Perhaps the society would be just, but everybody poor.

However some taxes doesn't have any impact on efficiency. Income from inherited capital for instance that is administered by institutional investors could and should be taxed higher than income from work. The argument that this would lead to a 'flight' of capital where taxes are lower is not very convencing. If the monetarian authorities keep interest rates low, there is no need for this 'capital' in the sense of non consumed income of the past. They can flee if they want. A real problem is the flight of human capital, but not of 'capital' in the meaning of not consumed income of the past.

Die Aufgabe bleibt immer die gleiche: Die Herstellung einer funktionsfähigen und gerechten Ordnung. Was Gleichgewicht bedeutet, kann einem im Angesicht dieser doppelten Aufgabe klar werden: Die Funktionsfähigkeit ist eine Frage des Gleichgewichts. Nicht weniger aber ist es - was hier angedeutet werden soll - die Gerechtigkeit. Dem Gleichgewicht kommt also mehr als eine bloß ökonomisch-technische Bedeutung zu.

Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen 2007, Seite 166

The task is always the same. The order has to be as workable as just. If one is aware of these two taks of equilibrium, he understands what equilibrium is about. Functionality is a question of equilibrium, but equally important is, that the point we want to focus on here, is justice. The equilibrium has therefore more than a simple economic-technical meaning.

Not at all. All kind of equilibriums, the Alfred Marshall version, the Vilfredo Pareto version, the Léon Walras version and the Adam Smith version is exclusively about optimal allocation of resources. The exclusive goal of all these different concepts of equilibrium is to prove that perfect competition leads to optimal allocation of resources and the different productive factors are paid depending on their scarcity. The more scarce they are, the better they get paid.

If we find that remuneration 'just' or 'fair', if they really depend on a personal effort or are the result of social conditions and luck is completely irrelevant in this concept.

If we want to criticise the concept of the equilibrium because it is unfair, we have to take a completely different approach. Capital is considered in the classical / neoclassical world as a productive factor and the result of a prior sacrifice and has therefore a price, see the little book downloadable from the startsite of this website. Under this perspective capital is scarce. If all that is not the case, in a situation of unemployment the sacrifice is useless, the price paid for money is to high and the income generated by capital only the result of an arbitrary restriction of the amount of money. This is not only unfair, it is inefficient.

Market prices and therefore the remuneration of productive factors have little to do with 'justice'. Market prices are the result of scarcity. If an engineer earns more than a bricklayer it is because the first one is scarcer than the second one and it would be a very bad idea to level the remuneration. The vaste majority of people would say that it is fair that the engeener earns more than the bricklayer, if the differences are the result of an effort and the vaste majority would say, that it is unfair, if the difference is due to a difference in opportunities. Redistribution of income would be confronted therefore with a bigger resistance than equalizing the access to training and education and the last approach would be, if successful, more efficient as well, because general productivitiy would increase and the costs of production would decrease.

[Equal access to opportunities can mean a lot of things, even a change in the didactical method. We don't know if the given 'talent' plays a bigger role or the didactical methods, but if the last one plays a bigger role, there is space for improvement. If we take into account that knowledge of the people has dramatically increased in the last 500 years, there is a strong evidence that the opportunities have a much greater impact than 'talent'.]

A redistribution of income will always lead to a debate about justice, because the group negatively affected will argue that the differences are justified by their personal performance. Levelling the qualification would make this argument obsolet and find less resistance.

Actually the analysis of the equilibrium allows to measure the difference between the ideal state, a state where the resources are allocated in an optimal way, and a suboptimal state, where the resources are not allocated in an optimal way, for instance if the government sets minimal prices, maximal prices, customer duties, taxes and so on. This is the purpose of analysing equilibriums, but the equilibrium is a theoretical concept.

In order to work a free market economy the equilibrium has not to be reached and actually never will be reached. It is enough that there is a tendency towards the equilibrium. The equilibrium is a state where the economy just reproduces itself, year after year, where there is no economic development, see dynamic economy.

The sentence "...Functionality is a question of equilibrium..." is meaningless and most of all incompatible with the ideas of Walter Eucken and the ordoliberalism. Ordoliberalism is about steering a PROCESS, the equilibrium is a STATE. In the ordoliberalism the RESULT of the PROCESS is unknown, but it is presumed that the market mechanism will lead to the optimal allocation of resources. It is assumed that decentral information processing through prices will steer the economic processes the best way possible, but there is no prediction about the result. The EQUILIBRIUM describes a concrete RESULT, that's a completely different issue. The analysis of an equilibrium in the neoclassical theory DOESN'T explain how an economy gets there, but describes the state itself. Ordoliberalism is about the PROCESS how to get there. It seems that Walter Eucken & company didn't understand their own theory.

