Our fundamental concepts of analysing and evaluating economic policy originated in the 19th century, when the ideas about the separate spheres of ‘government’, ‘market’, ‘society’ or ‘culture’ emerged together with the new disciplines of economics, sociology or philology aka cultural science, and when the grand systemic visions of ‘capitalism’ vs. ‘socialism’ were created. Now living in the 21st century, I believe that we need to overhaul these conceptual frameworks in a most radical fashion. We still think in terms of ‘state’ vs. ‘market’ or ‘civil society’ vs. ‘neoliberal globalization’, and so forth, when evaluating economic policy. The rise of China puts all this into question, although we still await a new grand scheme originating there which reflects this historical juncture. In a truly Hegelian view, we need to see these apparent polar positions as ‘moments’ of a larger integrated whole, which is our human living system as part and parcel of the Earth system. Our theories are performative, which means, they maintain a system in which we habitually live and which we take for granted, also because our theories seem to suggest that it is built on truthful knowledge. It is time to define our political values in a new way, derived from principles of human sciences. Great contributions to this project have already been made, for example, by Amartya Sen. I think that these efforts today converge on the idea of a 'critical liberalism'.
When I studied economics, I decided to position myself in the tradition of the German Freiburg School, with an important branch at Marburg. I am a fourth-generation student of Walter Eucken, in the sequence K. Paul Hensel and Gernot Gutmann, my PhD supervisor at the University of Cologne. One of my first academic publications, which I still count among my most important ones, was published in ORDO 1990 and dealt with a modern reinstatement of Eucken’s views. The German Ordo-Liberals already overcame one of the outmoded polar oppositions mentioned above, namely the opposition between government and market, in arguing that market competition can only work to the benefit of society if it is established, supervised and maintained by the government, and if the government keeps distance to interest groups in society by creating appropriate institutional mechanisms and channels of communication and influence. This idea is one of the pillars on which the German Social Market Economy is built. Evidently, Ordoliberalism adopted a thorough critical stance towards many aspects of modern capitalism: For example, Eucken rejected the legal construct of the public corporation with limited liability.
Although this fact is well-known, even in Germany, the 1980s turn to so-called ‘neoliberalism’ revived the old dualism of market vs. government, which plays an especially strong role in American thinking about economic policy. The underlying reason is even more down-to-earth: This is because in the broadest sense, economic policy is seen in the light of ‘efficiency’. Competition is seen as driving improvements of efficiency and fosters innovation, whereas government intervention appears to be messy and bureaucratic, in comparison. Government decisions fall prey to interest group influence, and so are always geared towards market distortions. And so forth. For the German Ordo-Liberals, efficiency was a secondary concept. Their major concern was power. Competition is a means to contain power in society, and markets are janus-faced in this respect. On the one hand, market competition offers choices and alternatives, and so limits positions of power. On the other hand, competitors always tend to build positions of monopoly, and hence the market is a system that continuously creates and leverages power. Therefore, government’s countervailing power is necessary to contain market power.
I think that we need to go back to these essentials: The main task of economic policy is to contribute to creating institutions and systems that minimize power and its expressions in society. Efficiency is a by-product of this. That means, economics is first and foremost ‘Political Economy’, just as it was in the beginning, with Adam Smith.
Well, the Ordo-liberal solution appears to put too much trust into benevolent government. So, what do we need to add? I think that the solution lies in Hegel’s philosophy. This may come as a surprise, as Hegel famously said that the state is ‘God’s march on earth’. However, consider the much misunderstood book ‘The End of History’ by Francis Fukuyama. This book is based on Hegel’s notion of a free society. What is going on here?
