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Contents
1. Introduction ... 3
1.1 Polanyi’s Suggestions in Our Time ... 3
1.2 My Research Topic ... 7
2 Theoretical Framework ... 9
2.1 Embedded Liberalism ... 9
2.2 Ordoliberalism: social market economy model ... 12
2.3 Neo-liberalism: Neo-liberal Model ... 17
2.4 Conclusion ... 22
3 The European integration in the post-war period: the relationship between state, market and society ... 25
3.1 European nation-states in post-war period ... 25
3.2 Embedded Liberal Europe ... 30
3.3 Conclusion ... 36
4 Transformation of European system: the completion of Ordoliberal Europe .. 38
4.1 Legal consolidation of the European Community: the reinforcement of the role of the ECJ ... 38
4.2 The Shift of the Community towards Ordoliberal Model... 44
4.2.1 European Single Market: the Community as Market Regulator ... 46
4.2.2 European Economic and Monetary Union: a Single Monetary Policy with National Societies ... 49
4.3 Conclusion ... 58
5 Interactions between Nationality and Supranationality: Neo-liberal Pressure in the EU ... 61
5.1 The Attempt for “Social Europe” ... 61
5.2 Conflicting Orders: Supranational Economic Order and National Social Orders . 65 5.3 Conclusion ... 70
6 General Conclusion ... 73
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1. Introduction
Since the integration project in Europe has been launched from the creation of common market in order to construct a more competitive European economy, the prior purpose of the action as European Community was to ensure the free mobility of all production elements: capital, goods and labor. According to pro-free trade advocates, theoretically, the deregulation of the allocation of production elements would enable the growth of a competitive economy, because free mobility allows the full-function of the price mechanism, called self-regulating markets, through which “[the] optimal use of resources and […] [economic] system’s capacity to respond to change”1
would be realized. In other words, with the free mobility, the gap between the demand and the supply would be fixed more effectively and quickly at the European Union (EU) market level, and at the same time, the international free mobility encourages Member states, according to Ricardo’s comparative advantage theory, to trade “in order to take advantage of their differences”2
which makes European countries’ economy competitive. Furthermore, a larger market offers more opportunity of making profit. Thus, the achievement of free movement would stimulate economic activity more, and would reduce the amount of idle element in production. This is the ideal of free trade broadly accepted in these days3. The main objective in this thesis is the relationship between the process towards this free market ideal led by supranational authorities and Member States’ societies governed by individual nation-states. For this unavoidably involves the relationship between society and markets, firstly, I introduce the concept of market-society advocated by Karl Polanyi known as “embeddedness”.
1.1 Polanyi’s Suggestions in Our Time
The theoretical expectation presupposes that nothing exists in the market other than commodities which producers provide to sell freely only by the negotiation through price.
1 Fred Block, “Contradictions of Self-Regulating Markets,” in The Legacy of Karl Polanyi, ed. Marguerite
Mendell and Daniel Salée (New York, St.Martin’s Press, 1991), p.87.
2
Paul R. Krugman, “The Narrow and Broad Arguments for Free Trade,” The American Economic Review, Vol.83, No.2 (May, 1993): p.363.
3 This ideal is based on the classical economic model. For contemporary economists, although they still hold
4 Based on this fundamental misconception, in his great work, The Great Transformation, Karl Polanyi elaborated two important concepts: “double movement” and “embeddedness”. Double movement is derived from the misleading feature of self-regulating market systems, and by this movement, economy is embedded into society, he argued with his empirical study of England in the 19th century.
With the evolution of industry which developed the factory system as a new productive organization, the supply of elements for the production became crucial for the continuance of productive activities4. Among them, the most important elements are three: labor, land and currency. In a market economy, however, the distribution and production of all commodities are directed by market price which would bring supply and demand into balance by economic actors interested in obtaining maximum gains. In this self-regulating market system, market price is the only and absolute indicator for the production and the distribution. The former led by the profit and the latter is by purchasing power made up with the profit. The premise of this market model is “that all production is for sale on the market and that all incomes derive from such sales.”5 Therefore, price, which is regarded as reflecting any background of supply and demand, must be free from any kind of intervention from outside markets for the maximum economic efficiency. To ensure the supply of elements needed in industry, all should be on the market with a price. In other words, “all the elements of industry [have] to be available for purchase.”6
Yet Polanyi perceptively pointed out that this model contains a grave contradiction: a false commodification of labor, land and currency.
Polanyi called these three fictitious commodities, because, first of all, these are not the outcome of production. No one produces them to supply for the market7. According to Polanyi’s descriptions of these fictitious commodities:
Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for
4 Karl Polanyi, The Great Transformation (Boston: Beacon Press, [1944, 1957], 2001): pp.75-78. 5 Ibid., p.71-72 and Fred Block, “Contradictions of Self-Regulating Markets,” pp.86-87.
6 Beverly J. Silver and Giovanni Arrighi. “Polanyi’s “Double Movement”: The Belle Époques of British and
U.S. Hegemony Compared,” Politics & Society, Vol.31, No.2 (June, 2003): p.330.
5 nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance. None of them is produced for sale. […] [The] description of labor, land, and money [as a commodity] is entirely fictitious.8
Regarding the nature of these fictitious commodities, Polanyi asserted that the self-regulating market is only an ideal that would be impossible to be realized in actuality, and the movement towards this ideal inevitably generates tension in society by which certain groups in that society claim certain regulations for the protection of fictitious commodities. For land, it would take a form of environmental protection, for labor, it would form a sequence of social policies. In the case of currency, Polanyi’s argument is made under the gold standard. So it is hard to apply his thought fully to the current situation, but the protection of national currency, mainly attempted by the intervention of state or/and national central banks into the currency exchange market, is frequently observed in our daily life. Without these sorts of protection, the market mechanism would be a “satanic mill” that demolishes society by the subordination of human and natural substances to the system grounded on the fictitiousness of commodity.9
Polanyi, with his acute notion of fictitious commodities mentioned above, inferred from his empirical study about the Industrial Revolution in England his famous theory “double movement”:
While on the one hand markets spread all over the face of the globe and the amount of goods involved grew to unbelievable proportions, on the other hand a network of measures and policies was integrated into powerful institutions designed to check the action of the market relative to labor, land, and money.10
It means the interaction between the deregulation for the attainment of self-regulating markets and the regulation to protect the actual nature of fictitious commodities. Economic policy aiming at the expansion of and the deregulation for markets should be
8 Ibid., pp.75-76. 9
Ibid., pp.76-77.
