Scientific Government

What would it mean to have a “scientific” government? Does it mean that you rely on the government to make scientific determinations on matters not related to governance? That would be a mistake. Science is a process that only incrementally crawls towards truth, and at given times is (later revealed to be) frequently wrong on matters of consensus opinion. Add the distortions that political incentives introduce to reasoned decision-making, and you’ll often get dogmatic pronouncements without the necessary caveats and disclosures of unknowns.

However, part of my support for Ordoliberalism is based on the idea of scientific governance in the sense of “let’s do experimental governing and see what happens.” In my previous post I alluded to governing “not always without missteps or uncertain outcomes”. What I was trying to pack into this little parenthetical was a disclaimer regarding the limits of knowledge, but also the willingness to proceed anyway with humility, tolerance for risk, and willingness to change our minds (and policies) in the future. At one time there was widespread belief that communism was a more efficient means of running an economy than the combination of free markets and rule of law that you see in Common Law jurisdictions. And some countries ran a large (and terribly horrible) experiment based on that hypothesis. The hypothesis proved to be wrong.

When I say that Ordoliberalism holds the promise of better government, I don’t mean that I (or anyone else) knows what the optimal policy mix is with a great deal of certainty (if such a thing can even be said to exist). What I mean is that we can approach governance the same way we approach chemistry or any other science. Government should be seen as a field of social science, one with discipline, humility, admission of ignorance, and the willingness to be wrong on occasion. Because government effects the real lives and property of real people, we should of course try to keep these experiments as small and local as possible, and correctly quickly when (not if) people start getting hurt.

Is this ideal achievable? I think it is, on a small scale. Getting a population of people to volunteer to be guinea pigs will always be hard, but it’s a lot easier on the scale of towns and counties than States and Federal Republics. This is one of the reasons I agree with the teachings of subsidiarity – the more laboratories of democracy we have running experiments concurrently, the more quickly we grow the public good of governing knowledge.

The Logic of Ordoliberalism and the Hubris of Knowledge

It was known that dietary fat was the cause of cardiovascular disease.

It was known that three generations of imbeciles are enough.

It was known marijuana caused Mexicans to go on murderous rampages.

It was known black men would kidnap and rape white women.

It was known the Irish bring disease.

It was known the Jews cheated us.

There’ve been many a strange fruit rotted because of some of these known harms to society.

The Hunter’s Bow

What is a bow? A bit of wood and deer gut; a means for projecting small, pointy sticks great distances; a tool for storing and releasing mechanical energy. These are physical descriptions which are objectively so, but when most people look at a bow they don’t see the plain mechanics of its nature, but rather the ethical weight they attach to it. To them a bow may be a bit of athletic equipment for shooting competition, or a means of putting food on the table, or a weapon of death feared for centuries (though not so much this century or the previous two).

The point is, most things in the world around us are merely tools, and it is not found within the thing itself whether they are good or bad. No amount of studying a bow will tell you if it’s harmless sport, honorable means of feeding others, or a threat. You must look into the heart and mind of the man wielding it to know these things.

I believe the above is the source of Adam Gurri’s concern with my post on Ordoliberalism. Ordoliberalism is associated with economic liberalism and economic systems’ planning, but it does not contain within itself a system of ethics. It doesn’t say how to treat people who are incapable of work, or the unborn. I see Ordoliberalism more as a discipline of engineering that describes how we approach governing ourselves and constructing our institutions. In the hands of a good Catholic like our own Andrew, you might get results you (personally) disagree with at the margin, but you wouldn’t get gulags and or even the “softer” despotism of a Pinochet. In the hands of an actual Pinochet though …

There were several purposes in my previous post, but none of them were to describe an “ought”, merely an “is”. Ordoliberalism is useful for looking at government and society as things that can be steadily and purposefully improved (though not always without missteps or uncertain outcomes), and in this respect it is both great and good. The modern era of liberal government has issued in an era of unprecedented prosperity and peace. It would be a shame if ever larger sections of our society gave up on liberal government out of excessive cynicism over our ability to check its excesses and weaknesses. To them I say, fear not! There’s a way of fixing what ails us, and it has been shown to work to good effect. Ordoliberalism is no silver bullet, but it’s a great arrow to have in our quiver on the hunt for a better tomorrow.

