1 Background

This chapter introduces the approach of the Freiburg School and explains its particular relevance to the focus of this book.

As we have seen, digitalisation is affecting the most diverse areas of the economy and society. As will be shown in the following chapters, the relationship between the two is also changing. Which argumentative approach could then be chosen to describe the relationship between the economy, society and individuals to show to what extent economic policy is facing new challenges?

An appropriate approach requires a sufficient degree of generality that covers the phenomena in question, which here concern both positive and normative economics, and is acknowledged by what is considered a scientific community. In view of the subject matter chosen here, the approach of the Freiburg School seems more relevant than ever. Why?

It seems appropriate at this point to once again refer to the technical, i.e. instrumental character of the economy and to take this as a starting point. This view in fact opens up a complex field of tension characteristic of economic policy. With a little courage to simplify and reduce, one can say that it is characterised by three poles. Firstly, there is the necessity to accept economic laws. Secondly, there is a normative component to every economic policy decision that has to weigh up between is and ought. Thirdly, a particular difficulty arises from the fact that the economy produces novelty endogenously and it is always dynamic. The latter means that every economic policy must also allow for an appropriate degree of openness.

It is the approach of the Freiburg School, as formulated in particular by Walter Eucken, which explicitly attempts to depict this field of tension with a pragmatic intention. The term for this approach is “Ordnungspolitik”. Its aim is,

... to shape the forms of economic activity or to influence the conditions under which they arise. But it leaves planning and action of households and enterprises free in these forms. ...the economic policy making (takes place) on the basis of knowledge of the individual forms of order, the interrelationships of the economic process and the interdependence of the orders. It is not ideologies about capitalism, socialism, etc., but orderly thinking that guides regulatory action (Eucken 2004, 242, own translation).

In this respect, the approach of the Freiburg School has the necessary degree of generality to catch the economic significance of digitalisation in its full scope. Moreover, the chosen perspective sheds light on the challenges posed by novelty. And precisely by recognising the necessity of both novelty and economic laws, the limits of what is pragmatically feasible can also be made clear.

So, what exactly is the approach of the Freiburg School and what distinguishes it? This is what the following sections are about.

2 “Ordnungsökonomik”—“Ordnungspolitik”: About the Concept in a Narrower Sense

The following chapter provides a brief overview of the concept of “Ordnungsökonomik” or “Ordnungspolitik”, focusing on three key aspects.

Section 3.2.1 gives a brief overview of the historical origins and background and provides some references to the key representatives.

Section 3.2.2 endeavours to provide a concise summary of the most important arguments of the Freiburg School.

Section 3.2.3 focuses on an aspect that is particularly important for the purposes of these considerations, namely the relationship between the rules constituting an order and its openness to development.

2.1 Origin

This section categorises the approach of the Freiburg School in terms of the history of economics and explains the background to its development.

First of all, the Freiburg School and its concept is by no means a one-size-fits-all theory either. Its approach was developed in the first half of the twentieth century and its basic arguments were and are shared by different scholars (Schnellenbach 2021, 1). The historical background of this concept is a time of upheaval. Thus, it represents a part of the response to the economic—and thereby social—problems of the nineteenth century and the dramatic economic crises of the early twentieth century (see Schnellenbach 2021, 7 or Feld et al. 2021, 1). This background of upheaval, which made fundamental reflection necessary, seems quite related to ours.

An important thrust was to consider how to turn away from the classical laissez-faire liberalism, which was obviously some sort of threat to the “greater good” as well as to individuals, without abandoning the central postulate of freedom (Vanberg 2017, 10). Chicago, London, Vienna and finally Freiburg were the epicentres of these reflections, a current that also went by the name of “neoliberalism”, which today admittedly carries a new and different meaning (see in more detail, e.g., Vanberg 2004 or, more recently, Kolev 2020).

