Dull but Sound: Ordoliberalism to the Rescue

Hannover, Germany: Simulating of car manufacturing by robots, digital twin of the production on Siemens stand on Messe fair

A hallmark of quality recognised the world over, ‘Made in Germany’ represents a welcome victory of content over hype. The German mindset and constitution, it would seem, are almost incapable of cutting corners to maximise short-term outcomes. As such, the country is an oddity in the industrialised world as its businesses mostly ignore the next quarter’s results, refuse to squeeze operational processes for instant profit, and keep focussed on delivering quality in the belief that the bottom line will follow.

Though the broad brushstrokes of generalisation usually hide a more nuanced and finely detailed reality, the differences between Germany and its economic partners and competitors are such that an exception may be justified. There is a reason why Germany does not and cannot produce a technological marvel such as the iPhone but can manufacture high-end cars.

Though Apple engineers in Cupertino do design a vastly superior product, the success of the company ultimately depends on the equally superior insights of its marketing department into the inner workings of the human mind. In a nutshell: it is hype that turns the iPhone into a coveted object commanding premium prices, just as it is engineering that drives a Mercedes to the pole position of consumer trust and desirability.

It is no coincidence that it was a Brit who coined Germany’s most ubiquitous post war slogan ‘Vorsprung durch Technik’. Sir John Hergarty, cofounder of the BBH (Bartle Bogle Hegarty) global advertising agency, remembers how he found inspiration on a faded poster during a visit to an Audi assembly plant in Ingolstadt. The phrase (‘Progress through Technology’) was dusted off and used to tie together the brand image of Audi. It not only became an instant classic in the advertising world, but also a source of pride for an entire nation. Nothing sums up Germany better than the catchphrase rescued from the crypt of industrial history by Sir John Hegarty.

Vorsprung durch Technik is also Germany’s ace in the hole for the post-corona world that will emerge sooner or later. Though the contours of that world are still barely visible, German industry is set to double down on its bet that global demand for hype is likely to decrease significantly as both individual and corporate survivors seek for meaning with an added sense of urgency and scepticism. The long reign of the ‘lean and mean’ crowd was cut short by the realisation that the corporate philosophy also included a ‘meagre and weak’ flipside.

During the pandemic, Germany’s fabled but often misunderstood ‘Mittelstand’ has just one major concern: the preservation of its workforce. The government has long been cognisant of the need to keep workers tied to their job. It helps out with a relatively simple yet widely available ‘Kurzarbeit’ support scheme that allows businesses to furlough workers during a downturn without shedding them from the payroll. Though many countries have tried to copy the original formula, and some are scrambling to do so now, most added a number of bureaucratic layers that undermined the scheme’s effectiveness.

Germany has used Kurzarbeit since the early 1900s to help workers and employers navigate the ups and down of the economy. The scheme is credited with helping the Mittelstand survive more or less intact through recessions, depressions, and periods of predatory business practices such as leveraged buyouts (‘Barbarians at the Gate’) and other destructive fads.

Though it lacks a clear definition, Germany’s Mittelstand may be defined as a collective of small- and mid-sized companies with up to €50 million in annual revenue and less than 500 employees. Slightly larger family-owned businesses are also generally understood to form part of this corporate constellation unique to Germany.

According to the Bundesverband mittelständische Wirtschaft (BVMW), the sector’s trade body, some 3.7 million companies, about 95 percent of the total, fall into the Mittelstand category. Together they employ nearly 60 percent of Germany’s workforce.

Most Mittelstand companies are virtually unknown to the wider public but some dominate a specific industrial niche and belong to a ‘hidden champions’ sub-category. Membership is reserved to companies deriving at least 40 percent of their sales from export and being the global number one, or runner-up, in their particular niche. Worldwide, the BVMW has identified around 2,700 hidden champions of which more than 1,300 may be found in Germany alone. These corporate gems form the true backbone of the German economy and support the country’s iconic industrial giants in their quest for global market share.

There is plenty of value to be extracted from Germany’s underreported addiction to ‘ordoliberalism’, a rather obscure form economic liberalism that gives the state a coordinating role in ensuring that markets operate near peak efficiency, regardless circumstance. Long eschewed by the much more fashionable – and flashy – Austrian School of economic thought prevalent in the English-speaking world, ordoliberalism may offer solutions to some of the quandaries facing policymakers as they try to trace a path through a post-pandemic landscape littered with broken companies and inhabited by traumatised people carrying a huge collective debt load.

The teachings of Friedrich Hayek and Carl Menger, and those of contemporary exponents of the Austrian School such as Alan Greenspan and James Buchanan, are of little practical use when a severe external shock has derailed markets to the degree that they no longer respond to either reason or stimulus. Arising, as it did, out of the smouldering embers of a world war, ordoliberalism offers a way to build up shattered economies without sacrificing individual or entrepreneurial freedom.

In essence, ordoliberalism argues that it takes three to tango: business, labour, and the state. Acting in unison, with only the state being more equal than the others, the three form the foundation of a social market economy. Though ordoliberalism features a few faintly corporatist elements, abhorrent to most advocates of the Anglo-American economic model, the approach does adhere to basic market principles, including a healthy degree of competition. Ordoliberalism aims to protect the market against its own tendency to create, if left unfettered, monopolies or oligopolies which can decrease and subvert the advantages offered by free competition.

This philosophy helps explain why the German economy is sustained by a backbone of many mid-sized corporates, small enough to remain nimble but large enough to rule over a niche. Historical parallels to the present moment abound and show, if anything, that after a major disaster everybody is an ordoliberal.

In the post war period, Adenauer and Eisenhower used the exact same interventionist recipes to rebuild and revamp the German and US economies. So did Clement Attlee in Great Britain and Charles de Gaulle in France. Even General Douglas MacArthur, as staunch a conservative as any, applied New Deal Economics to revive the war-shattered economy of Japan. China too seems to have taken more than a few pages out of the Freiburg School’s books on ordoliberalism, just leaving out the bits that mandate personal and economic freedom.

The difference is, of course, that most of the ordoliberals outside Germany quickly reverted to their own ways once the crisis had passed and the rebuilding was completed. That script will undoubtedly be replayed in the years ahead as the rubble left by the pandemic is cleared, debts are either settled or deflated, people have been put back to work, and businesses return to profit. With more experience than most in the application of ordoliberalism, and with its collective aversion to hype, Germany is well poised to limit the pandemic’s economic disruption, avoid lasting damage, and take the lead once the corona virus has been contained or defeated.