Ordoliberalism and the fallacy of Natural Rights

My co-blogger Samuel H. wrote a fantastic piece yesterday on Ordoliberalism, its role as true heir of the Scottish Enlightenment, and why Laissez Faire economies are mythical. It’s really a great post, and I encourage you to read it now if you haven’t already. This continuation to the discussion of Ordoliberalism will be here when you’re back.

The first thing I should make clear is that I really disagree with nothing in Samuel’s post. So this isn’t a critique at all. But it is a response to draw out the logic of Ordoliberal and to discuss what Noah Smith called the Markets in Almost Nothing. Namely, that discussion of Ordoliberalism does not stop with economic markets where prices are information, but can be applied to Noah’s Markets in Almost Nothing as well, the things we cannot easily price (such as dignity and satisfaction with life generally), but do know when we see them. And that’s because these un-markets are subject to political arrangements we can vote on, even if we cannot buy and sell them.

To see where this logic leads, let’s look at pensions, a very economic activity with lots of transparent pricing. A believer in laissez faire, or economic “natural rights”, would see no objection to an employee and employer bargaining to include a pension as one of the values exchanged for the employee’s labor. Instead of getting paid a fixed sum today, the employer pays an annuity at some point in the future. Dandy!

An Ordoliberal would look at this arrangement however and ask whether this arrangement is conducive with higher social values, such as the desire for a competitive market with lots of firm turnover and creative destruction. The Ordoliberal would recognize that there are several shortcomings to employer-provided pensions. For one thing, pensions probably aren’t that firm’s specialty, and they might not be good at it. For another, if a very large number of employees (and former employees) were receiving (or expected to receive) pension payments into the future, there would be an intense political pressure to bail out a struggling employer in order to save its pension, rather than allow the creative destruction of the market to unfold in its standard course. It would serve the higher values much better if pension investments were made to, and handled by, a firm other than the employer.

But as I said above, this logic does not stop at the market. We can look to other facets of human life and usefully dispense with talk of “natural rights” in order to make real progress towards higher social values. A good example would be the marriage market. Do people have the natural right to get divorced at will? As an Ordoliberal we can quickly dispense with that question with an easy “No, they do not. Nor do they have a right to get married in the first place. There are no rights, remember? Let’s decide on the society we want, and then decide what is legal or illegal, yes?”

What kind of societies do want? What kind of societies are possible given the limits of human nature? (This second question always trips up the Communists) These questions are difficult to answer even for individuals, and fiendishly difficult to find consensus on, but they do have one great advantage over discussions of natural rights – they are concrete. Anything at all could be a natural right, if we all agree it is, and if we all agree on natural rights being inviolable even in the face of harmful consequences to society, then we will never actually get to live in a society we want to live in. It is far easier for any individual to say “This is good”, or “This is bad”.

We must dispense with this fallacy of natural rights, not just to property and contract, but in all areas of our life – including areas of our personal life and non-contractual society that many people consider deeply personal. They are personal, it’s true, but to the extent these actions create measurable harm to the fabric of society, society has a right to modify them.

Ordoliberalism and The Myth of “Laissez Faire”

As many have noted before, even the great Adam Smith was not a believer in the kind of laissez-faire “self-regulating” ideology of, say, Alan Greenspan.

In Smith’s implicit model, the self-love that drives the butcher and baker to produce for the public good is an extremely special case, premised on the existence of a legal order including property rights and ample competition. One of Smith’s greatest anxieties about markets was that totally free exchange in the absence of these premises would invariably lead business men into “conspiracy against the public, or in some contrivance to raise prices.”

Hume held similar views, and as such based his political philosophy on the evolution of property rights as conducive to the public good, not based on a “natural right” that existed prior. In Hume’s anthropological account, “possession” was a natural sentiment that through socio-cultural evolution became projected onto property, imbuing it with moral connotations above and beyond its legal ones.

For both these classical liberal thinkers, then, property rights are a useful convention for aligning incentives to promote the stability of possession, investment and economic prosperity, and thus are objects of what Hume called artifice, i.e. part of an artificial system of justice.

This reading is what motivates me to call Ordoliberalism the truest modern expression of Scottish classical liberalism. Ordoliberalism is an economic school developed in Germany following WWII that, like the classicals, posited the interdependence of the social, legal and political orders in creating an economic order. To an ordoliberal, “laissez-faire” has no content. For economies to reach their theoretical potential, they depend on a legal, cultural and regulatory orders that align behavior with Smith’s “special case”.

