1. Democracy and Rule of Law:
Concordance and Conflict in
Competition Policy
.OECD, Paris, 7th December 2017
University of Freiburg and Walter Eucken Institut
Prof. Dr. Dr. h.c. Lars P. Feld

2. 2
The question as to whether competition and democracy are symbiotic …
 … reminds me of the old debate about economic and political freedom,
 … triggers the farther reaching question of markets vs. government intervention,
 … highlights the ambivalent relation between democracy and the rule of law.
Does economic freedom require political freedom or vice versa?
 We still do not know.
 In its Constitution of Liberty, Hayek was convinced that both must go hand-in-hand.
 Myriads of empirical studies in Economics and Political Science have not arrived at
clear-cut evidence: Economic freedom is associated with higher growth, evidence
regarding political freedom seems to be mixed, but is it?
 Feld and Voigt (2003), Gutmann, Voigt and Feld (2015): Rule of Law (judicial
independence) triggers economic growth.
Economic and political freedom

3. 3
Competition in markets according to German ordoliberalism (or the Old
Chicago School of Frank Knight and Henry Simons)
 German ordoliberalism views lack of competition as the evil of the development of
the German economy since the end of the 19th century through the Weimar
Republic until the end of the Nazi dictatorship.
 Competition (in markets and politics), according to Franz Böhm, is the most
ingenious instrument of disempowerment in history.
 F.A. von Hayek: Competition as a discovery procedure.
Competition in markets according to mainstream economics
 From perfect competition to effective competition and to contestability of markets
 More Economic Approach vs. Freedom in Competition
Competition in markets and politics

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Competition in politics: Democracy
 Checks and balances and the American vs. the French tradition.
 Separation of powers and division of powers.
 Several empirical studies in (political) economics (Public Choice) highlighting the effects
of checks and balances on economic policy.
 But there are also dysfunctional outcomes.
Competition in markets and politics are at least symbiotic in that sense.
 Both are supposed to restrict power in order to lead to rational political outcomes.
 Tragic examples in history when market power facilitated the dictatorial takeover of
society at large (Gleichschaltung).
 First thesis: There seems to be a mutual reinforcement of competition and democracy.
Competition in markets and politics

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Competition and democracy are, however, not necessarily complements, but
stand in conflict to each other
 Democracy may induce restrictions on competition.
 Subsidies and state aid control.
 National champions.
 Politicians favor restrictions on merger control due to interest group capture.
Time inconsistency problems may be solved by tying one‘s hands.
Independent competition authorities restricted by the rule of law.
 Germany: competition authority, monopoly commission, minister allowance.
 Clear example of the conflict between democracy and competition: comply or
explain.
Binding competition authorities by other socially desired objectives is harmful.
The ambivalent relation between democracy
and rule of law

6. 6
Yes: Competition in markets complements competition in politics, i.e.,
democracy.
 Both can reinforce each other.
 This leads to better outcomes for consumers and voters.
No: There is a notion of conflict between both as democratic decisions
may restrict competition in markets because it is subordinated to other
political objectives.
 Time inconsistency problems.
Solution: independent competition authorities restricted by the rule of
law as well as comply-or-explain principle.
General lesson: The rule of law may also be under threat in democratic
societies.
Are competition and democracy symbiotic?