How Freiburg and Chicago drifted away from market power and monopolies
The early neoliberals tended to view market power and monopolies as phenomena that had to be somehow restrained by an institutional framework in order to maintain competitive pressure. However, over time the Freiburg and Chicago schools of thought diverged in their respective views, resulting in fundamentally different perspectives on market dynamics and the need for regulatory action, thus marking the ends. respective areas of the neoliberal spectrum.
Editor’s Note: The current debate in economics seems to lack historical perspective. To try to fill this gap, we decided to launch a Sunday column on ProMarket on the historical dimension of economic ideas. You can read all the pieces in the series here.
In the neoliberalism cosmos, the Chicago and Freiburg schools of thought are generally seen to hold virtually opposing views when it comes to fundamental questions of market dynamics and their appropriate institutional framework. While the Chicago School is often described as synonymous with a free market approach in capital letters, rekindling a belief in self-regulating markets and a view of state policy reminiscent of the laissez-faire of the past, the school of Friborg – at least in its manifested in the classical texts of this tradition – represents the opposite: a conception of markets and market behavior which crucially requires the rigorous application of what the Friborg people generally called a competitive order to ensure that markets do not undermine their own logic as sites of competition.
However, the contrast between these two schools was not acquired at their respective creation. In fact, Freiburg and Chicago, for some time, were very on the same page when it comes to the exact issues that now set them apart one of the other – after all, both are widely and correctly viewed as undercurrents or variations of the same neoliberal tradition. So how did these two neoliberal worlds come apart?
Before the drift: ordoliberalism and early neoliberalism (Chicago)
Where there is estrangement and divergence, there must first be agreement and (common) understanding. Indeed, the ordoliberals of the school of Friborg and of the first school of Chicago around Frank Knight, Henry Simons and Jacob Viner presented notable correspondences.
The central argument of the ordoliberals was that the neoliberal project of which they saw themselves as part was not only gravely compromised by well-meaning collectivist fanatics and social policy planners, but also by an overly naïve understanding of how markets work, which they attributed to the mainstream of (economic) liberalism until the 20e Century. According to ordoliberal analysis, markets were neither natural phenomena that simply occurred because of the “propensity of people to barter and trucking,” as Adam Smith put it, nor stable entities guaranteed by the government. fact assumed that market transactions were in everyone’s best interest.
On the contrary, ordoliberals such as Freiburg school leaders Walter Eucken and Franz Böhm argued that markets should be constituted in the first place by some sort of institutional order, and that these artificial entities were also much more fragile than classical economic liberalism had supposed. . They conceptualized markets not so much in terms of harmonious trade as of (potentially) adversarial competition. Since each market player has an incentive to reduce competitive pressures, the natural result of market dynamics – if not controlled by political and legal institutions – will be the weakening of competition and development. concomitant with market power to the detriment of competitors and consumers.
That is, ordoliberals had a pretty good idea of what markets should look like, what real and desirable competition should entail, and what other forms should be banned, and they were also pretty candid about the militant role that leaders and the courts needed to play in enforcing the competitive order. Therefore, they took a typically aggressive stance on monopolies as the embodiment of market power and advocated the introduction of institutional precautions to ensure that empirical markets come to resemble their ideal of perfect competition as much as possible. . In this “regulatory ideal”, to put it in Kantian terms, no market actor would have a hold over the others or a significant unilateral influence on the modalities of a market transaction, in particular the price of such transactions.
Until the late 1950s, such notions were hardly considered outliers in the world of neoliberal thought. On the contrary, the work of the principal thinkers of the “first” Chicago school presented a certain number of correspondences with the Freiburg vision of things, whether it was about Frank Knight and his competition analysis or, more importantly, the widely discussed debate of Henry Simons A positive program for laissez-faire who was equally outspoken about the evils of monopoly and market power.