In this view, law is a public good that must be calibrated to encourage co-ordination. On the other hand, ignoring the societal outcomes of a legal system based on the dogma of natural rights leads to disaster. For example, in the early 1900s the cartelization of the German economy was upheld by “laissez-faire” courts emphasizing the inalienable right of freedom to contract. Ordoliberals recognized the dramatic expansion of cartels as a key factor behind the rise of national socialism, and thus made competition law a central plank in their post-war project.

To Ordoliberals, the property system, including contract and liability law, was itself as much a type of competition policy as anti-trust measures like explicit acts prohibiting monopoly. This point of view is sometimes referred to Ordnungspolitik, an organic conception of regulatory policy as integral to and a part of economic order. The Ordo Yearbook of Economic and Social Order was thus one of the earliest academic journals to publish what today is called law and economics, public choice theory and constitutional economics, with a special emphasis on limiting the influence of rent seeking through a strong, independent state apparatus. Note that these are all fields which blur the line between market and state, consistent with the interdependence thesis.

This appreciation of legal and political process made Ordoliberals particularly suspicious of ad hoc interventions, preferring a rules based system consistent with the qualities of law, particularly stability and generality. As such, Ordoliberals have always been suspicious of discretionary fiscal policy, and from early on pushed for political independence for the monetary authority. Even today, Germany’s “austerian” approach to the Euro Crisis is based on a solution consisting of supply side reform and fiscal prudence in the periphery, rather than ECB expediency. Scholars have explained this stance as stemming from the influence of ordoliberal thinking within the CDU/CSU and FDP parties.

Ordoliberalism remains influential within the Christian Democratic and Social Union parties because of its intellectual precursor in Catholic social doctrine. In the 1930s Catholic academics developed a social teaching based on natural law and subsidiarity, arguing liberty and prosperity through free-markets and property rights were essential to upholding human dignity, but needed to be complemented with provisions for social security.

Ordoliberals transformed this teaching into the principals of the social market economy, the system which underpinned Germany’s post-war economic miracle. The social market is based on the principle that social insurance can actually be complementary to liberty, innovation, and expanding output. Indeed, social market policies were explicitly conceived as part of effort to avoid a return to either socialism or fascism.

An updated version of this view is called the “compensation hypothesis” and it has a fair amount of empirical support. Liberalization is unpopular because it creates short run winners and losers, and therefore threatens the economic security of incumbents who naturally call for ad hoc government protections. The compensation hypothesis maintains that policies such as free trade and labour market liberalization will therefore be more popular in regimes with larger safety nets.

This focus on path dependency and public choice helps the Ordoliberal dissolve the dogmatic debates between “capitalists” and “socialists”. For example, in a dynamic world it may very well be the case that public pension plans are pro-market. From a public choice perspective, corporate welfare policies like auto-industry bailouts are a clear consequence of special interest lobbying through trade unions. Looking closer, the bailouts are less about the company as they are about shoring up massive pension liabilities. Thus an Ordo could argue that to oppose an actuarially transparent public pension scheme is to tacitly support the maleficent alternative.

Modern libertarianism could learn a lot by studying the ordoliberal example and reading their early writings. The early ordoliberals of the Freiburg Circles were commendable adversaries of totalitarianism and get too little appreciation among libertarians due to their embrace of social security. But it is this very school of thought that resurrected liberalism in Germany and continental Europe!

Even Hayek was deeply affected by ordoliberal thinking, and maintained a close friendship with one of its founders, Walter Eucken, who both influenced the Road to Serfdom and the formation of the Mont Perelin Society. Hayek’s concept of “spontaneous order,” for instance, contains the imprint of their frequent dialogues on the nature of ordnung (and couldn’t be farther from the endorsement of “self-regulation” that his naive supporters suppose). Indeed, the opening address of Mont Perelin in 1948 is where Hayek debuted  “‘Free’ Enterprise and Economic Order”, which includes what I take to be a perfect single-sentence encapsulation of the ordoliberal credo:

While it would be an exaggeration, it would not be altogether untrue to say that the interpretation of the fundamental principle of liberalism as absence” of state activity rather than as a policy which deliberately adopts competition, the market, and prices as its ordering principle and uses the legal framework enforced by the state in order to make competition as effective and beneficial as possible — and to supplement it where, and only where, it cannot be made effective — is as much responsible for the decline of competition as the active support which governments have given directly and indirectly to the growth of monopoly.

When one considers how US regulatory capture has only seemed to worsen since the conservative revolution (“starve the beast,” “privatize, privatize, privatize,” and so on ), Hayek’s words ring as true as ever.