6 counterbalanced by reactions in the domain of social policy in order to avoid crucial dislocation in society caused by the dissolution of the pre-existing social order11. In other words, the economic policy towards the completion of free market, disembedding the market from the society, has a spillover effect as social reactions are willing to re-embed the economic sphere into society. It is worth noting that this countermovement has no particular ideological context. Since it comes from “the broad range of the vital social interests affected by the expanding market mechanism” with a great variety of forms, it has a rather spontaneous and practical character12. As a consequence of this interaction, market mechanism, which is the predominant economic order in modern society, could be “embedded” in society. In Polanyi’s perspective, it is remarkable that social order precedes the economic one, and that economic space is never separated from social space.
It should be taken into account, however, although his arguments seem to insist upon the incompatibility between the economic order designed for the maximization of economic efficiency and social relations historically constructed to stabilize the society, that Polanyi acknowledged the importance of the economic sphere for society as he wrote in the first part of The Great Transformation: “society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way.”13
Accordingly, “embeddedness” should be understood not as the elimination of markets, but as the requirement for the existence of market in society:
In order to have the benefits of increased efficiency that are supposed to flow from market competition, these societies must first limit the pursuit of gain by assuring that not everything is for sale to the highest bidder. […] the economy has to be embedded in law, politics, and morality.14
11 Polanyi stated clearly that “the economic order is merely a function of the social order. Neither under tribal
nor under feudal nor under mercantile conditions was there […] a separate economic system in society.” Ibid., p.74. As the example of the result of predominance of the economic order over the social order in society, Polanyi indicated the case of the enclosure process in England. See ibid., Chap.3.
12 Ibid., pp.151-152. Polanyi indicated various regulations taken in diverse countries against laissez-faire
dogma after the liberalization process in Europe. See ibid., pp.152-157.
13 Ibid., pp.3-4. 14
7 In sum, the core of Polanyi’s argument is the following. The commodification of those which are not products in their nature generates countermoves by practical reasons in order to protect them from the unregulated expansion of markets: fictitious commodities and double movement. This double movement consequently positions markets within “a broader set of social and political rules and cultural understandings”15
in order to reconcile the market with the society. This very reconciliation is “embeddedness”.
1.2 My Research Topic
With the focus on the embedded liberal perspective, especially on its concept of “embeddedness” that the political objective predicated on social purpose precedes the conformity to the economic order in a state, my research is focused on the question, which force, towards embedding or disembedding is dominant in the EU, and what is the cause of that force. As I consider that the establishment of a European economic order has been culminated at the time of introduction of the Euro, the period I treat in this thesis is from the launch of the European integration project in 1950 to the formation of a Euro area in 1992 with some recent case law of the European Court of Justice (ECJ) in 2005 which suggest the very problematic character of the EU. For this purpose, in chapter 2, I demonstrate my research framework in which three models of state are illustrated: embedded liberalist, Ordoliberalist and neo-liberalist model. Every term I use in this introduction without clear definition will be clarified in that chapter. In chapter 3, I investigate the historical context of the welfare state in Europe and its significance in the European integration project by which it could be clarified whether John Gerard Ruggie’s embedded liberalist international relations framework is applicable at the level of the EU. In chapter 4, I attempt to demonstrate the transformation of the European Community from embedded liberal model to more market-concentrated Ordoliberal model with particular attention to the ECJ’s decisions related to its supranational authority. I show the interaction, or conflict, between national social policy and the EU as an economic order guarantor with the consideration of Polanyi’s perspective. In chapter 5, I conclude that the EU holds a fundamental inconsistency between the embedding approach at the national level and the disembedding approach at the EU level through the efforts to construct ‘Social Europe’ and
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2 Theoretical Framework
2.1 Embedded Liberalism
Starting from Polanyi’s empirical analysis about the interrelationship between society and markets, the domestic stabilization and the economic regimes in his expression16, John Gerard Ruggie extended the notion of “embeddedness” to the field of international relations. The most important point in Ruggie’s argument is that the political authority is “a fusion of power with legitimate social purpose”17
. About the prevalence of markets rationality in the 19th century, the failure of its reconstruction and diverse social reactions against market in the first half of the 20th century, introducing Polanyi’s perception that these destructive experiences were conceived as the lesson for governments that “international automaticity stands in fundamental and potentially explosive contradiction to an active state domestically”18
, Ruggie argued that domestic stability has been included into the responsibility of the state as social purpose especially among European countries. Putting emphasis on this social purpose as an indispensable element to legitimate political authority, Ruggie characterized the post-war international regime by the term “embedded liberalism”.
The compromise built in this embedded liberalism, which is the core of post-war international regime, is twofold: the orientation towards multilateral open economy because of the the economic nationalism of 1930s, but with the acceptance of domestic interventionism to mitigate external disruptive impact on national society19 . This compromise implies following the situation: whereas economic orientation is consistently towards more open economy and international free trade, the impact on national society derived from this international economic order must be countervailed by domestic stabilization policies.
In international context, Ruggie adduced, as the example of monetary regime, the twofold function of the International Monetary Fund (IMF). On the one hand, the IMF was designed to provide for free and stable exchange that would encourage the formation of
16 John Gerard Ruggie, “Political Structure and Change in the International Economic Order: The
North-South Dimension,” in The Antinomies of Interdependence: National Welfare and the International Division of Labor, ed. John Gerard Ruggie (New York, Columbia University Press, 1983): p.432.
17 John Gerard Ruggie, “International Regimes, Transactions, and Change: Embedded Liberalism in the
Postwar Economic Order,”: p.382.
18
Ibid., p.387.