The German-speaking variant of this current has also become known as “Ordoliberalism” or “Ordo-liberal School”, which can be traced back to the Freiburg School of Law and Economics founded by Walter Eucken, Franz Böhm and Hans Großmann-Doerth. Interestingly, and possibly to a greater extent than could be explained by the native German language of its most important proponents—Nobel Prize winner F.A. Hayek also achieved great prominence and can certainly be read as an “ordo-liberal” (see Kolev 2010)—this approach has actually become known primarily as a kind of German Sonderweg. It has again come into focus in the recent past, which has been marked by crisis developments, especially in the euro zone (see, for example, Dullien and Guérot (2012); or even, quite prominently, in the Economist, 9 May 2015, 21–22), and one can even attest to a certain degree of alienation here. Denord et al. (2015) even saw it as “Germany’s iron cage” (!), while Beck and Kotz (2017) entitled their instructive volume on the topic, no less quaintly, “A German oddity”; Bofinger (2016), for three periods one of Germany’s “Five Sages of Economy” (an honourable designation for the members of the German Council of Economic experts), even speaks of the “long shadow of Walter Eucken”. Where the light comes from, he does not say.

Without being able to go into the historical background of the theory in more detail here (see, e.g., Sally 1996, also Vanberg 2014a, and briefly the latter 2017), it should be mentioned for the sake of completeness that two other currents can be distinguished from the most prominent strand of ordoliberalism, the Freiburg School, which formulated a kind of founding manifesto in 1936 with “Our Task” and which is also at the centre of the considerations presented here. On the one hand, the concept of “social market economy”, primarily known through Ludwig Erhard, known as the father of the German “Wirtschaftswunder”—economic miracle—after World War II, and Alfred Müller-Armack; and on the other hand, “sociological liberalism”, best known through Alexander Rüstow and Wilhelm Röpke.

Although these three currents differ in certain aspects, they share a core of common convictions (see in nuce Feld et al. 2021; Vanberg 2017). These were most clearly formulated by Walter Eucken (see below).

2.2 Main Arguments

This chapter briefly presents the central arguments of the Freiburg School.

What was the mission of the “Freiburg School”—and why does it also bear the designation “ordoliberalism”?

A good starting point is what it does not want. As indicated above, it does join the liberal tradition, but in view of the experience of serious economic as well as social upheavals, it turns against laissez-faire liberalism. What does this mean? From the perspective of the Freiburg School, markets or a market economy does not develop in a sustainable manner when the actors are left completely to their own. Market and market economy are, as Vanberg once aptly put it, “(…) not a natural event but a political-cultural product” (Vanberg 2014a, b, 5). Both require preconditions. Freedom is a necessary but not sufficient one. On the one hand, it is a matter of limiting the destructive and/or freedom-restricting potential of forces unfolding in markets; on the other hand, it is a matter of preventing the state from such interventions, which in turn would result in losses of freedom or prosperity. At the centre of the considerations are thus the complex conditions for a free-market economy.

The Latin first compound of the word suggests precisely this: Under the varieties of “ordo-liberal” or “ordo-economic”, there is a strand of theoretical considerations on the question of what order or what framework of order—“ordo”—must be guaranteed so that economic activity unfolds as a market economy. This is desirable because, on the one hand, the greatest possible degree of prosperity can be realised through the system of markets. Smith’s “invisible hand”Footnote 1 works through the market; here the Freiburg School seamlessly follows classical liberalism. On the other hand, this is desirable because citizens should be granted the greatest possible degree of freedom, hence the second compound of the word “-liberalism”.

Freedom and prosperity are mutually dependent. But because they are open in their concrete results, it therefore depends on a framework that makes them possible. Only under the prerequisite of individual freedom will “competition on performance” come about, which will be able to deliver the best possible results for consumers (see Vanberg 2014a, 5). The state being responsible for the framework must thereby first recognise the inherent lawfulness of the market and then do no more than provide the rules for the game. It is not to force any desired results! This means two things. Firstly, the state acts primarily only with the aim of protecting the framework of rules within which the coordination principle of the market economy unfolds. A state that intervenes in economic activity too easily makes itself the agent of particular interests and thus enables tendencies that Franz Böhm has called “re-feudalisation” (Vanberg 2014b, 8; Zweynert 2015, 5). For the time being, a rich literature deals with this phenomenon under the term “rent seeking” (see, e.g., very short, Seekamm 2022; Tullock 1994). Secondly, the state has to intervene beyond the sheer rules, if—possibly precisely because of the market’s inherent lawfulness—tendencies of monopolisation occur.

