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Confronting Liberalism’s Fatal Flaw
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Liberal democracies are under increasing pressure. Growing discontent about inequality, lack of political participation and identity have rekindled populism and a shift away from liberal values.

This book argues that liberalism’s reliance on a utilitarian policy framework has resulted in increased concentrations of power, restricting freedom and equality. It examines five key areas of public policy: monetary policy, private property and liability, the structure of the state, product markets and labour markets.

Drawing on the German ordoliberal tradition and its founding principle of the dispersal of power, the book proposes an alternative public policy framework. In doing so, it offers a practical pathway to realign policy making with liberal ideas.

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Liberalism, the ideology of liberal democracies, is founded on the principles of freedom and equality. The freedom of individuals to pursue their own interest as long as it avoids harm to others, with everyone considered equal members of that society, has been a very powerful idea in legitimating liberal societies. Since the demise of the potential Soviet threat to the liberal order, the idea that each person is treated equally in terms of access to legal and political rights has been progressively questioned. Furthermore, the ability of individuals to pursue their idea of freedom appears to be increasingly constrained by birth. Instead of the triumph of liberalism, liberal democracies since the end of the Cold War have presided over a growth in the concentration of power which has resulted in societies becoming increasingly divided. The coronavirus pandemic has highlighted just how entrenched these inequalities have become. This rising dissatisfaction with liberal democracy has been accompanied by an industry of books and articles claiming that liberalism is in decline. The fact that electorates believe liberal democracies are merely serving to entrench specific interests suggests these criticisms are largely valid.

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Trafalgar Square lies at the heart of London. Besides its illustrious location, sandwiched between the National Gallery and Whitehall, it has often provided space for the British electorate to make their views heard when they are in conflict with government. In 1887, Trafalgar Square hosted a demonstration against policy towards Ireland organized by the Social Democratic Federation and the Irish National League. The demonstration turned violent and has subsequently become known as Bloody Sunday. Tragically for British–Irish relations this was not to be the last Bloody Sunday. Over a hundred years later in 1990, the All-Britain Anti-Poll Tax Federation called for a demonstration in Trafalgar Square against the community charge, which was a flat tax on the electorate. By the evening the demonstration had developed into a full-blown riot with running battles between police and protestors. Such is the potential outcome of a clash in ideology. This chapter explores the development of utilitarianism and its influence on contemporary public policy for both forms of liberalism. This utilitarian approach to public policy has been reinforced by the rise of welfare economics providing additional quantitative tools to help drive policy decisions. Despite criticism that utilitarianism is an illiberal political philosophy, this system largely remains intact due to its practicality for policymakers. While public policy professionals have started to measure different aspects of social and economic activity, these approaches have not yet developed an effective method of resolving conflicting claims.

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The Paris office of the International Institute of Intellectual Cooperation (IIIC) was inaugurated in the Montpensier wing of the Palais Royal in Paris in 1926. The IIIC was an advisory organization for the League of Nations which fostered international exchange between scientists, artists and intellectuals. The Palais Royal built by Cardinal Richelieu and noted for its splendour, hosted an event to discuss the failings of liberalism in 1938. This has subsequently come to be known as the Lippmann Colloquium. The five-day meeting chaired by the French philosopher Louis Rougier was to discuss Walter Lippmann’s new book The Good Society. Among the 26 attendees were Friedrich Hayek and Ludwig Von Mises from Austria along with Wilhelm Röpke and Alexander Rüstow from Germany – all of whom were now in exile. The Lippmann Colloquium provides an insight into a potential alternative form of liberalism: a view that was sceptical of the market, constant state intervention and of a utilitarian calculus. This chapter explores the development of these ideas in the US, and in Germany where they developed further including a focus on the role of the community and the environment. Central to the German ordoliberal movement was to create rules that eliminated concentrations of power, thereby improving upon initial conditions prior to voluntary exchange.

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The IG Farben building lies in the northern outskirts of the German city of Frankfurt. The site completed in 1930 became the corporate headquarters of the IG Farben conglomerate. Despite significant bomb damage to the surrounding area during the Second World War, the building remained largely intact and became the headquarters of the US occupation forces. The ousted IG Farben management team were on trial for war crimes at Nuremberg. Among other things, one of the subsidiaries of IG Farben had produced the gas Zyklon B which was used at a number of Nazi concentration camps to exterminate mostly Jews. Despite this dark history, the boardroom at IG Farben has since become something of a landmark in the post-war revival of liberalism. At a meeting there in July 1948, Ludwig Erhard, the director of the economic council of Bizonia, and General Clay, the military governor of the American Zone, had been discussing Erhard’s decision to abolish rationing, as well as removing wage and price controls. Such a dramatic shift in economic policy by Erhard in such a short space of time raised serious questions by the occupying powers. Clay addressed the German official. “Herr Erhard, my advisers tell me that what you have done is a terrible mistake. What do you say to that?” “Herr General,” Erhard replied. “Pay no attention to them! My own advisers tell me the same thing” (Hartrich, 1980: 4).

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Concern about inflation in Germany has a long history. The onset of the Thirty Years War in 1618 triggered an inflationary spiral which contributed to living standards plunging in towns across the Holy Roman Empire. Between 1619 and 1622, real wages fell by more than two thirds in Augsburg in Bavaria, in contrast to just a 5 per cent decrease in Southern England. Furthermore, this dramatic fall in real wages took place largely before the outbreak of hostilities (Kindleberger, 1991). A plate published in 1620 by Daniel Mannasser and now in the Germanisches Museum provides an indication of the causes of the inflationary spiral. It appears to depict a German mint deliberately debasing coins designed to be taken into other city-states and exchanged for good coins. The good coins could then be brought back and re-coined with greater seignorage – the difference between the face value of coins and their production costs. This perceived opportunity by principalities to profit and increase their war chests led to a massive increase in the money supply through mint production of an ever-falling value of coinage across the empire. Contemporary accounts depict children playing games in the streets with the worthless coins due to the debasement of the currency (Kindleberger, 1991).