10 international free trade, at the same time, a “double screen” was erected to “cushion the domestic economy against balance of payments constraints” on the other.20 This double screen consists of two facilities to buffer a national payment from external market influence: IMF’s conditional short-term financial assistance and the capability of controlling exchange rates in collaboration with the IMF. In the former system, because of the reluctance of the U.S. as the sole major creditor country, the assistance was rigidly supervised by quotas which are proportioned to paid-in subscriptions. Yet, it permitted individual states, to a certain extent, to avoid adopting the austerity policy for the disequilibrium of national payment. The latter system had a more significant role in the state control over capital flows: “the Fund could not oppose any exchange rate change on the grounds that the domestic social or political policies of the country requesting the change had led to the disequilibrium [on national current account] that made the change necessary.”21
This double screen left space for individual states to seek their own full employment policy within the frame of the IMF with which the promoter of multilateral free trade in the monetary domain was attributed. For the trade regime, although the General Agreement on Tariffs and Trade (GATT) had been created for the promotion of multilateral free trade, it accepted domestic safeguards and negotiated export restrictions which could be invoked by a domestic necessity22. It means that an individual state could avoid an immediate adjustment to exogenous changes, so generating more disruptive impact on domestic society, by claiming the state’s discretion to take necessary protectionist measures for the domestic stability. In both, monetary and trade regimes which are the core to realize an
20 John Gerard Ruggie, “Political Structure and Change in the International Economic Order,”: p.434.
21 John Gerard Ruggie, “International Regimes, Transactions, and Change: Embedded Liberalism in the
Postwar Economic Order,”: pp.394-396.
22 Ibid., pp.410-412. As the transitional point toward the formation of GATT, Ruggie indicated in the
negotiation of International Trade Organization (ITO) that “Britain succeeded in having the pursuit of full employment raised to an international obligation of governments”. Although this statement did not survive in a clear form in GATT, the allowance of a blanket exception and the escape mechanism under certain
11 ideal free trade regime, states keep resorts to protect their social policy domain from the external pressure.23
Thus, contrary to the appearance of international economic order as a free trade oriented stream, “[n]o country anywhere was prepared […] to subordinate domestic stabilization to free trade.”24
In other words, the liberalization of trade is possible, only when governments provide enough social protection for their nationals. Post-war international order is largely dependent on the achievement of the “social compact”: “Governments asked their publics to embrace the change and dislocation that comes with liberalization in return for the promise of help in containing and socializing the adjustment costs.”25
It is noteworthy that, as Polanyi indicated the broad support for the state intervention, Ruggie also admitted that the claim for these protections comes from varied political spectrum, and so the objects and objectives are diversified.26 Accordingly, ‘welfare state’ has obtained predominance as state model in post-war international free trade regime where it has been observed:
movement toward greater economic openness among the member countries of the Organization of Economic Cooperation and Development (OECD) is statistically closely associated with governments expanding their domestic role via adjustment and distributive policies.27
In Ruggie’s embedded liberalism, it is obvious that Polanyi’s supposition that the reconciliation between society and market is the prerequisite for the society’s stability and social policy taken by states is necessary for this purpose is in accordance with the deployment of post-war international order from which welfare state model has concretely emerged. In the embedded liberalism model, therefore, society-market relation is not only regulated, but actively intervened by the state in order to stabilize the society and to adjust
23
This post-war international regime, embedded liberalist system was, however, designed almost only for the developed countries. Since the important negotiations were taken between the U.S., as the hegemon in post-war world, and the European countries, mainly the UK, this scheme paid little attention to the developing countries. About the exclusion of North-South dimension from the construction of the post-war regime, see John Gerard Ruggie, “Political Structure and Change in the International Economic Order,”: pp.428-435.
24 John Gerard Ruggie, “Trade, Protectionism and the Future of Welfare Capitalism,” Journal of International
Affairs, Vol.48, No.1 (Summer, 1994): p.2.
25 Ibid., pp.4-5. 26
Ibid., p.3.
12 so gradually to the demand from the market that would not cause a grave unbalance within society. This is the effect of the linkage between domestic stability as social purpose and social purpose as normative framework in international relations in Ruggie’s arguments. In sum, Ruggie succeeded in making the logical articulation between the necessity of the protection of society from the market which has been advocated by Polanyi and the fact that the completion of free market has been the supreme principle in the post-war international relations, that are in a fundamentally conflictive relation because of the fictitious commodities, by setting the state between them as a mediator who acts actively to mitigate external influences. State intervention into free market is, therefore, justified for the compatibility between society and market.
2.2 Ordoliberalism: social market economy model28
Whereas the embedded liberalism is formed on the basis of empirical studies, Ordoliberalism29, often called as “German Neoliberalism”, has its starting point in the attempt to construct a normative concept of economic policy. This attempt is rooted in particular historical experiences in Germany which raised a deep doubt towards interventionism and collectivism, namely, “The corruption of the political order and unreliability of economic institutions combined with politicians’ subsequent dependence upon economic power groups”30
that had been observed in the first half of the 20th century in Germany. The solution advocated by Ordoliberals is the economic policy oriented to competition and “economic constitutions” which guarantees and consolidates this competition policy.
The core value of competition policy is the protection of the freedom of individuals. A totally free market system of laissez-faire economy, self-regulating market called by Polanyi, can bring asymmetrical positions of agents in the market which would reach the
28
Although some scholars insist on distinguishing strictly Ordoliberalism from social market economy theory, Ordoliberalists and social market economists share certain values regarding with the role of state, the freedom of individuals and economic private powers. Their interconnection is undeniable. Therefore, in my paper, I treat them in the same line as variations.
29
In this chapter, I focus on the discourse of two founding fathers of Freiburg school which was the center of Ordoliberalism; Walter Eucken and Franz Böhm. Without a particular mention, the word “Ordoliberals” means the mainstream in Freiburg school led by these two figures.
30 Manfred E. Streit and Michael Wohlgemuth, “The Market Economy and the State: Hayekian and
13 monopolization or cartelization stage such as cases observed in German history. These organizations as the consequence of a free market, however, have a propensity to bypass markets constraints and impose rules on the market that facilitate their acts in markets. Although these are neither due to the market process nor to the nature of Capitalism, according to Ordoliberals, this asymmetrical power relation in markets caused by a particular form of markets and the behavior adopted by economic agents leads not only to inefficiency in the allocative function of a whole market, but also to limit a freedom of other agents31. Ordoliberals regard this limitation of freedom in markets, which entails the distortion of the right of entrepreneurship and of free contracting, as a significant encroachment on the freedom of individuals. Moreover, bloated private market powers tend to reflect their own demands in the political sphere through the collaboration with political forces. Thus, for Ordoliberals, a totally free market contains a “problem of power” that certain dominant groups infringe the freedom of individuals, not only in economic, but also in political terms32. To constrain this particular form of markets and to retain the freedom of individuals, the solution suggested by Ordoliberals is the setting up of a competitive economic procedure33 which would prevent particular private forces from occupying a predominant position in a society, and consequently guarantee the liberty of individuals.