Accordingly, the concept of order is at the same time both an analytical and a normative umbrella term for a social constellation that enables a life that is as prosperous and as humane as possible (Eucken, 2004, 14). The question of order thus posed is also a constitutional question: “the treatment of all practical politico-legal and politico-economic questions must be keyed to the idea of the economic constitution” (Böhm 1989, 23, cited after Vanberg 2001, 39).

Because of this tension between the mutual conditionality of individual freedom, the market and “society”, the approach of the Freiburg School has always required a combination of several perspectives. In analytical terms, it combines the economic perspective with the perspective of law in an obvious way. The home of the Freiburg School at the “Faculty of Law and Political Science” already suggests this, and this guided the view of the founding fathers. Vanberg (2014a, b, 2) draws on Böhm, who emphasised as a common feature of the founders of the Freiburg School “(…) their common concern with the question of the constitutional foundations of a free economy and society”. The normative component can be inferred from the second part of the quotation. The humanly possible is to be achieved under the recognition of economic laws. It is this mutual conditionality of several elements that makes this approach, on the one hand, really “basic research” of economic reality. On the other hand, compared to other economic approaches, it has a relatively wide object area.

One might object that such fundamental questions probably extend too far into the realm of other disciplines. The Freiburg School, however, explicitly opposed the “historical school” of German national economics by claiming systematicity beyond mere descriptiveness. It was Walter Eucken who, in his fundamental works “Foundations of Economics” and “Principles of Economic Policy”, attempted to provide a theoretically consistent, systematic approach that combined the market-theoretical perspective with the constitutional question—together: the question of economic constitution—while taking into account the interrelationships of society as a whole.

This is where the core principles and most important argumentative or analytical building blocks for understanding an economic order can be found. Indeed, it is not without reason that Schnellenbach (2021, 1) chose the formulation that despite the diversity of implications of this concept, “the main thrust of the School’s theoretical research program can be extracted from the works of its most prominent proponent, Walter Eucken”. Accordingly, his principles, which are commented on below for the purpose of introduction, provide the leading perspective in this book.

2.3 Rules and Openness

This chapter explains the apparent contradiction between the central role of clear rules on the one hand and openness to development on the other.

Neither can nor should this be the place to delve further into specific theoretical aspects of this school. In this context, it is important to emphasise that it is not only a theoretical stance, but one that provides an approach for practical economic policy: “Regulatory policy” is directly linked to the “theory of order”. After all, it is about the best possible design of a framework given the possibilities, within which unpredictable results may, indeed should, come about. Feld et al. (2021, 3) put it clearly: “Instead of describing the interactions of economic agents within existing rules (e.g. on markets), the Freiburg School focuses on describing the effects of different rule frameworks”. As long as certain basic principles are preserved, this approach then trusts in the forces of the market, which will then, indeed, produce the best of all possible worlds. Nota bene: This may turn out to be much more modest than some politicians would like to promise their voters and interest groups.

The state sets the rules of the game and adjusts them if necessary. In doing so, he must perform a demanding balancing act, because the order as a whole must—while taking into account the real possibilities—enable a humane life for society as a whole. An ideal order is “functioning and humane” (Eucken 2004, 14, own translation). It is therefore a demanding but realistic approach. Its realism lies precisely in the fact that it focuses on preserving order among and for agents, but otherwise does not strive for concrete results.

Both the openness of the approach—the market and society spontaneously produce unforeseen results and formations—and the scope of its object area—the individual and society, wealth and distribution—are reasons for its realism. Admittedly, the field of tension that is fundamentally set up between the individual, the market and the state is a drastic simplification, because for all three there must admittedly also be a more differentiated picture in each case.Footnote 2 All “theory of order” is therefore also always social theory oriented towards certain core questions.

A milestone of the approach discussed here is Walter Eucken’s posthumously published work “Principles of Economic Policy”, which captures the described context by means of a typology of “economic orders” that move in the field of tension between centrally planned economy and free-market economy. Programmatically, he refers to the economic policy described above, which is limited to providing and ensuring the rules of the game. It is opposed to interventionist policy—using Eucken’s term “process policy”.

3 Eucken’s Principles in the Light of Digitalisation: Recombinations and Additions

This chapter will present the principles of the market economy formulated by Walter Eucken and explain why it makes sense to recombine and supplement them for the purposes of our study.