In the equilibrium there is no decision making needed and still less an entrepreneur, because everything is already fixed. Prices are well known and there is not even a change of prices. An economy in the equilibrium state can be perfectly planned and should be planned. There is no need for trial and error, if we already know everything, see as well methodological approach.

The term long lasting imbalances is meaningless as well. Dynamic economies are about imbalances, always. Changes in the production structure are always disturbing. If messages are sent through the internet in milliseconds, the Post will be disturbed, if all the newspaper appears online, the newspapers on paper will be disturbed, if people buy more things online, the shops will be disturbed. Market economies are about disturbing someone.

This sentence is completely meaningless. Walter Eucken & Company have a problem with the terms they use. It is kind of "associative" thinking, that means nothing if one analysis it more in detail.

Lang anhaltende Gleichgewichtsstörungen lassen immer darauf schließen, dass das allgemeine Gleichgewichtssystem versagt. Hier gilt aber der Grundsatz: Allgemeine Gleichgewichstsstörungen lassen sich nur durch Beseitigung ihrer Ursachen beheben.

aus: Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen, 2007, Seite 165

Long lasting impaired balances alwaysindicate that the general equilibrium system fails and these imbalances can only be eliminated by eliminating the causes.

If we want to figure out what he wants to say, we have to assume that he sticks to the neoclassical theory, although he didn't understand very well, that the neoclassical theory is actually the opposite of what he presumes. In the neoclassical theory there is no trial and error needed, because neoclassical theory supposed perfect information. Under perfect information no trial and error process is needed. The problem is, that the future doesn't have any price.

The future is very insecure and the steering mechanism of a market economy is not enough to get the economy back on track, in other words to reduce unemployment. What he describes in the paragraph below, doesn't work so easily in practice.

That would only be true, if Say's law would be valid, what is not the case. Say assumes that people only produce a value, if they want to buy something for the same value. The more value is created, the higher the demand. A lack of demand is therefore due to the fact, that the production is not high enough. The problem is, that this doesn't resolve anything. If 'capital', not consumed income of the past, is needed to start the production and the amount of capital is not enough, it is perfectly possible that any production is converted into demand, but this production is not high enough to reach full employment.

[In a keynesian scenario this problem could be resolved easily by an expanise monetary policy.]

The second problem is that the classic and neoclassical theory, assume that income is either consumed or saved for being invested. The logic is simple. If the interest rates are not high enough to induce people to save part of their income, they will consume it and in both cases they will create demand. However this is not true, because in a situation of insecurity, people will not invest but in the stock markets, see Keynes.

[In this situation people will not even take loans, because they are not sure that they can pay them back. In this situation Keynes advocates in favour of an expansive fiscal policy.]

Ordoliberalism and similar lines of thinking underestimate completely the problem of insecurity, because in the world of a professor at the university there is none. They get paid at the end of the month for writing never discussed discussion papers.

In der vollständigen Konkurrenz wird bekanntlich der Wirtschaftsprozess auf die Nachfrage der Einkommensbezieher ausgerichtet, und zwar so, dass sich die Anbieter an Konkurrenzpreisen orientieren. Haftung gehört zur Lenkungsmechanik der vollständigen Konkurrenz. Sie ist ein unentbehrliches ordnungspolitisches Institut der Wettbewerbsordnung. Denn die die Wettberwerbordnung setzt voraus, "dass der Weg zur Rentabilität nur über eine äquivalente wirtschaftliche Leistung führt, während gleichzeitig dafür gesorgt sein muss, dass eine Fehlleistung ihre unerbittliche Sühne in Verlusten und schließlich durch den Konkurs im Ausscheiden aus der Reihe der für die Produktion Verantwortlichen findet. Einkommenserschleichungen (ohne entsprechende Leistung) und ungesühnte Fehlleistung (durch Abwälzung des Verlustes auf andere Schultern) müssen in gleicher Weise verhindert werden" (W.Röpke).

Walter Eucken, Grundzüge der Wirtschaftspolitik, Tübingen 2007, Seite 281

In a situation of perfect competition the whole production is oriented to the demand of the people with purchasing power in a way that the supplier sell their products to prices of competition. Liability belongs to steering mechanic of complete cometition. It is an indispensable organisational institution of the competition order, because the competition order supposes "that the way to rentability is only possible through a corresponding economic performance and any mistake has to be sanctionned relentlessly by loses and finally bankrupcy with the consequence that the responsables are no longer part of the production system. Income obtained by fraud (without a corresponding performance) and unsanctioned errors (by passing the loses to others) has to be prevented (W.Röpke).

