What does Germany’s high industrial employment have to do with antitrust and the new Trump Administration?

24 March 2017 10:20am

By Neil Averitt. Originally published on FTC:Watch January 19, 2017

A new administration is setting up shop with a high priority on finding ways to increase well-paying manufacturing jobs. It might want to look to Germany for some antitrust ideas.

Germany has a robust manufacturing sector, with much of it in the so-called mittelstand of mid-sized firms. The success of this sector is due to many factors, many of which are unrelated to competition policy. But a basic philosophy of business organization has underlain most of the German government's postwar programs. Almost unknown in the English-speaking world today, this philosophy is known as "ordoliberalism."

The success of the German economy certainly calls for our attention. American manufacturing employment has fallen by nearly 15 percent since the beginning of 2005, while during this same period German manufacturing employment grew by 7 percent. As a percentage of the US labor force, manufacturing has fallen steadily from 22 percent in 1977 to about 8 percent today, while manufacturing still accounts for nearly 20 percent of the German workforce.

The German employment performance carries special weight because it is concrete and actual — and therefore a good bit more persuasive than theoretical arguments.

To be sure, several non-antitrust factors have been important to Germany's success. The country has a long tradition of high-end manufacturing. It has strong unions. The government produces a steady supply of skilled workers by maintaining apprenticeship programs that are closely integrated with the public vocational schools. Many German firms are privately owned, and so are not under shareholder pressure to produce short-term results at the expense of long-term investments. The government also provides its firms with financial subsidies in a number of ways, some of them indirect and inconspicuous.

But something more coherent and purposeful than that has been going on as well. Underlying all of these economic programs in general, and the competition programs in particular, has been a general philosophy about the proper relationship between the state and the business community.

That philosophy is known as ordoliberalism. As the name suggests, it is a variant of classical liberalism. It relies primarily on free markets to work. The "ordo" prefix is what spells out the differences. That is a reference to the movement's magazine ORDO, whose title is suggestive of the words "ordering" or "Ordnungspolitik." The free-market principles are to be exercised within a framework that is set by the state and actively defined by rules that are more precise and more frequently per se than is usual in the West.

Ordoliberalism was developed in the 1930s and 1940s in response to specifically German circumstances. Its founders wanted to avoid the excesses they saw in the other systems around them. They rejected laissez-faire capitalism as predisposed toward monopoly. They rejected Soviet-style central planning as inescapably inefficient. And they rejected a fascist-style corporate state as too likely to turn authoritarian.

To guard against all these shortcomings they sought safety in decentralization. Freedom could be ensured by maintaining a relatively large number of players in both downstream and upstream markets.

In downstream markets they sought to protect the variety of consumer choices. If competition is, among other things, a "process of discovery" about what the market wants, as the economist Friedrich August von Hayek suggested, then it is important to have a fair range of choices available from which these discoveries can be made.

In upstream markets, a "freedom to compete," to enter the marketplace on fair terms, is seen as the starting point for competition. For this reason, potentially exclusionary vertical restraints, such as tying and exclusive dealing, were viewed with deep suspicion by the first generation of ordoliberals.

There is a clear political component to all this. Ordoliberalism sees competition policy as something more than just economics. It is instead a species of political economy — a melding of economics and social organization with roots going back as far as Aristotle. Ordoliberals favor deconcentrated markets because they are conducive to freedom and democracy. Downstream, consumers with free choices have a broadened scope of discretion. Upstream, freedom to compete is a social value in itself. Even more important, upstream deconcentration prevents the acquisition of political power by corporations with market power and wealth. As Alexander Rustow put it, "our fight against monopolies is not primarily directed at monopoly profits … but our fight concerns the threat monopolies pose for freedom."

The ordoliberals sought to head off market power before it emerged, believing that once power was achieved, it might be politically impossible for the government to undo it. (In the United States, the inability of the antitrust agencies to frame a policy on single-firm monopoly conduct gives some color to this fear.)