As Fukuyama explains, today there are two different traditions of liberalism. One is the Anglo-Saxon tradition which is contractarian in the broadest sense. In this tradition, people are envisioned as being autonomous and free individuals in a ‘natural state’, and government in a free society is established by mutual consent. Existing government is legitimate in the light of freedom, if we could at least deconstruct it analytically by means of these principles. The other tradition is Hegel’s. For Hegel, individual freedom is only the result of the evolution of government and social institutions, and emerges from a struggle for recognition. Fukuyama rightly states, that this defines liberalism in terms of rational mutual recognition of individuals on the basis of respect and dignity, and only this move can create individual realms of freedom. This dimension of Hegel was the source of all ‘leftist’ interpretations, and gave rise to Marxism. Fukuyama’s great contribution was to reclaim it for modern liberalism after the fall of the Berlin wall.
Exactly for this reason I think that the solution of our ideological conundrums lies in Hegel’s philosophy. The great divide between ‘left’ and ‘right’ goes back to his apparent ambivalence. If we can overcome this ambivalence, we find the solution, which I now dubb 'critical liberalism', and of which Ivan Boldyrev and I have sketched the first outlines in our book on Hegel.
Central notions in Hegel’s practical philosophy are ‘civil society’ and ‘the public’. Here we are. Consider the post-Seattle anti-globalization movement: Civil society stroke back against what was widely perceived as an abuse of market power and political power in the ongoing process of negotiating globalization. In a Hegelian view, markets can only work if they are embedded into a strong civil society, and if there is government regulation. For Hegel, markets even were a model of civil society (remember the conditions of the early 19th century). Yet, at the same time, he did not believe that markets alone can solve fundamental economic problems such as maintaining full employment and eradicating poverty. For him, a free society is a workable institutional arrangement between civil society, markets and government. There is no fundamental opposition between the three sides of this triangle, they are ‘moments’ of the whole of society, which he calls ‘the state’.
I cannot go into details here, but it is fairly evident here that this has far-reaching implications for our conceptualisation of a ‘liberal economics’. However, in some sense it is simple and straightforward: Start out from the Ordo-Liberal position, and add a strong civil society. The Ordo-Liberal position has direct complements in Anglo-American thought, in particular John Rawls’ notion of a ‘property owning democracy’. This also includes detailed points such as Rawls’ critique of ‘welfare capitalism’, which in a nutshell highlights the power asymmetries that are maintained or even created by modern welfare systems. But that does not mean to keep government ‘small’. What counts is a strong involvement of civil society and the public in designing government policies and in containing government power. So, a crucial issue in critical liberal economics is rethinking modern democratic systems. This is exactly the context where China comes into play. China is an extremely successful capitalist country with an authoritarian and autocratic one-party rule. Thus, China challenges Western democracies. The response is a critical liberal economics. The critical liberal economics puts less emphasis on electoral democracy than on deliberative democracy. Deliberation is the medium through which Hegelian recognition is enabled and practiced.
The principle of deliberative democracy leads economics to rethink its theoretical approaches to ‘interest group politics’. It is powerful in designing new approaches to international economic policies, where governments are no longer ‘monopolists’ of government services and functions. It is the only way how we can find truly global solutions to global issues such as global warming, where the reach and scope of government action is too small and narrow. It helps to reconcile societal oppositions between business and society in recognizing that business, as in Hegel’s times, is part and parcel of civil society, and not a separate domain following its own norms and standards.
I am currently working on a book in German, tentatively entitled 'Elements of a Critical Theory of the Economy'. My aim is to combine critical social theory with modern economic theory, in order to build a new normative framework for economics that transcends utility-based welfare economics and emphasizes freedom, justice and inclusion. In the 2000s, I contributed to the theory of ‘diversity management’ which I regard to be the management approach of a ‘critical liberalism’. This resulted into the programmatic paper:
- Diversity: Managing the Open Corporation, http://ssrn.com/abstract=953332; published in German: Diversity: Management der offenen Unternehmung, in: Iris Koall, Verena Bruchhagen, Friederike Höher (ed.), Diversity Outlooks, Münster: LIT, 202-222.
I have also worked out some implications of this position iin my various contributions to international trade theory and policy that are summarized on the pertinent page of this website.