Even beyond these early representatives of a Chicago perspective, the notion of a market framework explicitly designed to improve competition continued to be appealing, even to those who are often seen as the embodiment of the so-called neoliberal belief in self-regulatory markets, namely Milton Friedman. and Friedrich August Hayek. In the 1940s and even at the beginning of the 1950s, both were adamant in their demand for a market order that would ensure maximum competition, explicitly criticizing “classical” liberalism for not paying attention to these issues in the past. . In a 1951 article titled “Neoliberalism and its perspectives”, Friedman even went so far as to write: “The collectivist belief in the capacity of direct state action to remedy all ills is itself, however, an understandable reaction to a fundamental error in the individualist philosophy of the nineteenth century. . The state could only harm. Laissez-faire should be the rule. Neoliberalism should go beyond these simplicities and reckon with the logic of self-destruction of competitive markets.
Likewise, in his presentation at the inaugural meeting of the Société du Mont Pèlerin in 1947, Hayek spoke with approval of a market framework designed to increase, not curb competition. In other words, until the mid-1950s much of the neoliberal world spoke with a noticeable ordoliberal accent. But that was not to last.
Freiburg and Chicago: diverging paths
As German ordoliberals fought to have their aggressive antimonopoly position enshrined in law to be disappointed when Germany’s 1958 anti-competition law did not meet these demands, the Anglo-Saxon world of neoliberalism gravitated further. in addition to Chicago, where the protagonists were more and more inclined to consider these fights at best as futile and at worst as detrimental to the neoliberal cause.
It was Friedman who was most candid about the dispute between Freiburg and Chicago. In Capitalism and freedom, published in 1962, Friedman explicitly mentions Eucken and Freiburg’s position on monopolies only to move away from them: There is no systemic tendency towards monopolies because most of them exist only through the state intervention, and even in the case of ‘natural monopolies’ Friedman says the best of many bad options is always to leave it as it is rather than trying to regulate it or even turn it into a public monopoly. Around the same time, in his Constitution of liberty published in 1960, Hayek laconically writes that monopolies are undesirable in the sense that scarcity is undesirable: it is enough to face it because it cannot be definitively overcome.
The roots of this estrangement lie in the tradition of Chicago law and economics as it evolved until the late 1950s and in the impact that the transaction economy had on its outlook. In short, Chicago’s point of view centered on the argument that monopolies potential be detrimental to market dynamics, but any state-led effort to eliminate private monopolies would inevitably make matters worse. And this did not only concern the most radical options such as the reduction of monopoly conglomerates, but also, and explicitly, the ideas launched by the Freibourgese Leonhard Miksch, with at least his thesis supervisor and friend of the family Eucken sympathizing, to know that the state should regulate private monopolies so that they behave “as if” they are in a competitive market. Hayek in particular and many others rejected this notion as well because their core belief was that no one could know what kind of environment a competitive market would create – if it were knowable, there would be no need for markets in the first place. .
But in a final and ironic turn, just as the rift between Freiburg and the Chicago-centric Anglo-Saxon variant of neoliberalism emerged in the early 1960s, the sharpness of that contrast also began to rapidly diminish as Hayek moved from Chicago to Freiburg and not only became a professor there, but also president of the Walter Eucken Institute. During his tenure and that of his successor Erich Hoppmann, Friborg’s vision of competition was assimilated into the new orthodoxy of Chicago law and economics. And, thus, Freiburg’s classic position is increasingly seen as an oddity born out of dogmatism.
In view of contemporary manifestations of monopoly, particularly in the world of Big Tech and big data from Microsoft to Facebook, Google and others, one wonders if this position is really as obsolete as it has long been considered. Given the enormous (market) power wielded by these tech giants, it is at least questionable whether, despite the validity of basic transaction arguments, we should consider the possibility that the costs of state regulation are in reality derisory compared to the economic, social and political costs that these monopolies generate. Perhaps it’s time to rethink Chicago orthodoxy – and judging by the most recent legislative projects aimed at the market power of big tech, the current Congress could be on the verge of doing so. Yet, these current reverberations aside, the divide between Freiburg and Chicago shows the breadth of market conceptualizations that exist even within neoliberal thought.