Eucken’s normative commitment to individual freedom, the market and humanity is reflected in the corresponding type of order, the “competitive order” (Vanberg 2004, 15). To this end, Eucken formulated principles, so-called constitutive principles that are intended to be the basic prerequisites for such an order to come into being. They can be understood as a set of minimal but necessary prerequisites for the functioning of markets. These must be fulfilled simultaneously both so that a competitive order can come into being at all and so that it is sustainable. In concrete terms, these principles are the pillars of the regulatory framework that the public regulator must set so that a competitive order or, in other words a free-market economy in the instrumental sense can emerge.

In addition, Eucken formulated so-called regulative principles, which provide a category for how the public regulator can specifically intervene in a rule-based manner when the functioning of the competitive order is endangered. These principles together provide the structure, the heuristic perspectives of this book. Why?

Firstly, because these principles describe the inevitable prerequisites of a market economy. If digitalisation is such a technology that brings about a far-reaching, epochal change, then it seems worthwhile to look at the extent to which these very principles may come under new conditions.

Secondly, it is worthwhile to choose these principles as a heuristic access structure, as it can map the necessary degree of openness of the developments,

Thirdly, this access structure opens up a perspective that can integrate otherwise separate aspects. This is particularly important in view of the complexity caused by digitalisation.

Fourthly, these principles offer a proven starting point for pragmatic considerations which, in view of the increased complexity of economic and social events, must be holistic and should be sustainable.

This access structure is therefore ideally suited to demonstrating the challenges for economic policy. Because Eucken’s principles can be read as a minimalist blueprint of state activity and intervention competence. Particularly important for our purposes is the fact that this minimalism is not only the result of the normative basis—individuals as free as possible, as much prosperity as possible, an order as humane as possible—but formulates in a pragmatic perspective the foundations of an economic policy that recognises economic laws.

And it is precisely from this last perspective that we see how explosive the current transformation through digitalisation actually is. For it seems to have become much more difficult to follow these fundamental principles of economic policy. This is the reason why this book is oriented towards these principles, also with regard to its chapter structure. At this point, only a few brief references will suffice.

3.1 Constitutive Principles

The following section explains Eucken’s first group of principles, the so-called constitutive principles.

Eucken formulated seven “constitutive principles” that sum up the most important convictions of the Freiburg School. He described them in his posthumously published work “Principles of Economic Policy” (see Eucken 2004, 254f.). Let us name these principles in turn and briefly outline the extent to which digitalisation poses new challenges for these principles. In a sense, this then briefly reflects the detailed procedure of the main chapters.

The first constitutive principle is a functioning price system. Prices are a kind of neural system of the market economy, as they express individual scarcity ratios in a countable unit of measurement and make them anonymously communicable. The price system enables the coordination of the conduct of any number of actors in markets. The other way round: Without functioning prices, there is no division of labour and no adequate information about scarcity. In the view of F.A. Hayek, prices are the social technique that enables economic competition as a discovery procedure and thus the greatest possible use of dispersed knowledge and thus greater prosperity. Digital technology can challenge this social technique and changes the coordination among actors by encoding facts without using prices; by enabling perfect price discrimination; by observing the prices not through the observation of entrepreneurs and critical customers, but by price-bots. Thus, both the way prices are formed and what they express are to be interpreted differently today than in the pre-digital age. Chapter 4 is devoted to this problem.

The second constitutive principle is the primacy of monetary policy. The core claim is to ensure monetary stability. It is essentially justified by the fact that the “functioning” prices addressed with the first principle can only fulfil their very function if the value scale in which prices are counted is stable. Now the discussion about the devaluation of money is by no means new. However, digitalisation, firstly, may have new effects on inflatory developments and open new possibilities for monetary policy. Secondly, the traditional central banks now face competition in the form of “cryptocurrencies”. Thirdly, and directly related to the latter new form of currency competition, digital technology is enabling the “unbundling” of traditional money functions that were previously bundled in central bank currencies (see Fiedler et al. 2019). Fourthly, central banks around the world are planning to introduce a new complement to cash, namely digital central bank money. These are all completely new challenges for the claim for stable money. Chapter 5 deals with these issues.