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One of the items in the collection of the United States Holocaust Memorial Museum in Washington, DC is a machine manufactured by IBM. The machine, known as a Dehomag Hollerith Machine, used punch-card technology enabling information to be sorted and arranged before computing the required outputs. During the late 1930s and early 1940s, more than half of the profit of IBM worldwide was likely derived from the sale of these machines to Nazi Germany and occupied Europe. The machines were used to classify who was Jewish, which facilitated the mass incarceration and ultimately extermination of 6 million Jews. Without these machines it would not have been possible for the Nazis to have carried out genocide on the scale that they did (Black, 2001: 352). The concept of private property that emerged within liberal societies protects a company’s right to contract with other agents in order to generate an income stream from its assets. Since the 19th century this legal framework has been accompanied by the development of the limited liability of shareholders. In 1911, the Nobel Peace Prize winner Nicholas Murray Butler, who was then the President of Columbia University, said in a speech that the limited liability corporation is the greatest single discovery of modern times. He noted that even steam and electricity were far less important as they would be reduced to comparative impotence without it (Micklethwait & Wooldridge, 2003: 9).

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In the courtyard of the district court in Altona, which is now part of Hamburg, lies a memorial to four men falsely accused of murder. On 17 July 1932, a major confrontation between thousands of extremists took place leaving 18 dead as a result of police intervention with firearms: 16 were communists and two were fascists. Street fighting between radical left- and right-wing groups by the late 1920s had become an increasingly common occurrence in large urban conurbations across the country (Rosenhaft, 1983). When the Nazis took power, four communists were sentenced to death and beheaded for the alleged murder of the two national socialists. These violent skirmishes are to a certain extent the epitome of the massification that Rüstow and Röpke railed against. The breakdown of community ties along with the rise of mass production, anonymity and the onset of high levels of unemployment left workers unfulfilled and resentful of the liberal system of the Weimar Republic. Many turned towards embracing the faith of a greater nation or towards class war to fill this vacuum. Rüstow and Röpke attempted to counteract the threat of societal alienation by arguing that communities had to be the foundation for social and economic development or Vitalpolitik. This community would be based on individuals and their families in a decentralized economic system, taking into account the natural environment. To support individuals and their families, the state had to provide a basic level of welfare to all citizens given that individual insurance was not always practicable. This foundation would also serve as a basis for closer international economic interaction with other like-minded states. This chapter explores how the ideas of community-based living provide a positive theory of a liberal state, and help inform the contemporary debate on the built environment and relationship with the natural world.

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Along the wall of the Ministry of Finance on Leipziger Strasse in Berlin, is an 18 m mural entitled Aufbau der Republik. The painting depicts a happy society with officials, tradesmen, farmers and engineers all working together for the construction of the classless East German Republic. The idea to base East German society on the equality of outcomes did not produce a sufficiently stable polity, although as George Orwell intimated in Animal Farm, party officials were more equal than others. The ordoliberal focus was instead on achieving greater equality prior to voluntary exchange. With regards to the labour market, although Eucken argued in favour of freedom of contract, he also thought it had limits given it can lead to concentrations of power thereby curtailing freedom. Achieving a greater equality of initial conditions may therefore require some rebalancing of power between workers and managers which is why Eucken supported trade unions and worker representatives under certain conditions. Rüstow promoted the need for continuous training to address the dislocating effects of economic change, which he thought ought to be provided by the state to maintain the equality of starting conditions across the labour market. This chapter explores the effects of co-determination on the West German economy and the importance of continuous training. It relates these ideas to contemporary labour market debates including the changing returns to labour and capital and to what extent the European Commission’s idea of flexicurity encapsulates the essence of ordoliberal ideology. During the 19th century, the relationship between labour and capital became a focal point of class struggle and revolution. In response to poor working conditions and low pay, workers in factories began to group together to form unions in order to improve their bargaining position, particularly for more commoditized labour. Highly skilled labourers that were in demand had a more equal bargaining positioning which could be observed by the difference in wages.

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In March 2014, the public caught a rare glimpse of a Wilhelm Schreuer painting at an auction in Cologne entitled ‘The Council Meeting of the Hanseatic League’. The painting depicts well-to-do merchants discussing their plans around the table with smiles on their faces. Adam Smith’s comment that when people of the same trade meet, the conversation ends in a conspiracy against the public is perhaps an apt description of Schreuer’s work. The Hanseatic League was, after all, one of the world’s earliest examples of an international cartel. The central tenet of ordoliberal ideology was for the state to enforce competition. This was required to remove distortions from the price mechanism, thereby protecting individual economic freedom of action. Böhm did not believe in a utilitarian maximization of welfare but instead proposed that the dispersal of economic power should be the goal of antitrust policy based on performance competition. This enabled firms to reap the rewards of innovation through temporary monopolies, but placed significant constraints on firm behaviour from distorting the market. To complement performance competition, the free trade of goods and services was promoted to further reduce the power of domestic vested interests. Röpke, however, was careful to recognize the downside to free trade which had to be managed through policy intervention.

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