It is clear that the agent who could place this competition policy upon markets is nobody other than the state. At this point, however, German historical experiences shed negative assessments of state power on Ordoliberals’ thought: while the competition policy is inspired by the fact of the corrupt, weak state of the Weimar Republic, a strong state that exerts its control on markets provokes the memory of the Third Reich. The answer given by Ordoliberals is “a ‘strong state’ safeguarding the market game on a constitutional level […]
31 Sylvain Broyer, “The Social Market Economy: Birth of an Economic Style,” Discussion paper in
WZB-research document, August, 1996, http://bibliothek.wz-berlin.de/pdf/1996/i96-318.pdf (accessed 12 August 2010): p.8.
32 Manfred E. Streit and Michael Wohlgemuth, “The Market Economy and the State,” pp.230-231.
33 According to Eucken, this “competitive order” in economy contains following principles; the stability of
the monetary system, open markets, private property, freedom to contract, liability for one’s commitments and actions, and steadiness of economic policy. While these “constituent” principles are, however,
14 but it does not control economic processes.”34 In other words, the state is assigned to regulate the framework of markets in order to avert monopolization and cartelization, while it must be precluded from interventional means into the market mechanism. To realize this “strong but limited government”, Ordoliberals advocated the necessity of prescription by constitutions. Thus, a state is excluded from the market process by political constitutions, but legitimized as the sole provider of market framework: economic constitutions. This concept is obviously grounded in “the rule of law”35: the relationship between the state and the market is substantially defined, and consequently there seems to be no space for discretionary acts of government.
Regarding the state-market relationship, Ordoliberal thought argued clearly that by the economic constitution, markets should be regulated, and by the constitutional bindings, the state should refrain from interventions into the competition process in markets. But it seems to lack societal factors such as the concept of “embeddedness” in Polanyi’s theory. Is society disregarded in the Ordoliberal thought?
The competition policy and the economic constitution, these look like purely economic concepts without a consideration of societal factors. Ordoliberal thought, however, holds the similar idea with the embeddedness of Polanyi: the interdependency of orders. It is required in their theory that a competitive economic order should be “corresponding and compatible ‘interdependent’ political, social and legal orders.”36
This “interdependency” of orders can be found in their definition of the authority of law: an economic constitution lays the principles for the markets’ efficiency, but follows the values protected by society, by means of common determination and control37. Thus, although Ordoliberals primarily put their emphasis on the competition policy and economic constitution as “the productive solution of all actually existing social problems”38, there is a space for social consensus to
34 Nils Goldschmidt and Michael Wohlgemuth, “Social Market Economy: origins, meaning and
interpretations,” Constitutional Political Economy, Vol.19, Issue.3 (2008): pp.267-268.
35 Manfred E. Streit and Michael Wohlgemuth, “The Market Economy and the State,” pp.232-234.
36 Razeen Sally, “The Social Market and Liberal Order: Theory and Policy Implications,” Government and
Opposition, Vol.29, Issue.4 (1994): p.463. Emphasis in original.
37
Sylvain Broyer, “The Social Market Economy: Birth of an Economic Style,” p.9.
38 Alexander Ebner, “The intellectual foundations of the social market economy: Theory, policy, and
15 influence on the process of establishing an institutional framework, because it should be based on a general political decision-making reflecting values existing in society39. The meaning of this point is conceptualized in Ordoliberal thought as “the interdependence of societal and economic orders”40. The social market economy theory that was applied in the post-war Federal Republic of Germany (FRG) had its starting point in Ordoliberalism, but it reflected the interdependence of two dimensions more pragmatically than Ordoliberals argued.
The social market economy theory shared with Ordoliberals’ thought the approach toward markets: while thinkers of social market economy accepted a free market as the mechanism of economy, they recognized a free market itself can not be justified only by its advantage of economic performance. To protect an essential value, personal freedom, accordingly, an effective competition policy and supervision by a strong state are necessary41 such as Ordoliberals claimed. The core value and the solution for defending it in a free market are common between both42.
The difference between them is social market economists’ acceptance of state interventions regarding the social question43. Whereas Ordoliberals naively considered that the implementation of competition policy itself could relieve class conflicts and reduce social tension44, social market economists in the application of their theory into real politics took a more pragmatic attitude towards social question in order to achieve three social goals:
39 Ordoliberals, however, did not completely neglect the significance of social policy. To some extent, they
acknowledged the necessity of state’s distributive interventions such as “income policy” aiming at correcting the spontaneous income distribution and covering “urgent needs” of the population.
40 Christian Joerges and Florian Rödl, “Informal Politics, Formalised Law and the ‘Social Deficit’ of
European Integration: Reflections after Judgments of the ECJ in Viking and Laval,” European Law Journal, Vol.15, No.1 (January, 2009): p.4.
41
Kishor Thanawala, “Reflections on private market economy and social market economy,” International Journal of Social Economics, Vol.29, No.8 (2002):p.670.
42 Both the Freiburg school and Alfred Müller-Armack, the main advocate of social market economy,
believed in a free price mechanism as an ideal allocative system of resources, while they were hostile towards the 19th century laissez-faire policy as represented in their belief in the necessity of market regulation.
43 Razeen Sally, “The Social Market and Liberal Order: Theory and Policy Implications,” pp.466-467, and A.
J. Nicholls, Freedom with Responsibility: The Social Market Economy in Germany 1918-1963 (Oxford, Oxford University Press, 1994): p.140. Their attitude towards interventionist measures was not rejective, however, such measures must be compatible with a free market mechanism in their thought. As Ordoliberals, the maintenance of a healthful free price market is the primal precondition of any political acts in social market economy theory.