There is no doubt that problems like that exists, it is crystal clear that risk taking and infefficiency increases if a third party pays the bill. That's why bureaucracies are always less efficient than private companies, but expressions like "... unsanctioned errors..." reveals a completely erroneous conception of a market economy, because the real problem is completely different. No one takes any risk and if nobody takes any risk and tries we quickly get into a downward trend and a high unemployment rate. If the government intervenes in a case like that it is not plausible that we have a missallocation of resources, because the maximum of missallocation is already reached. Unemployment is the maximal missallocation, because it is completely unproductive.

The problem is much more complex. If we want to avoid structural problems we have to prepare today for an unknown future. The advice of Walter Eucken is not doing nothing at all, because that is risky.

This is for instance what institutional investors do. The have a liquidity preference, in other words they only make investments that are reversible at any moment, in other words, they invest in the stock markets.

Besides the fundamental problems, there are other problems with his idea that the limited liability for corporation should be abolished. A company can even go bankrupt without having taken any risk. A building contractor for instance can go bankrupt if his customer doesn't pay or get bankrupt himself. Every company who works with a corporation knows that the liability is limited and if they don't want, they don't have to corporate with this company.

Beyond what has been already said by Adam Smith, competition and decentral information processing through prices, there is no new idea in the ordoliberalism and similar lines of thinking.

Concerning the main problem of Walter Eucken, the risk that the intensity of competition decreases if not maintained by a strong government, we can say that this problem is resolved provided that the government is weak. If the government does absolutely nothing, competition is very strong because it happens on a world wide level and at a world wide level there is always enough of competition. Almost all restrictions on competition are due to government intervention. Milton Friedman is completely right on this issue: Milton Friedman on Antitrust.

The ordoliberalism and similar lines of thinking considers the market economy, with different emphasis, the guarantor of personal freedom, efficiency, social stability. Sometimes the government is the menace to market economy and sometimes the market economy itself, which tends to eliminate competition. There is no difference in the underlying economic concept, but big differences on the issues emphasised, as we will see in the following chapters about Walter Eucken, Friedrich Hayek and Alfred Müller-Armack.

It is true that totalitarian or authoritarian regimes got and gets always to power in situations of economic instability. The ordoliberalism and similar lines of thinking has to prove therefore that competition and free market alone prevents economic instability.

There is little historical evidence for that and furthermore there are a lot of economic reasons that make this thesis questionable.

If this thesis, the idea that the market economy protects personal freedom, promotes social stability and is the most efficient system is not true, the question rises why economic instability leads to radical positions. This question is relevant, because if we understand that, we can do something against radicalisation.

Trivial but perhaps useful would be a general better understanding of economic issues and that the truth are not the extremes, but something in between. However to trigger a general interest a change in the discussion with the public is needed, see preliminaries.

The basic assumption of ordoliberalism and similar lines of thinking is that everything should be coordinated and steered through the market and what cannot be steered and coordinated through the market shouldn't be steered and coordinated at all. There is actually nor space nor need for any democratic decision making process as we are going to see in the following chapters.

If it were true that the free market economy leads automatically to social stability the thesis that the free market economy protects against totalitarian or authoritarian regimes would be true. An actually useless state would never become very powerfull. Nobody would ask for government intervention. If noboby ask for government intervention, political mouvements and still less radical political mouvements have any chance to get to power. That's obvious.

The truth is different. People have a tendency to demand from the government to resolve certain problems. Social instability leads to a situation where people are receptive for radical solutions and for government intervention and this demand can be abused.

Ordoliberalism in similar lines of thinking believes that collectivis, totalitarism, socialism, the terms are actually used by these lines of thinking without any difference, are the result of misleading ideas about the working of the economy. This is not true. Totalitarism or authoritarian regimes can be based on any kind of ideology including religion. The attempt to explain totalitarism exclusively by economics is misleading. We are going to discuss about these issues in the following chapters.

Ordoliberalism and similar lines of thinking, neoliberalism, austrian school, social market economy, have all a somehow critical distance towards democracy, see for instance this short statment: Milton Friedman on Democracy. This is a logical consequence of their basic thinking. If everything is resolved by the market, there is no need for governmental intervention and if there is no need for governmental intervention, there is no need for democracy, because there is nothing left to decide upon.