The third constitutive principle is open markets. This has two main meanings. On the one hand, this principle is to be understood in the sense of open economies, i.e. it has a significance for trade policy, which aims to make optimal use of the effects of the division of labour through free trade. On the other hand, an open market must also be understood in terms of competition policy, namely that even within a national economy, undertakings must be exposed to competition from others at all times, and new players should be able to enter markets. Even though ensuring this has never been a trivial task, the age of the internet brings with it completely new challenges. For example: What does it mean when marginal costs no longer play a role for digital goods? Can markets really be kept open on the internet when indirect network externalities and snowball effects have taken on an unimagined dimension? Or does the internet even enable more competition in certain areas—because competition is “just one click away”? These questions will be addressed in Chap. 6.

The fourth principle concerns private property. Securing private ownership of the means of production meant an important aspect for Eucken and the Freiburg School, since the idea of collective ownership in combination with corresponding centralised planning competence was relevant as a solution to problems in the economy at the time of the approach’s emergence. The debate about centrally directed or market-based economy seems to be over and with it the question of ownership of the means of production. However, digitalisation has also opened up revolutionary possibilities in this respect. Everyone has been saying for a long time that data is the key to success, and that data is the “oil of the twenty-first century” (The Economic Times 2018). However, it is neither clear who should own what data, when and why and how, nor is it trivial how it should be technically possible to enforce respective regulations. Moreover, the platform-based “collaborative economy” and, to use the more common and widely discussed expression, the “sharing economy” are new phenomena, so that the issue of private property in the context of economic policy requires a new, more differentiated assessment. Chapter 7 discusses these questions.

The fifth principle is freedom of contract. Now, it is clear that all participants should have the freedom to draw up and conclude contracts independently, and it is equally unambiguous that this freedom of action must not be used to the detriment of the other principles. For example, the establishment of a monopoly is obviously not one of them. In the digital world, however, this principle is not unproblematic with regard to the principle of property rights, because it is precisely the disposal of these that is subject to contracts. It therefore seems worthwhile to treat both principles, i.e. the fourth and the fifth, in Chap. 7 together.

The same applies to the sixth principle, liability. This principle emphasises that each individual actor should be liable for the risks he takes. In the present study and its focus on economic policy challenges, no separate chapter will be devoted to liability. Questions of the respective responsibility will be dealt with accordingly in connection with the other sub-questions.

The principles mentioned so far already shed light on the fact that the sixth principle, an overarching demand for economic policy, faces new challenges. This is the continuity of economic policy. It is therefore necessary for actors to be able to make long-term decisions, to plan safely and to cooperate and compete with each other at their own risk. The predictability of economic policy is a significant prerequisite for participants to dare to innovate. Digitalisation, however, obviously sparks a completely new development dynamic in the economy. It cannot be appropriate for economic policy to lag behind developments and expose citizens to dangers, nor can it be appropriate for excessive restrictions to deny citizens the potential of digitalisation. A new balance must be found.

In today’s usual language, one would probably rather use the—admittedly somewhat strained—umbrella term sustainable economic policy. Now, the fundamental problem of democratic governments is a short-term focus, interest in votes, and thus long-term problems and costs that will be passed on to the next generation will probably neither be solved by digitalisation, nor be exacerbated to such an extent that it would be worth a chapter of its own. Instead, each chapter focuses on the possible long-term implications of the new challenges posed by digitalisation.

3.2 Regulative Principles

The following section describes the second group of Eucken’s principles, the so-called regulative principles.

Eucken complemented the constitutive principles in his “Principles of economic policy” with four so-called regulative principles (Eucken 2004, 291f), those that categorise the possibilities of state intervention in the economic system, which should serve to safeguard the constitutive principles.

The first is antitrust or competition policy. In fact, digitalisation has confronted competition policy and competition theory with completely new challenges. To put it optimistically, the situation is quite diffuse. “It’s not easy to know how those changes affect competition—or even, in some cases, exactly what has changed. But we need to understand them, to do our job properly”, Margerete Vestager said at Harvard University in 2018, referring to digitalisation and competition policy. And indeed, the assessment of platforms, search engines and the variety of digital business models poses major challenges for competition policy. Problems such as the relationship between concentration, efficiency and (potential) competition appear in a new light.