44 This does not imply that Ordoliberals lacked any active social policy. As mentioned above, Eucken stated
16 social equity, social security and social progress45. Concerning these challenges, according to Müller-Armack, “to disregard the process of redistribution is to fail to appreciate the social content of the market economy.” As a consequence, his solution of social question ranged much more than Ordoliberals’ simple answer, from a progressive taxation to state subsidies for small businesses, minimum pensions and the use of counter-cyclical macro-policy instruments to assure full employment.46 With the embedded liberalist perspective, although Müller-Armack insisted, in the same manner with Ordoliberals, that social policy should be kept under the degree which would disturb the market process, the space for reflecting societal factors existing even in original Ordoliberalist thought47 could not evade being influenced by the expanded state responsibility, as the provider of social welfare, after the disruptive result of the 19th laissez-faire policy48.
Ordoliberalists considered almost exclusively about the relationship between state and market, and their focus was on the prevention of high degree interventions between them. They disregarded, or more precisely belittled the society as they believed a well functioning of the market would automatically resolve social questions. The failure is that, although their perspective succeeded in capturing the problems in German past experiences such as bloated economic private powers, the corruption in government and state planned control, they overlooked the societal transformation which has occurred in the same period: the increasing demand for the protection from disruptive impact of free market, as Polanyi indicated. This renewedly emerging social question, however, in the case of Ordoliberalism, has found its way of expression in the establishment process of economic constitution reflecting social values, and enlarged its own space through social market economists’
45 Kishor Thanawala, “Reflections on private market economy and social market economy,” p.669.
46 Razeen Sally, “The Social Market and Liberal Order: Theory and Policy Implications,” p.471. 47
Although Ordoliberals remained the notion of economic regulation as purely efficiency-oriented with an exclusive interest in the injustice of income levels, Müller-Armack juxtaposed “social justice” with “market-conform” conditions. In the domain of social policy, Ordoliberalism is similar with Neo-liberalism in the following subchapter, but crucially different regarding the character of rule. About the establishments of rule in Ordoliberal thought, see Manfred E. Streit and Michael Wohlgemuth, “The Market Economy and the State,”: pp.246-249.
48 In fact, the FRG government could not keep even the essential condition of both theories in political
17 pragmatic approach in the application of their theory in practice. Although neither of both had desired the model of welfare state, the FRG confronted with political demands could not avoid, but advanced to the realization of the welfare state. In sum, both Ordoliberalism and the idea of social market economy concentrated on the construction of a ‘healthy’ relationship between state and market based on the economic principle: free price mechanism. Nevertheless, because the measure of ‘health’ was basically relying on political determination, they unavoidably reflected social demands in their practice. Market-oriented theory originally reluctant to intervene into market process, however, could not resist realizing interventions as the response to social pressure.
2.3 Neo-liberalism49: Neo-liberal Model
Welfare state that is the natural consequence of embedded liberalist approach towards the liberalization of international trade, and finally accomplished form of state in the practice of Ordoliberalism, has recently been threatened by an alternative: neo-liberal model. Neo-liberalism, underpinning of this newly appearing form, is originally a normative theory advocated by thinkers such as Friedrich August von Hayek. While neo-liberal thinkers are multiple, they share three elements as essential in neo-neo-liberalism: the rule of law, a particular concept of freedom and the insulation of persons. A neo-liberal model is founded on the basis of the rule of law, as in Ordoliberalism, but with a different character: it is devoted to protect a particular liberty relying on the presupposition of thorough individualism.
The rule of law, penetrating all features of neo-liberal thought, is an ideal order characterized by neo-liberalists as nomocracy, opposed to teleocracy. The former is “a rule governed order not devoted to the attainment of particular ends”, the latter “an order
49 The term “Neo-liberalism” in political economic thought argued in this thesis, whereas embedded
18 devoted to the pursuit of some overall end, goal, or purpose”50. The distinction emerging as state-model is:
[nomocratic state] is concerned with the structure of the framework of non-coercion and rights that have to be in place within which individuals can pursue their own good in their own way so long as in pursuing that good they do not interfere with the freedom of others to do the same. A tel[e]ocratic state, however, is concerned not only with structures and procedures but rather with ends such as social justice, and will search for institutions and policies that will secure such collective ends. It is concerned with virtues, not just rules.51
For the principle of non-coercion and facilitating the maximization of individuals’ ability to achieve their own varied goals, the rule of law must embody the generality and universality, non-instrumental character which confine the law’s function to an abstract framework without specific goals52.
The generality, universality and non-instrumental character which compose the basis of the law in the neo-liberal model determine the role of government. Since a general, universal law should provide equal treatments for people, governments can not promote particular sets of goals which, with much possibility, differ from some people’s desire. Because of the scarcity of available resources with so various ends pursued by people, a law containing such a government-setting purpose unavoidably privileges a particular group to attain their goal, while other groups are, if not obstructed, ignored within the legal system. By contrast, a purposeless law providing an abstract framework, within which the right based on the principle of non-coercion is protected, allows diverse people to pursue individual ends by their own means with maximum freedom53. In a Rechtsstaat, which realizes this ideal of ‘the rule of law’, the role of government must be confined to the protection of law, and government’s actions should abstain from any interference into
50 Raymond Plant, The Neo-liberal State (Oxford, Oxford University Press, 2010): p.6.
51 Raymond Plant, “Neo-liberalism and the Theory of the State: From Wohlfahrtsstaat to Rechtsstaat,”
Political Quarterly, Vol.75 (2004): p.33.
52
Raymond Plant, The Neo-liberal State, pp.29-30.
19 individuals’ activity54
. Any social policy, concept of social rights are incompatible with this nomocratic law, because these eventually involve, from the point of neo-liberal view, discriminatory legislation in the distributive process and infringements on the liberty of individuals by imposing the pursuit of particular goals on them.
If it is impossible for neo-liberal states to adopt social policies in order to be governed by the rule of law, how would social questions which states in embedded liberal model intensively address, and the FRG bearing social market economy idea was progressively prompted to respond to, be resolved in neo-liberal thought? The answer is simple: such questions of social justice, social equity do not exist in neo-liberal perspective. More accurately, according to the particular definition of freedom in neo-liberalism, these problems can not take a form in neo-liberal model.
