Early neoliberals tended to view market power and monopolies as phenomena that somehow had to be reined in by an institutional framework in order to maintain the pressure of competition. However, over time, the Freiburg and Chicago schools of thought diverged in their respective views, giving rise to fundamentally different perspectives on market dynamics and the need for regulatory action, thus marking the respective endpoints of the neoliberal spectrum.
Editor’s note: The current debate in economics seems to lack a historical perspective. To try to address this deficiency, we decided to launch a Sunday column on ProMarket focusing on the historical dimension of economic ideas. You can read all of the pieces in the series here.
In the cosmos of neoliberalism, the Chicago and Freiburg schools of thought are typically considered as standing for virtually opposing viewpoints when it comes to core issues of market dynamics and their appropriate institutional framework. While the Chicago School is often portrayed as synonymous with a Free Market approach in capital letters, reviving a belief in self-regulating markets and view of state policy that is reminiscent of the laissez-faire of old, the Freiburg School—at least as it manifests itself in the classical texts of this tradition—represents the opposite: A conception of markets and market behavior that crucially requires rigorous enforcement of what the Freiburgers typically called a competitive order to ensure that markets do not undermine their own logic as sites of competition.
Yet the contrast between these two schools was not a given at their respective inception. As a matter of fact, Freiburg and Chicago, for a while, happened to be very much on the same page with regard to the exact matters that now set them apart from each other—after all, both are widely and correctly considered to be subcurrents or variations of the same neoliberal tradition. So how did these two neoliberal worlds drift apart?
Before the Drift: Ordoliberalism and Early (Chicago) Neoliberalism
Where there is estrangement and divergence, there must first have been agreement and (a common) understanding. Indeed, the ordoliberals of the Freiburg School and the early Chicago School around Frank Knight, Henry Simons, and Jacob Viner did exhibit some notable correspondences.
The ordoliberals’ core contention was that the neoliberal project they considered themselves a part of was not only put in grave jeopardy by collectivist zealots and well-meaning social policy planners but also by an overly naïve understanding of the functioning of markets, which they attributed to the dominant current in (economic) liberalism up to the 20th Century. According to the ordoliberal analysis, markets were neither natural phenomena that simply happened to come into existence because of people’s “propensity to barter and truck” as Adam Smith had put it, nor were they stable entities guaranteed by the supposed fact that market transactions were in everybody’s best interests.
On the contrary, ordoliberals such as Freiburg School figure heads Walter Eucken and Franz Böhm maintained that markets had to be constituted in the first place through some kind of institutional order, and that these artificial entities were also far more fragile than classical economic liberalism had assumed. They conceptualized markets not so much in terms of harmonious exchange but rather (potentially) conflictual competition. Given that every market actor has an incentive to decrease the pressures of competition, the natural outcome of market dynamics—if left unchecked by political and legal institutions—will be the undermining of competition and the concomitant development of market power to the detriment of competitors and consumers.
That is to say, the ordoliberals had a fairly strong idea of what markets should look like, of what real and desirable competition should entail, and what other forms should be outlawed, and they were also quite candid on the activist role that executives and courts needed to play in enforcing the competitive order. Consequently, they took a characteristically aggressive stance on monopolies as the epitome of market power and urged the introduction of institutional precautions to ensure that empirical markets would come to resemble as much as possible their ideal of perfect competition. In this “regulative ideal,” to put it in Kantian terms, no market actor would have any sway over others or meaningful unilateral influence on the modalities of a market transaction, most notably the price of such transactions.
Until the late 1950s, such notions were hardly considered to be outliers in the world of neoliberal thought. On the contrary, the works of the leading thinkers of the “first” Chicago School exhibited a number of correspondences to the Freiburg view of things, be it Frank Knight and his sobering analysis of competition or, even more importantly, Henry Simons’s widely discussed A Positive Program for Laissez-Faire that was equally candid on the ills of monopoly and market power.
