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Ordoliberalism & Competition Law

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Competition law through an ordoliberal lens. Talk by Ignacio Herrera Anchustegui at the International Institute for the Sociology of Law, Oñati, 17 February 2017

Ordoliberalism is a German school of economic thought that advocates regulation of the free market economy based on a set of state-imposed rules guaranteed by the economic constitution, to impose a competitive order in society. It proposes an alternative method to pure laissez-faire and state-planned economy for the better regulation of the market economy, where the goals are the protection of the competitive process and individual freedom. In this paper I submit that ordoliberalism, an indigenous European competition policy, is an adequate economic and analytical tool upon which to base the practice anddecision-making of competition law. My aim is twofold: to contribute to the discussion on what ordoliberalism is, in general, and in particular concerning competition policy, and offer a fresh perspective on an ordoliberal-oriented competition policy.

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Ordoliberalism & Competition Law

  1. 1. www.beccle.no post@beccle.uib.no Ordoliberalism & Competition Law Ignacio Herrera Anchustegui PhD Candidate / Post-doctoral research University of Bergen
  2. 2. Content • Ordoliberalism in a nutshell • Birth and waves of ordoliberalism • Central themes of ordoliberalism – Basic postulates – The Economic Constitution – Social Market Economy – Economic Freedom • Ordoliberal competition – The past – Some thoughts on the now • Protecting competition and economic freedom • Competition itself as economically efficient • Ordoliberalism and the more economic approach • Conclusions and discussion
  3. 3. Ordoliberalism in a nutshell • State regulated competitive process for the protection of individual economic freedom • Arises on the late 1920s and early 1930s • Freiburg Imperative – the regulation of the competitive order of market freedom – Protection of private property – Trust in the market-price system • The societal Ordnung dictated by the state imposes competition rules – Respecting individual freedoms
  4. 4. Ordoliberalism in a nuthsell • Therefore, ordoliberalism is a liberalism “European Style” • Often labelled as the “third way”
  5. 5. Birth of ordoliberalism • Late 1920s and early 1930s as consequence of WWI, the great depression, the Weimar Republic failure and the Nazism • Private market power can be abused to the detriment of economic freedom and preventing the state to function • Inspiration from classical liberal theory and the Historical School (Germany) • Emphasis on individual freedom and preventing of public power in private spheres – But argued for the control of private economic power
  6. 6. Waves of ordoliberalism • The Freiburger Schule: 1930s and 1940s in Freiburg: Eucken, Böhm and Grossmann-Doerth • Second wave: more social than economic. Rüstow, Röpke, Müller-Armack and Erhard (Economic minister and then German Chancellor). Major impact in the EU project: Social Market Economy and direct influence in the drafting of the Rome Treaty • Freiburg tradition: focused on economic order and competition policy: Hayek, Hoppmann, Mestmäcker, Vanberg
  7. 7. Waves of ordoliberalism
  8. 8. Central themes • Ordoliberalism as a full social/economic policy: social- philosophy • Third way between neo-liberalism and state-planned economic – Large laissez-faire but… ‘advocating the creation of ‘an institutional framework which brings order to economic processes in a liberal atmosphere’ • Not a compromise or midway – Institutional framework for better regulation of market economic
  9. 9. Central themes • Set economic policy based on clear legal rules of the game • Price system is key (Freiburg Imperative) • But the market and the invisible hand is insufficient, the efficiency depends on ‘the appropriateness of the economic constitution’s rules’ – Good economic rules = efficiency (distribution is another issue) • Therefore, the state imposes an ‘order’ in the market based on the rule of law to bring economic development
  10. 10. The Economic Constitution • Wirtschaftsverfassung: the child of Böhm. “defines the rules of the game under which economic activities can be carried out in the respective jurisdictions” (Kerber, Vanberg 2001) Anchored on the “private law society” = freedom of contract and voluntary transactions (Böhm in Peacock and Willgerodt 1989). • Both positive and negative limits on state intervention and also for undertakings towards enhancing private cooperation. • Synchronize law and economics • In my view, the economic constitution protects and defines the limits of the private sphere.
  11. 11. The Social Market Economy • Is the result of the 2nd wave of ordoliberals, in particular Müller- Armack who claim that it is ‘market freedom with social balance’, combining the productive prosperity of a capitalist-driven economy with institutions and regulations guided by the pursuance of social justice (Müller-Armack, 1946) • Incorporated in the TEU Article 3.3: “The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.”
  12. 12. The Social Market Economy • Hayek: the most interventionist of the ordoliberal-related ideas: compromises individual freedom. • Seeks the individual satisfaction and implies a redistribution of wealth “to the less fortunate, although not in ways which will defeat the basic aim.” (Peacock and Willgerodt, 1989 quoting from Müller-Armack) • Three (+2) pillars: – Competition policy on the Ordnungsökonomie – No unsystematic state interventionism – No central planning – Welfare measures (Barry, 1989) – Preservation of individual freedom (Barry, 1989)
  13. 13. Economic freedom • Private economic freedom protected and limited by legal rules that ‘define mutually compatible private domains within which individuals are free to act, protected from encroachment by other private law subjects as well as from government intervention’ (Vanberg, 2009) • Protection from both the state (traditional liberalism) as well as from private market power that is detrimental to competition • Based on contract freedom, but with limits to avoid abuses of unilateral behavior (exploitation) or cartels
