State Roles in Market Competition: Ordoliberalism vs. the Chicago School

Hello! Last lesson examined Hayek’s argument that prices help coordinate knowledge dispersed across many people. But prices do their work within a framework of property rights, contracts, and rules about competition. Who should establish that framework—and how actively should the state defend it?

This lesson compares two answers developed within the broader neoliberal tradition: German ordoliberalism and the Chicago School. Both opposed comprehensive economic planning, yet neither assumed that a competitive market could operate without a state. Their sharpest disagreement concerned what threatens competition and how government should respond.

Ordoliberalism: establish a competitive order

German ordoliberalism emerged in the 1930s amid concern about both state planning and the power of private cartels. A cartel is an agreement among businesses to limit rivalry—for example, by fixing prices. From an ordoliberal perspective, allowing firms to make any contract they wish does not necessarily preserve economic freedom: firms might use that freedom to agree not to compete, keeping new entrants out.

Watch these portions of This Is Neoliberalism: The Chicago School (Part 5) from BarakalypseNow for the historical setting and the early overlap between the two schools. Treat the account of postwar economic recovery as context, not proof that one set of ideas caused that recovery on its own.

For ordoliberals such as Walter Eucken and Franz Böhm, the state’s central economic task was to establish an economic constitution: an enduring legal order within which people and firms could make their own decisions. This did not mean a single document called an economic constitution. It meant, among other things, enforceable rules for private property and contracts and rules that prevent agreements or concentrations of power from disabling competition.

That is an active role for the state, but it differs from telling each factory what to produce or adjusting prices whenever a problem appears. The ordoliberal ideal is to set and enforce general rules before private power becomes entrenched, rather than repeatedly intervene to correct its effects afterward. A state strong enough to resist powerful firms is important to this project. “Strong” here describes its capacity to uphold the rules, not necessarily the number of goods and services it produces.

Read Thomas F. Remington’s Ordoliberalism Revisited for the reasoning behind that position. The article offers an interpretation of ordoliberalism; concentrate on its account of the proposed institutional design rather than treating every contrast it draws as an absolute distinction.

This also explains the ordoliberal link between competition and political freedom. A powerful cartel can restrict choices for customers and smaller businesses; it may also gain leverage over the government meant to regulate it. The state must therefore defend a competitive order against private coercive power as well as avoid becoming a central economic planner itself.

Ordoliberalism was associated with a social market economy: competitive markets set within a wider legal and social order. That does not mean every ordoliberal endorsed the same welfare policies. It does mean their account of a good economy was not exhausted by asking whether prices were free to move.

The Chicago School: rules, markets, and a changing view of monopoly

The Chicago School also assigned essential tasks to the state. Listen to economist Milton Friedman describe why even a government with tightly limited powers must establish the rules of economic interaction and provide courts to resolve disputes.

Defining property rights is not a trivial preliminary step. In Friedman’s example, a rule is needed to determine when an aircraft passing over someone’s land infringes their property. People cannot simply exchange well-defined rights until those rights have been defined and disputes about them can be settled. On this basic point, Chicago thinkers and ordoliberals alike recognized that markets depend on institutions.

Their differences become clearer when we ask how to protect competition from dominant firms. There is an important historical qualification: the Chicago School’s position changed. Early Chicago economist Henry Simons was strongly hostile to monopoly and argued that government had substantial responsibility for maintaining competitive conditions. On that issue, he was closer to the ordoliberals than a simple two-school contrast would suggest.

Later Chicago thinkers became more skeptical of aggressive antitrust enforcement. They were more inclined to ask whether a large firm could actually sustain harmful market power when rivals had opportunities to enter, and whether government intervention might cause greater harm than the conduct it addressed. This was not the claim that property law or courts were unnecessary, nor that every form of collusion was harmless. It was a different judgment about how readily market dominance defeats competition and how confidently officials can improve the result.

Return to Remington’s account for this shift:

The later Chicago view described here placed greater weight on potential competition: even if one company currently dominates, the prospect of a rival taking its customers may constrain its behavior. The ordoliberal worry is that a dominant firm may instead acquire durable advantages, exclude rivals, or influence the rules of the market itself. These are competing assessments of how markets and political power work, not simply a dispute between “state” and “no state.”

Compare their responses to one market

Imagine that one building-materials supplier gains a very large share of a market. It has lowered costs, but it also signs agreements that make it difficult for smaller rivals to obtain essential supplies. A local licensing rule creates an additional obstacle for newcomers.

An ordoliberal would pay close attention to whether the supplier’s agreements and the licensing rule are closing off competition. The state should maintain a legal order that prevents entrenched private power and preserves opportunities for rivals to compete. Its concern is not merely today’s price; it is whether the competitive order will survive.

A later Chicago-style analysis would be less likely to infer a problem from the supplier’s size alone. Its low costs might benefit buyers, and rival firms might still enter. It would ask whether the agreements create a lasting barrier and demonstrable harm, while also scrutinizing the licensing rule as a government-created obstacle. This approach can still justify action against harmful exclusion; it demands a different case for taking action.

These are emphases, not exceptionless rules. Early Chicago economists could favor robust anti-monopoly action; ordoliberals did not ask the state to direct every business decision. Neither position follows mechanically from Hayek’s observation that prices convey dispersed information. One must also decide which rules let prices reflect meaningful rivalry, how private power might obstruct it, and what government can reliably do about that obstruction.

Conclusion

German ordoliberals assigned the state the task of constructing and defending a competitive legal order, especially against cartels and entrenched private power. Chicago thinkers also saw rules and courts as necessary, but later Chicago approaches placed more confidence in market entry and were more cautious about government attempts to curb large firms. The early Chicago School’s anti-monopoly position is a reminder that these traditions developed over time rather than occupying fixed, opposing camps.

The next module turns from intellectual foundations to political influence. It begins with the crises of the 1970s: why did circumstances make market-oriented proposals more attractive to policymakers, and why was their rise nevertheless not inevitable?