The failure in the logic of Milton Friedman is, that suppressing definetely a minority is not compatible with democracy, because in this case the minority would lose its change to make part of a new majority. It doesn't make any sense to question democracy by arguing that it can be abolished.

Karl Popper belonged to the Mont Pèlerin Society as well, however his approach is completely different. He advocates in favour of an open society. By open society he understands a society that is open for any kind of further development and is not transformed in a kind of "ideal" state buy coercion as it happens in socialist countries.

Democracy in this concept is kind of a trial and error process, where errors can be corrected by changing the government. Democracy is the only political system where there is an institutionalised and non violent way to get rid of bad ideas and incompetent governments.

Democracy becomes under this perspective kind of an experience comparable to the experiences in natural science. Someone has a theory about an issue and the experiment will show or not if the result is what can be predicted by the theory. If this is not the case, another theory is needed.

However this is much more complex than a simple system steered by incentives of the ordoliberalism type and the quality of the democratic decision making process depends obviously from the qualification of the voters. If they are not sufficiently well trained, it is well possible that their decisions depend more on emotions than on a clear idea on how to resolve a problem.

The tendency to personalise conflicts or to put a lot of hope on people is in indicator that people are overstrained when it comes to make a decision about a more complex issue and they simplify the problem by personalising it. We will come back on the issue in the chapter about Karl Popper. There is space for improvement, see preliminaries.

Ordoliberalism and similar lines of thinking have a certain tendency to consicer democracy as the supression of the minorities. Beside the fact, that this is wrong, see a variation of a totalitarisme theory, it is not logical, because they as well assume that a free market economy leads to the highest living standard of the majority.

[To be more precise, we assume that they stick to the neoclassical theory. David Ricardo assumes that 'capitalism' lead to a system where the vaste majority lives at subsistence level and this opinion is more or less shared by Jean Baptiste Say. The neoclassical theory assumes that productivity of labour is increased and the amount of labour increased until a level where it becomes scarce and is therefore paid with the (monetary) marginal output.]

If the majority in a free market economy is not better off than in another economic order, in other words if the unequal distribution is not compensated by a higher living standard of the poor because efficiency is higher, this system will not be accepted and in the long run and the majority will abolish it. That's what we have seen very often in history.

The same is true for democracies. In contrary to what Hayek assumes, differences in income, even high differences in income, are accepted, if people believe that this improves efficiency and they are therefore better off or at least not worse off.

The approach of Karl Popper seems to be the most realistic one, but has a failure as well. The title "The open society and its enemies" describes the central problem, but one can ask oneself open for what? We admit that this is a more philosophical question. If the goals and aims of the people depends on what they assume possible. en things they assumes to be stable, in personal ambitions etc.. we can reflect as well about these goals. We will return on the topic when talking about Ernst Bloch.

Ordoliberalism and similar lines of thinking, especially Friedrich Hayek, assumes that totalitarism, socialism and collectivism, term he uses almost as synomyms, are the result of governmental interference in the economic order. That supposes a certain idea about mankind. We can accept that a lack of competition leads to a situation where an abuse of power is possible, especially that some people earns money without a correspondent performance.

However totalitarism is much more than that. The theory of Hayek only explains any kind of rent seeking, but totalitarism is something completely different. Totalitarism is the attempt to control any sphere of of social live and to demand an active support of the ideology. Private live is restricted to the utmost and any resistence is broken by brute force.

We understand that certain lobby groups will try for instance to induce the government to impose customer duties on certain product to protect them from foreign competition at the expense of the consumer, but it is hard to see the relationship between that and the imposition of an ideology like the national socialism.

Totalitarian ideologies never got too power THROUGH the economy, as Hayek assumes, but once got to power they capture the economy. Hayek assumes that clear rules will prevent that from happening. The problem is, that totalitarian regimes don't care about rules. Maybe it may be helpful to that the rules interdicts clearly that the virus of an ideology enters the government and administration, but a vigilant civil society would have the same effect. Its like the Mafia or other criminal instution. If we allow them to put a foot in the door, they will open the door.

Furthermore Hayek assumes that the content of an ideology is relevant. That's completely wrong. The content is irrelevant. Hayek assumes that ideologist are well minded people, but the way they try to realize their ideas leads to catastrophy. That's foolish. Hitler and Stalin were not well minded people. Their ideology was just a means to get and stay in power.

Therefore totalitarism is a much more complex phenomenon and has little to do with economics.

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ordoliberalism

The difference between ordoliberalism and the neoclassical theory is that neoclassical theory assumes perfect competition and ordoliberalism assumes that is must be maintained by the government