The idea of freedom in neo-liberalism, as in classical liberalism, is the core value of this thought. However, neo-liberals have elaborated a new concept of freedom suitable for Rechtsstaat: they distinguish freedom from and freedom to, negative and positive freedom respectively, and neo-liberalism recognizes only the importance of negative liberty. Negative freedom is the way of the judgment of free status by which the absence of coercion and constraint is the only satisfactory condition. In the notion of positive liberty, if someone lacks the access to resources necessary to develop oneself, this lack impedes one’s freedom. Therefore, the provision of resources, such as the distribution of resources in welfare state, is included in the terms of the defense of liberty. It implies that the right of freedom should cover social rights55. From neo-liberal perspective, however, this kind of positive freedom is achieved unavoidably at the cost of some others’ freedom as already mentioned. Thus, as neo-liberal model does not consider positive liberty as a civil right, the
54
At this point, however, a question emerges; what is the foundation of such a law? As Ordoliberals leave a space for social values to be reflected in economic constitution and competition policy through general political decisions, the foundation of law, in this case “general political decisions”, can introduce some moral and/or a particular set of goals such as social justice. The answers by neo-liberals are varied. Hayek argued the law in Rechtsstaat should be a spontaneous order, not a designed law which can be justified by a reasoning based on a particular purpose. A spontaneous order is generated by evolutions in long term of practices through countless different people’s activity. This order facilitates an effective individual activity, because its ground is practical knowledge, but has no particular end. For James Buchanan, unanimous agreements by the voluntary will of people whom the law covers are crucial. Robert Nozick embraced the importance of the property rights, as the consequence of anarchy, a law is borne to protect these rights. Murray Rothbard identified natural law with the rule of law. All of them, however, stated that a guiding law to a particular goal can not be justified by the significance of that goal. See Raymond Plant, The Neo-liberal State, Chap.2.
20 rationale for the necessity of social policy, the right of liberty as a human being, completely disappears from the neo-liberal theoretical framework.
When it is unnecessary to assure a fair distribution, how do neo-liberals consider the nature of markets which often bring ‘unfair’ results in the distribution of goods? How about the dissatisfaction of needs, indigency, as the consequence of market operation? Is it not an economic coercion? The answer is, again, simple: any outcome from markets is legitimate, there can not be an “unfair” result. Actually, for neo-liberals, a free market is the ideal space for the liberty of the individual, and is the very embodiment of the idea of ‘the rule of law’.
In neo-liberal perspective, as I have argued so far, an exhaustive subjectivism is presupposed: each individual holds own desires, will and purpose, so it is impossible to assume that there would be a common moral which serves to construct one socially shared goal56. With such a view, society within which merely separate persons or/and organizations pursue the attainment of diverse ends, a free market is considered, by neo-liberals, firstly, as the space where people freely engage in exchange as a voluntary activity, and secondly as an informational and coordinating mechanism through a price which is solely the “aggregate of individual evaluations of the worth of something” rather than representing some moral value57. Through this device, people who are crucially lacking a common basis can find a ‘fair’ price and evolve an order spontaneously such as contract law, property law and the like. According to this perception of market mechanism, the outcome of a free market should be regarded as the result of the most effective coordination of the countless acts of people eager to reach their own ends. Although such an outcome impedes a free act of certain people by economic difficulty, with the neo-liberal definition of coercion, there can not be perceived coercive power. The definition of coercion in neo-liberalism is intentional enforcement towards others in their determination of acts. Unintentionally exerted coercion does not cause injustice for the liberty in the neo-liberal term. Outcomes from markets themselves, while those are the consequence of aggregate intentional acts of individuals, is unintentional as well as natural disasters, since a market itself has no intention58. Only when an intentional action influences the outcome of markets,
56 Raymond Plant, The Neo-liberal State, pp.6-7. 57
Ibid., p.72.
21 governmental interventions for example, the consequence of market can be claimed as injustice. Therefore, to realize ‘justice’ in the neo-liberal term, a free market controlled only by the price mechanism, precisely equated with what Polanyi called self-regulating market, should be kept intact. For neo-liberals, there is no more effectively harmonized consequence out of diverse individual desires than the outcome of a self-regulating market, which is, at the same time, compatible with the rule of law, the liberty and individualism in the neo-liberal thought.
It is obvious that social purpose is an incompatible element for the neo-liberal model within which the rule of law, negative liberty and thorough individualism compose its foundation. The market is disembedded from society, more precisely, the market is identified with the space where whole social activities are taken which is actually equivalent with what the term “society” indicates: there is “no such thing as society, only individual men and women”, as stated by Margaret Thatcher59, is the reality in a neo-liberal state. Market mechanism is regarded rather as a unique determinative system of society than as a subservient system to the society. In Polanyi’s term, market in neo-liberalism is completely disembedded from society. There is no state-society relationship because society, if not disappeared, is considered as another name for market. State-market relationship is, owing to the conviction that a freely functioning market is the ideal system for all individuals, minimized to the extent that governments supervise whether actions taken in markets are of intentional coercions or not. Any other role charged by governments so far such as the provider of social protection, of favorable treatments for the poor and of the redress of asymmetrical power relationships between employers and employees, is wrong and a distortionary approach for sound functioning of the market, which coordinates the most effectively innumerable human activities.
Neo-liberalism, however, how has it been applied to the real world? Are there some modifications in order to fix the gap between theory and reality such as happened in the practice of Ordoliberalism? It is hard to conclude, besides in a limited space, the evaluation of the theory which is still proceeding. Here, I am briefly indicating the character of neo-liberal politics and its effect in social policy.
22 From the 1970s and 80s, neo-liberal thought has gradually become mainstream in politics as the antidote for the allegedly fundamental defects of Keynesianism. The “correctness” of neo-liberal politics has once been proved by the economic success of the U.S in the 1990s60. The character of neo-liberal politics brought into application is a change of relationship between societies and states: deregulation and expansion of market by the reduction of state’s role, cutting taxes in order to increase capital flow by private actors in market, privatization as the means of transference of function from states to private actors, expansion of market to the extent that has been regarded as public goods and services such as health, education and pollution, and elimination of social program61. All these characters fit with three neo-liberal core elements argued above.
At the same time, however, as Yvonne Hartman demonstrated in her study of the Australian case, the deregulation of the labor market which generates precarious employments is paralleled with the increase of recipients of income support. Low wage workers, natural and “just” outcome according to neo-liberalism, are necessarily sustained by a welfare system62. It is not my aim to argue whether this is a temporary phenomenon on the process of neo-liberalism or indicating the definitive limit of such an idealism, but it is important to keep in mind that “neoliberal states […] are constrained by [the] lack of electoral support” if without any welfare provisions63
.