Ordoliberals believed that a deconcentrated market along these lines was likely to be the most efficient and productive one as well. If a conflict emerged, however, they were willing to accept at least a marginal loss of efficiency in exchange for a safe democracy. More recent ordoliberals have suggested that such conflicts may be unlikely. They suggest that a greater number of firms will lead to efficiency in the medium- to long-term, as the benefits of innovation competition come to fruition.

As this last point makes clear, ordoliberalism is not a fixed doctrine. Its tenets have evolved over time.

It began in the years before World War II as a small, dissident movement in the university town of Freiburg, and is sometimes called the Freiburg School. (Among its students and professors, this university can also claim the humanist Desiderius Erasmus, German chancellor Konrad Adenauer, and New Left philosopher Herbert Marcuse; you have to admire its diversity.)

The movement reached its peak in the 1950s and 1960s, when one of its adherents, Ludwig Erhard, served a 14-year term as Minister of Economics and presided over the Wirtschaftswunder, or "economic miracle." Since then ordoliberalism has come under increasing intellectual pressure from the Chicago School, with its more elaborate and exclusive focus on economic efficiency, and it has lost ground within the European Union as a whole. It still retains significant pockets of influence, however, particularly in Germany. Today a new generation of German writers is working to revitalize the theory by showing that it can take account of genuinely useful efficiencies when formulating rules of conduct. They still insist, however, that it should retain its original principles of supporting democratic values and working through predictable rules rather than case-specific analysis, which they believe is too easily manipulated by well-financed defendants.

Not too long ago this may have been considered primitive 1960s economics. Now, however, in light of the broader issues surfaced by the US election, it also has a prescient look.

What does all this have to teach us about concentration and industrial employment?

For starters, it seems clear that ordoliberal principles have led to the German marketplace being less concentrated than it would have been under American thinking. This is so even though German businesses are regulated by the broader EU law in many important respects. Ordoliberal thinking has had an effect on EU jurisprudence, and more local matters continue to be handled by the national cartel office.

As a result, the threshold of "dominance" is set around 40 percent in Germany, rather than the 70 percent or so that would be required under American monopolization law.

A lack of concentration is also suggested by a study of the actions brought by the German Cartel Office between 1985 and 2000. The study reviewed 196 cases involving abusive practices and cartels. In only three of the 196 cases did a single firm control the entire market, and in only eight cases did the three largest firms. In the majority of cases the three largest firms controlled less than half of the market. This suggests that most of the problematic industries were relatively unconcentrated, and that the cartel office was keeping them so. Indeed, economy-wide macroconcentration has actually decreased over the years.

Ordoliberal principles also seem to have influenced an important EU case on exclusive dealing. In 2009, Intel was fined 1 billion euros ($1.2 billion) for abuse of dominance for allegedly giving conditional rebates on computer chips in a form that pressured its customers into dealing with it exclusively. Intel appealed to the General Court. A court panel, with a German judge presiding, affirmed the decision in 2014. It found that Intel's conduct was intrinsically likely to harm competition, so that a detailed analysis of the competitive consequences in the particular case was not needed. Banning exclusive dealing in this way served two of ordoliberalism's goals. It fostered deconcentration by holding the market open for additional chip manufacturers and it operated through clear and simple rules.

But as one might expect, the diminished role of case-specific analysis has made this decision controversial. It has been further appealed to the European Court of Justice, where a decision is expected in the next few months.

And what effect does this deconcentration have on manufacturing employment? It is harder to draw the causal connections there. On a level of intuition and hypothesis, it seems likely that multiple firms mean more employment. Firms will be pursuing different strategies and different processes, and so their workers are less likely to be found redundant. But really solid answers will have to wait for more research.

That kind of research, drawing ideas from other countries' experiences, is exactly the kind of thing that might help American antitrust law, and might help with the employment problem.

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