  14. 14. Ordoliberal competition – the past • Ordered competition is the key to the Ordoliberal economic system • Goal is to protect competition as such, as a process and freedom to compete among players • Should be based on pre-existing rules rather than pure case-by-case decision making • Was developed before the more “economic schools” of the current state (Chicago & Post-Chicago), but not devoid of economic knowledge or grounds
  15. 15. Ordoliberal competition – the past • Competition is consequence of scarcity and needed to coordinate social and economic life. • Economic order enables market to function effectively and efficiently • Surrogated to the rules of the economic constitution – competition laws • As put by Van Miert (European Commissioner) ‘Privatisation, deregulation, releasing initiative are clearly important. Only market forces will in the end get the collapsed state economies out of the rut. But market forces not only have to be released, they also have to be contained by accepted and enforced rules of the game. The invisible hand is not sufficient. Like a football match it needs rules of the game and a referee. The market is not anarchy but a subtle construct of human ingenuity’ (Van Miert, 1998).
  16. 16. Ordoliberal competition and the now • Ordoliberalism is a living school, not only rooted in the 1930s and 1940s. – Changes and developments can be adjusted to ordoliberal ideas • Three main discussions on the now – Protecting competition and economic freedom – Competition as a process = economically efficient – Ordoliberalism and the ‘more economic approach’
  17. 17. Protecting competition & economic freedom • Main goals are the protection of individual economic freedom to compete, and the competitive order (or competition as such) • By protecting the competitive process the interest of consumers and market players is supposed to be guaranteed – Implies preventing the distortion of competitive price setting – Abuses of market power – particularly exclusion (parties are not free) – Based again on some pre-existing rules that tell in advance which behaviors are allowed or not – Economic arguments and efficiencies, therefore, must ‘fit’ the pre-set rules
  18. 18. Competition as economically efficient • A ordered competition that is protected avoids undertakings trying to cheat or going to undercompetitive choices • Rules are designed in an economically informed manner and set a standard of performance competition (behaviors allowed and desired) • If competition therefore as such is protected: economic efficiency and social peace should follow. In this sense, if freedom to compete is preserved, economic efficiency is a derived consequence because performance competition is allowed to naturally take place, which would lead towards economic progress. Such freedom to compete, however, requires that economic players have equal legal standing and that economic activities are coordinated through voluntary contracting and exchange. (Herrera Anchustegui, 2016)
  19. 19. Competition as economically efficient • More (perhaps quite so) interventionist than Chicago and Post Chicago schools • Protecting competition as such and economic freedom does not imply protection of inefficient firms • The focus is more on the medium and long term of the wellbeing • This means that some abuses of economic freedom are prohibited (even if strict) to avoid dynamic inefficiencies • The aim, therefore is to protect competition and not economic efficiency (Akman, 2011) – But…if you protect competition as such then the result should be also economic efficiency in the long run
  20. 20. Ordoliberalism & more economic approach • Since the ‘more economic approach’ ordoliberal views have been criticized • Mixing ordoliberalism with formalism and ‘form-based approaches’ • Mixing ordoliberalism with criticism to the Court’s decisions (which do sound quite ordoliberal at times)
  21. 21. Ordoliberalism & more economic approach • Ordoliberalism advocates for clear rules of the game (conducts allowed and forbidden) and, therefore, forms are helpful • This does not mean that economic considerations are eliminated – Not all is pure formalism and devoid of efficiency considerations • Ordoliberalism is compatible with modern microeconomics and industrial organization – It is not a different type of economics – What it does is to have goals and values; economics therefore bring information about what is pursued
  22. 22. Ordoliberalism & more economic approach • What ordoliberalism is incompatible with is Departure from the rule of law and just using a ‘a case-by-case assessment based on pure welfare considerations as a guiding policy instrument without the existence of more formal or structured rules defining the economic game’ (Herrera Anchustegui, 2016) • But compatible with ‘advocating for the use of economic insights and in accordance and as allowed by the rules in place’ (Herrera Anchustegui, 2016) • Different levels of application: Ordoliberalism plays a “macro level”: shapes and sets the rules and aims of an institutional framework, whereas a neo-classical microeconomic analysis of the cases is the concrete application of the competition policy
  23. 23. Which welfare standard? • Tricky question. Traditional ordoliberals did not speak in such language, but seems to be the pursuit of what I call an “aggregated consumer welfare standard” • No pure short term end consumer • Consumer is not only the end buyer, but also other players in the market that acquire goods (to resale a product) • The idea is a focus on medium to long term efficiency in which the competitive structure (both in the upstream markets and downstream markets) remains healthy = not excessive concentration of private market power
  24. 24. Which welfare standard? • In practice? The harm required to trigger the application of the law • A short term end consumer welfare standard triggers upon direct end consumer harm (US and the ‘more economic approach) • A broader perspective triggers CL even absent direct end consumer harm because there might be damage to competitive structure in the long run = harm to end consumers (ECJ and the ordoliberal view) • Broader and more protectionist/interventionist against conduct that diminishes competition • This, however, does not imply protection of inefficient firms = which are better off the market. Means let small firms have a chance of develop to become efficient
  25. 25. Conclusions and Discussion

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