2.4 Conclusion
So far, focusing on the relationship among state, society and market, I have presented three theories. In the conclusion of this chapter, I try to construct the diagram of these theories based on state-society-market relationship.
In embedded liberalism perspective, states, standing between the international trend towards free trade and the pursuit of social purpose domestically imposed on national governments, have undertaken the role of mediator between market and society. In practice, states should actively react to market’s action by social policies in order to keep the
60 Andrew Gamble, “Neo-Liberalism,” Capital & Class, Issue.75 (Autumn,2001): pp.127-130. 61 Harland Prechel and John B. Harms, “Politics and Neoliberalism,”: p.5.
62 Yvonne Hartman, “In Bed with the Enemy: Some Ideas on the Connections between Neoliberalism and the
Welfare State,” Current Sociology, Vol.53, No.1 (2005): pp.64-70.
23 domestic stability. The market rationality is actually regulated by state’s protectionist interventions backed up by social demands. States in embedded liberalism are, thus, rather society-oriented than market-oriented. Social purpose prevails over market efficiency, which could fully be realized in the form of self-regulating market, in the political sphere at the national level.
Ordoliberalism, contrarily, considers itself as the market-oriented thought. But, while it demands more market efficiency, it recognized that a regulating market could be a self-destructive mechanism through cartelization or/and monopolization by which unlimited private economic powers control the political sphere. Since Ordoliberalism suspects both the risk of market-dominated society and of authoritarian society by enlarged bureaucratic state system, it insists on the regulation for both systems: the idea of economic constitution. According to this idea, the state’s ability is limited to basically a non-interventional character, however, market capacity is also regulated by economic constitutions politically formulated. This “politically’ constructed constitutions, as shown in the practice of social market economy politics in the FRG, keep the space for social demands to be reflected in the domain of social policies. Although Ordoliberalism theoretically excludes the possibility of state’s intervention into the market except for competition policies in order to redress the excessive asymmetrical power balance in market, the establishment process of constitutions allows including social purposes which necessarily requires certain degree of interventional acts for states. At this point, Ordoliberalism has the broadest range of consequences: its strict theoretical approach brings a similar model with the neo-liberal’s, but the space allowed for social values in constitutional foundation could realize de facto embedded liberalism model.
24 the domain of social policy does not, more accurately must not exist in the political sphere. In this neo-liberal vision, state and market exist independently, less interrelation between them is considered better situation.
With above described characters of each thought, now I figure the relative positions of these three theories with the consideration of state’s role:
Figure 1
Vertical axis indicates the state’s priority: on the social purpose expressed in the term of domestic stability, on the one hand, and on the perfection of self-regulating market, on the other. Horizontal axis is the degree of interventional policies into markets taken by governments. Such interventional actions are varied from purely economic forms, quotas on trade and the control over capital flow for example, to direct social protections for citizens such as regulations favorable for employees and redistributive policies. All these kinds of interventions are somewhat explained by the pursuit of domestic stability: quotas to avoid a radical adjustment of national economy which increases unemployed workers in particular sectors, labor protections to correct originally asymmetrical power relations between employers and employees in order to prevent class conflicts.
From next chapter, applying these three theoretical models, I argue the nature of the European organizations and characteristics of the European integration.
State’s tendency towards intervention Neo-liberalism Ordoliberalism and
Social market economy
Society-oriented Market-oriented
25
3 The European integration in the post-war period: the relationship
between state, market and society
3.1 European nation-states in post-war period
It is unquestionable that the Second World War was the most disastrous event, in which full resource of nation-state was dedicated only to carry out warfare against other nation-states during six years. In this first record of such great scale of lamentable effort in human history, few European cities were saved from the destruction and the loss of human life supposedly amounted to about thirty-six and a half million among Europeans64. People suffered from the loss in material aspect even long after the end of war itself, however, the damage of war was not limited to the physical aspect. It also brought an effect on mentality: the dilution of allegiance to pre-war national political authority.
During the war, the majority of European nation-states were once dissolved and re-organized by the occupation force, while legitimate governments had fled into exile. In the re-organization under the administration of the invading force, however, many nationals of the occupied countries collaborated with them as businessmen and officials and certainly profited from the occupation regime. Some of them were accused and punished as collaborators after the liberation, but others did not face such persecutions, furthermore they kept their place in re-built democratic states. This fact, although it was because of pragmatic difficulty, the scarcity of human resources available for the reconstruction of society, discouraged the trust of people in the national political system65. Thus, both the governmental organization composed of ex-collaborators and the lost confidence in the government-in-exile brought their own legitimacy in question. The emergent task of post-war European states was “to reassert the nation-states as the fundamental organizational unit of political life as vigorously and securely as possible.”66
To regain the legitimacy and to unify people as the polity of nation- state meant the redefinition of the role of the state which would be no longer confined to the defense of the national territory, keep national law and provide minimum public infrastructure. The
64 Tony Judt, Postwar: A History of Europe Since 1945 (London, William Heinemann, 2005):pp.13-21.
65 Ibid., pp41-51.
66 Alan S. Milward and Vibeke Sørensen. “Interdependence or integration? A national choice,” in The
26 response to this task was already an existing proposal, but never fully applied to actual politics: active state intervention for national stability. With people aspiring stable life and the government seeking to rehabilitate its legitimacy in the post-war period, the interventional state model could obtain national consensus which has confined national political choice to the pursuit of this social purpose. With the disillusion about laissez-faire capitalism triggered by the Great Depression, and the justification provided by the social purpose, the enhancement of the role of the state was broadly accepted and/or claimed in post-war European states, even in the FRG, where political advisers had never intended such “big government”, the government could not escape from this post-war political framework as I described in ch.2. This phenomenon was, to a certain degree, common in western European states67. The European integration project, the biggest political scheme for post-war Europe, should also be located in this political context.