Even beyond those early representatives of a Chicago point of view, the notion of a market framework explicitly designed to enhance competition continued to be appealing, even to those who are often considered to epitomize the alleged neoliberal creed in self-regulating markets, namely Milton Friedman and Friedrich August Hayek. In the 1940s and even early 1950s, both were adamant in their demand for a market order that would ensure a maximum of competition, explicitly blaming “classical” liberalism for its insufficient attention to these matters in the past. In an article from 1951 titled “Neo-liberalism and its Prospects,” Friedman even went as far as to write: “The collectivist belief in the ability of direct action by the state to remedy all evils is itself however an understandable reaction to a basic error in the 19th-century individualist philosophy. The state could do only harm. Laissez-faire must be the rule.” Neoliberalism would have to go beyond these simplicities and reckon with the self-undermining logic of competitive markets.
Similarly, in his presentation at the inaugural meeting of the Mont Pèlerin Society in 1947, Hayek spoke approvingly of a market framework designed to increase and not to curb competition. In other words, up to the mid 1950s large parts of the neoliberal world spoke with a detectable ordoliberal accent. But this was not to last.
Freiburg and Chicago: Divergent Paths
While ordoliberals in Germany fought to have their aggressive antimonopoly position enshrined in legislation only to be disappointed when the 1958 German law against restrictions in competition fell short of these demands, the Anglo-Saxon world of neoliberalism increasingly gravitated toward Chicago, where the protagonists were more and more inclined to view these battles at best to be futile and at worst to be damaging to the neoliberal cause.
It is Friedman who was most candid about the divergence between Freiburg and Chicago. In Capitalism and Freedom, published in 1962, Friedman explicitly mentions Eucken and the Freiburg stance on monopolies only to distance himself from it: There is no systemic tendency towards monopolies as most of them only come into existence through state interference, and even in the case of ‘natural monopolies’ Friedman says, the best of many bad options is still to leave it be rather than try to regulate it or even transform 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: one simply has to cope with it as it cannot be overcome definitively.
The roots of this estrangement lie in the Chicago Law and Economics tradition as it evolved up to the late 1950s and the impact that transaction economics had on its perspectives. In short, the Chicago point of view was centered around the argument that monopolies did have the potential to be detrimental to market dynamics, but any effort led by the state to eliminate private monopolies was inevitably going to make matters even worse. And this not only pertained to the most radical options such as slashing monopolist conglomerates but also, and explicitly, to the ideas that were floated by the Freiburgers Leonhard Miksch, with his doctoral advisor and family friend Eucken at least being sympathetic to it, namely that the state ought to regulate private monopolists to the effect that they behaved “as-if” they were in a competitive market. Hayek in particular and many others as well took exception to this notion as their core belief was that no one could know what kind of environment a competitive market would create—if that was knowable, there would be no need for markets in the first place.
But in a final and ironic turn, right at the time when the rift between Freiburg and the Chicago-centered Anglo-Saxon variant of neoliberalism came to the fore in the early 1960s, the starkness of this contrast also began to decrease rapidly as Hayek moved from Chicago to Freiburg and not only became a professor there but also the President of the Walter Eucken Institute. During his tenure and that of his successor Erich Hoppmann, the Freiburg view on competition became assimilated to the new orthodoxy of Chicago Law and Economics. And, thus, the classic Freiburg stance increasingly came to be seen as an oddity born out of dogmatism.
With view to the contemporary manifestations of monopoly, especially in the world of Big Tech and big data from Microsoft to Facebook, Google and others, one wonders if this stance is truly as obsolescent as it was considered to be for a long time. Given the enormous amount of (market) power these tech giants wield, one might at least wonder whether—the validity of the basic transaction arguments notwithstanding—we might have to consider the possibility that the costs of state regulation might actually pale in comparison to the economic, social, and political costs that these monopolies accrue. It might be time to rethink the Chicago orthodoxy—and judging from the most recent legislative projects aimed at the market power of Big Tech, the current Congress might be about to do just that. Still, aside from these current reverberations, the divide between Freiburg and Chicago shows the breadth of market conceptualizations that exist even within neoliberal thought.