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.