In reconstructed democratic political systems, governments had to provide assurance of stable life for nationals in a visible form to legitimate their authority. With the reflection on the economic depression and its social costs which had consequently led European states to the war, firstly, national governments were inclined towards state planning: strengthening market regulation. It took varied forms: in the FRG, while private sectors remained as a main economic factor, the government intervened into labor relations; in the Netherlands, governmental edicts guided the direction of private enterprises. The most remarkable case is France where national government directly stepped in the economy through nationalization68. This tendency can be rationalized as the means to avoid destructive effects of market failure which would cause inefficient resource allocation in domestic markets. Interventions into the domain of failure of competition, public goods, externalities, incomplete markets and information failures, which are referred as market failure in economics69, while even the advocates of economic liberal order acknowledged them as necessary approaches to improve the efficiency of markets, were not a sufficient response to purchase the allegiance to nation-states. These are minimum conditions of society, in Polanyi’s sense, that markets should be embedded into social order. In other words, the
67 Alan S. Milward, The European Rescue of the Nation-State (London, Routledge, [1994] 2000): pp.27-28.
68 Tony Judt, Postwar, pp.69-71. 69
27 extension of the role of the state towards the social regulation is merely the starting point of the construction of the welfare state under which re-built nation-states could consolidate national social integrity. In post-war European states, national governments were required not only to configure national society as an entity protected by social regulation against external market effects, but also to implement a social policy70 which could deliver actual benefits to nationals in order to reunite people under the name of nation-state.
Social policy implemented commonly in post-war European states was deployed in the domain of stabilization and distribution, namely, measures against unemployment, distribution of income and provisions of merit goods. The emergence of these policies on the political agenda reflected the change of the political environment in the post-war period. While pre-war political parties resembled a club of which members hold similar political positions and act as a voting association in the parliamentary process, post-war political parties functioned as “a machine for discovering the demands coming from below in society and transmuting them into policies”71
. Considering the emergent task in post-war nation-states, the reassertion of legitimacy, this transformation was an unavoidable consequence and, thus, national governments had to be committed actively to realize full-employment, equal distribution of income and direct engagement with the welfare state system.
Full-employment policy is often argued as the realization of an economic approach advocated by Keynes, but the degree of its effect in actual implementation overreached economic justification provided by Keynes. Keynes argued that governments can control long-term mass unemployment through the augmentation of public expenditure, supply of currency and credits which would generate multiplier effects in demand. By this control, he insisted, the national economy could recover an ideal economic equilibrium within which the unemployment rate would be reduced to minimum degree. In practice, however, the level of unemployment in the period of 1950-1969, within which the Keynesian economic approach prevailed among western European states, was maintained far below estimated
70 In this thesis, I follow the distinction between social regulation and social policy discussed by Majone.
While social regulation is included into the sphere of social policy, its objective is defined as the correction of the market; increasing welfare of participants of markets and, as its consequence, improving market efficiency. On the one hand, social regulation is basically market-oriented policy, certain interventions belonging to the category of social policy can not be justified by economic rationale, on the other. These state interventions are legitimized “on political and moral grounds, even at some loss in economic efficiency.” Ibid., p.156-159.
28 equilibrial levels that Keynes had suggested72. This fact indicates that full-employment policy was not only based on economic rationale theorized by Keynes, but also strongly urged by the demands from the whole of the labour force that the nation-state with a weakened legitimacy could not ignore.
The claim pushing national governments towards an interventional approach was not limited to wage labours that mainly consist in industrial sectors. Since European states had witnessed that the widening gap between the income of agricultural and industrial sector caused by the downspin of agricultural product prices in the inter-war period which consequently prepared the political basis for authoritarian regimes, re-distribution of income favourable for agricultural sector became a prime concern for post-war Western European states73. As a result, to avoid the re-emergence of authoritarian force and to secure political stability under reconstructed democracy, firstly, agrarian reform aiming at diminishing the numbers of landless peasants and, secondly, redistributionary policy through state-subsidy were commonly observed in post-war European states’ political agenda74. Although these policies targeted particular interest groups, agricultural policies in the post-war Europe were not only a favourable treatment for the sector: it composed a part of a political scheme to consolidate the legitimacy of national governments by avoiding political grave conflict.
Not only direct state interventions into markets were implemented, also the increase of other sorts of social policies, ranging from national insurance, pensions to education, medical care, those which are generally called welfare provisions, was a common phenomenon in post-war Europe. It is certain that the beginning of the welfare system itself can be traced back to the end of the 19th century in several countries, and that with so varied forms, the process taken by each country can not be generalized in the term of the re-assertion of the nation-state. Regarding political motivations in the post-war period which propelled the institutionalization of welfare systems, however, there were common features: to satisfy the demands from growing lower middle class under democratic regime and the
72 Ibid., p.29. 73 Ibid., pp.30-31. 74
29 concentration in the period 1945-68 within which welfare policies were applied in Europe75. Also concerning varied schemes of welfare system according to country, the provision of free or heavily-subsidized care and services financed by collected revenue through taxation, direct cash payment from governments based on socially determined criteria in order to enable beneficiaries to purchase services freely and governmental refund system for the cost of public services, from a comprehensive view point, these different national welfare systems are inherently redistributive76. In sum, by undertaking the responsibility of the distribution of varied goods and services which were regarded as necessary for domestic stability through the improvement of the living-standard, states redefined themselves not only as the guarantor of the rule of law, but also as a direct provider outside the market mechanism.
Thus, at the domestic level, Ruggie’s argument about the formation of social purpose and its connexion with political legitimacy is fully applicable to post-war European states: the problems then existing, social desire for stability after the devastating war experience and governments’ necessity to reassert their legitimacy, were resolved by implementing social policies which had consequently been incorporated into an expanded state function. This means, from Polanyi’s perspective, that the nation-state re-consolidated its raison d’être by positioning itself between society and market: nation-states have been expected since then, on behalf of national society, to regulate markets and compensate directly for nationals through the implementation of social policies.
Whereas social policies were desirable and a necessary response for the legitimacy of the nation-state in the political arena, it was not costless in economic terms. All governments needed to find means to sustain their growing expenditure of social policies in the manner that would be compatible with domestic stability achieved as the bedrock of the nation-states’ authority. Therefore, whereas the redistribution came to be the core function of the welfare state, its degree could not be unilaterally harmful for the wealthy at the risk of intensifying political conflicts. This economic difficulty of social protection had to be overcome not by the arrangement of how to divide a pie, but by the answer to how to aggrandize a whole pie: “the concept of economic growth was defined as the quickest way
75
Alan S. Milward, The European Rescue of the Nation-State, pp.31-33.