Now, it would undoubtedly require another book to give a halfway adequate account of the challenges of digitalisation to competition policy. For the purposes of the present considerations, namely, to present the basic, overarching challenges of a basic nature, it makes sense to treat this regulatory principle together with the constitutive principle of open markets. This already implied a competition policy dimension and provides the corresponding opportunity to show where anti-competitive tendencies can unfold through digitalisation.

Just as the combination of one of the constitutive principles with one of the regulative principles seems to make sense, the problem of digitalisation suggests that two further regulative principles should be considered in combination: the so-called principle of the correction of anomalous labour supply on the one hand and the income policy on the other. This is necessary because digitalisation, with its potential for robotisation and the possibility of replacing human labour with artificial intelligence, has a characteristic effect on labour markets as well as on the distribution of income. To separate this heuristically would hardly make the essential interrelations comprehensible. Accordingly, Chap. 8 will look at both, labour and incomes, together and will show where the effects of digitalisation come in.

This leaves only one of Eucken’s regulative principles, that of the correction of externalities. Eucken thus proved to be extremely far-sighted, as he already had the problem of environmental pollution in mind. As topical as this problem is today, the possibilities that digitalisation offers for better management of potential environmental problems are more technical in nature—i.e. in the sense of prognostics, control, sensor technology, etc.—and do not in themselves, from our point of view, represent a qualitative leap in such a way that it would be worthwhile to deal with them individually with regard to the central question of this book—how to give the modern industrialised economy a functioning and humane order. Individual aspects relevant in this context, such as the high energy consumption of crypto-mining or social networks, are appropriately referred to where appropriate.

3.3 Additional Perspectives

This section concisely demonstrates the extent to which the perspectives of the principles must be supplemented by further relevant approaches for the considerations of this book.

As already noted in the introduction, the basic convictions of the Freiburg School laid down in Eucken’s principles will be used as a guiding heuristic for the following considerations in order to adequately portray the extent to which digitalisation is changing the social phenomenon of the economy and thus also challenging economic policy. Two aspects that do not have a structural expression in the composition of this book should be briefly pointed out here.

The first aspect concerns the approach of the Freiburg School itself. On the one hand, Eucken had supplemented his principles, briefly outlined above, with further principles, namely those explicitly related to public policy—hardly adequately translatable as “state policy principles”, “staatspolitische Prinzipien”—in order to be able to adequately represent the role of the state. For certainly the order outlined here does not require a weak state, but a strong state, strong with regard to the enforcement of the rules and equally strong with regard to its own self-restraint. On the one hand, this demand referred to the possibility of “neo-feudalisation” through the interaction of interest groups and the bodies of the state, and on the other hand to avoid steering the economy concretely in favour of merely shaping the forms of order. The power of private actors is to be limited by the pressure of competition, the power of public actors by rules. Now this is an area that poses different problems in different policy areas, but in the end it is always illuminated by reference to the constituting or regulating principles. Accordingly, it should become clear in these considerations that digitalisation places various policy areas under new conditions, but separate sub-chapters will not be devoted to this.

The second aspect concerns the concrete method of presentation in detail. Admittedly, this cannot mean that more recent analytical tools in economic science developed since then are not also used for an appropriate understanding of the phenomena covered by this heuristic. Accordingly, the structure of the chapters is based on the components outlined in the previous sub-chapter, which result from the partial combination of Eucken’s principles. In order to describe the problems encountered in each case appropriately and clearly, other methodological instruments will have to be used, depending on the focus. Therefore, methods of institutional economics, transaction cost economics, property rights theory, but also price and competition theory, among others, will be consulted.

This methodological plurality is on the one hand the result of the conviction that the problems determine the methods, not vice versa; on the other hand, however, it is also a necessity that arises from the claim to develop a comprehensive account of fundamental problems that guarantees the interested reader an understanding of the scope of current changes, but also an appropriate initial access to the broad arsenal of methods.

This will undoubtedly lead to pragmatic reductions in some cases, which cannot reflect the current discussion in the respective sub-fields of economics in its breadth. Where this seems appropriate, the theoretical background, aspects of the history of theory and current discussions are referred to mainly in the footnotes. This also applies in detail to the use of some terms, which—such as “artificial intelligence”, “scarcity” and “price”—are sometimes used and understood in different ways and are therefore respectively specified for the purposes of this contribution.