Lessons from the Past? How Ordoliberal Competition Theory Can Address Market Power in the Digital Age

Some of the lessons uncovered by ordoliberal thinkers during the interwar period in Germany could help us tackle the current challenges posed by the significant market power held by Big Tech companies like Facebook. These lessons are especially useful when considering certain parallels between the historical circumstances in which ordoliberalism emerged and contemporary socio-economic and political trends.

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 early October, Facebook whistleblower Frances Haugen told the US Congress that Facebook’s platforms “stoke division and weaken our democracy,” detailing how these platforms deliberately used algorithms that encouraged the spread of divisive misinformation for commercial reasons. In a bizarre coincidence, Facebook also suffered from a global network outage on the previous day that affected the Facebook-owned Instagram and WhatsApp as well. While there are valid economic causes of high market concentration in the digital age, such as economies of scale and network effects, these events brought to light important problems regarding the highly-centralized nature of digital markets, as well as the extent to which these problems transcend the economic sphere.

This is not the first time that the relationship between powerful firms and their wide-ranging impact on society has come under scrutiny. In Weimar Germany, the increasing concentration of economic power was heavily criticized by a group of economic, legal, and sociological thinkers called “ordoliberals,” among them Walter Eucken, Franz Böhm, Wilhelm Röpke, and Alexander Rüstow. Observing the failures of laissez-faire capitalism and the detrimental economic, political, and social effects of economic concentration, these scholars developed a reformed understanding of competition. They aimed to identify a regulated, legal framework for an efficient market economy that, rather than benefitting the select few who controlled the cartels and monopolies at the time, ensured freedom and equal rights to all its participants. Their emphasis on a strict but rule-based antitrust law and policy can therefore be understood as a “quest for a privilege-free order.”

Some of the lessons this group of ordoliberal thinkers uncovered during the interwar period could help us tackle the current challenges posed by the significant market power held by Big Tech companies like Facebook. These lessons are especially useful when considering certain parallels between the historical circumstances in which ordoliberalism emerged and the socio-economic and political trends of today. These parallels pertain to how the growth of economic concentration can influence the political order, has negative effects on consumer welfare, and reduces the contestability of future markets. In other words, similar to the Weimar period, economic concentration today has far-reaching effects that transcend the economic sphere. These effects have often been overlooked when weighing the anticompetitive effects of digital platforms against their extraordinary economic efficiencies. In light of these similarities, one might ask whether a “contemporary ordoliberalism” could help guide antitrust enforcement in the digital age.

Germany’s interwar economy saw a dramatic increase in industrial concentration, which can partly be traced back to the legal support given to cartels by the German Supreme Court from the late 19^th century onwards. The controlled war economies of the First and Second World Wars and the increasing disintegration of the global market, as well as the Great Depression, further increased the spread of cartels, syndicates, and ultimately monopolies. This, in turn, opened up the possibility for an endemic interdependence between large firms, banks, and far-right politicians, which arguably facilitated the rise of the Nazi party. While not all firms participated equally, several dominant firms secured implicit future protection by providing the Nazi regime with organizational resources that helped control the economy and by undermining democratic features within their firms. The ordoliberals observed how concentrations of economic power contributed to a distortion of the political order and, consequentially, developed theoretical concepts and practical plans that envisioned the return to a more competitive market order.

Studies on economic concentration have found that many global markets have, once again, become less competitive over the past decades. In the past two decades, for instance, more than two-thirds of US industries have experienced an increase in concentration levels. And while there is significant variation across markets and within industries, a similar rise in concentration has been found in the EU. The most important example of this trend is the digital “surveillance economy,” which is dominated by a few powerful companies, known as GAFAM (Google, Amazon, Facebook, Apple, and Microsoft), that face limited competition and exert an increasing impact on other sectors and the economy. As a result, these Big Tech companies take up the position of key gatekeepers for access to multiple markets, which prevents smaller or mid-sized companies with innovative ideas from entering. 

If the state is “negligent in its duties as policeman of the market,” Rüstow remarked at the Walter Lipman Colloquium in 1938, then competition “degenerates” and can be “abused by robber knights.” Similarly, competition in the digital economy no longer corresponds to the ordoliberal vision of a highly diversified market structure with multiple players but has resorted to a form of “toxic competition” that reflects a more centralized market structure, whereby dominant players can dictate what ordoliberals often referred to as the “rules of the game” of the free market order (see, for example, Eucken’s 1940 book The Foundations of Economics, in German Die Grundlagen der Nationalökonomie). This trend has sizeable welfare effects: recent research by Bruno Pellegrino estimates that moving from the current oligopolistic market setting to a perfectly competitive market, as envisioned by the ordoliberals, would lead to large increases in both total surplus and consumer surplus.

In addition to these economic effects, ordoliberals realized, in the context of the struggling Weimar Republic, that the detrimental effects of concentration went “beyond supply and demand” (as stated by Röpke), to encompass the political and social orders as well. In his 1946 monograph The German Question, Röpke explored how the growth of cartels and syndicates led to German imperialism. Similarly, Eucken argued that the concentration of economic power led to increased state interventions, which in turn fueled the strive for special privileges that further disturbed both the price mechanism and the political order. 

This observation of how the accumulation of power by economic giants has repercussions for the political order can be observed in the current digital age as well. Specifically, this encompasses the impact of digital giants on privacy and free speech; the non-transparency of their underlying algorithms; their selection of information and spreading of “fake news” that lead to the emergence of self-contained filter bubbles; their potential influence on political agendas and even elections; their usage of “hyper-nudging,” and their far-reaching networks of lobbyists that extend into the academic world.

If reforming antitrust law for the digital age necessitates linking market freedom more closely with democracy and, more generally, with the political order (which is currently increasingly being advocated, for instance, by members of the Open Markets Institute, such as Barry Lynn), ordoliberal lessons from the past might be useful. The hyper-centralized interwar period led ordoliberals to strive for an ideal-type situation of what they repeatedly called “complete competition,” in which no corporate entity possessed the authority to coerce the action of others (Walter Eucken primarily developed this concept, for example in his 1938 essay “What is the Use of Economics?,” in German “Wozu Nationalökonomie?”). Through restructuring markets and enacting stringent regulation, complete competition would secure an equal distribution of market power as well as the prevention of unfair market advantages and thus symbolize the ultimate expression of freedom on the market and beyond. 

Rather than merely ensuring the efficient allocation of scarce resources, as in the textbook conception of competition, complete competition was tasked with ensuring general welfare and democracy, hence being elevated to a moral authoritative status that ordoliberals summarized under the notion of an “economic constitution.” Viewed through this lens, the numerous reform proposals that are currently drafted to create a safer digital space and to establish a level playing field for digital companies can be understood as puzzle pieces of a broader economic constitution that is urgently required for the digital economy of the 21^st century.

A further structural parallel between the world in which early ordoliberals operated and the present day relates to the wide-ranging societal effects of economic concentration. There is no denying that Weimar Germany saw some improvements in its welfare system, such as the introduction of social rights to the new Constitution, unemployment insurance, and municipal welfare policies. However, the cartelization of the German economy during this time also enabled powerful market actors to dictate the “rules of the game” in the economy, thereby restricting the wants and freedoms of others in favor of their own, and thus economic inequality widened. Eventually, massive economic and social problems led to the breakdown of society. After the Second World War, confidence in the German state apparatus had completely collapsed, which the ordoliberals sought to remedy by conceptualizing the state as an impartial arbiter that was inherently linked to a competitive economy embedded in a regulated legal order. It comes as no surprise that at a time of chaos and upheaval, the German population sought out order and regulation. 

As well as promoting a completely competitive order that should ensure what we would nowadays call consumer welfare, the ordoliberals developed the concept of Vitalpolitik (“vital” or “organic policy”), which aimed to maintain a humane economy and encompassed all qualitative factors, laying outside the market, that influenced an individual’s quality of life, such as family, nature, working environment, and equal starting positions in life. Werner Bonefeld, a prominent scholar of ordoliberalism, highlights how Vitalpolitik sought to maintain the vitality of an entrepreneurial society “in the face of a socially and morally disintegrating market logic.” In concrete terms, this meant that policies should take inspiration from “the peasant, the craftsman” and “rural home workers” who, according to Röpke, generally “earn less and work longer, but lead a fuller, more dignified and human life.” 

Though ordoliberals tended to romanticize these agricultural and family-orientated communities, these communities arguably make the economic structure more robust and insusceptible to external shocks. The need for a more de-centralized, and thus more resilient, economic structure has been illustrated by the Covid-19 pandemic, during which supply-side bottlenecks of crucial infrastructures became apparent. More generally, the increased interconnectedness and efficiency brought about by digital gadgets is increasingly offset by their negative effects on consumers’ quality of life, ranging from infringements of data protection, communal bonds, and privacy to the foreclosure of future markets and discriminatory effects of certain algorithms. In the face of increasingly-disintegrating confidence in our current market structure, constructing a Vitalpolitik for the 21^st century that incorporates qualitative, humane, and “organic” factors may be very useful.

Given the enormous concentration currently experienced in certain markets and its negative impact on politics and welfare, ordoliberal concepts like “complete competition,” “economic constitution,” and “vital policy,” and the lessons from the past incorporated into those concepts, might be productively repurposed for the challenges of today. They can inspire a renewed orientation of competition policy toward market structures, rather than today’s narrow consumer welfare approach. These concepts can also adapt the “rules of the game” to the new economic and technological conditions. As the recent revelations regarding Facebook illustrate, many of our current challenges go beyond the purely economic sphere and require a return to less concentrated markets. The history and teachings of the ordoliberal movement might provide us with conceptual stimulation and practical policy tools for how to get there.

Note: A more detailed exposition of these ideas within an explicit antitrust law framework can be found in the authors’ jointly written paper entitled “Taming Giants: How Ordoliberal Competition Theory Can Address Power in the Digital Age,” forthcoming in the Journal of Contextual Economics – Schmollers Jahrbuch.

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