The document titled "session02_lecture_vanberg_1988.

pdf" appears to be a lecture or academic

paper by Viktor J. Vanberg from 1988. Here are the key insights from the document:

## Key Insights

### 1. **Constitutional Economics**

Vanberg discusses the concept of constitutional economics, which focuses on the rules and
frameworks within which economic activities occur. This field examines how these rules are
established and how they influence economic behavior and outcomes.

### 2. **Rules vs. Outcomes**

A significant portion of the lecture is dedicated to the distinction between rules and outcomes.
Vanberg emphasizes that while traditional economics often focuses on outcomes (such as market
efficiency or income distribution), constitutional economics is more concerned with the rules that
lead to these outcomes. The idea is that better rules can lead to better outcomes.

Why traditional economics is more focused Why constitutional economics is more

on outcomes? focused on rules than outcomes?
1. **Efficiency and Optimization** 1. Framework for Economic Activity
Traditional economics is primarily concerned Constitutional economics focuses on the rules
with the efficient allocation of scarce resources because these rules form the framework within
to maximize outcomes such as production, which economic activities take place. The rules
consumption, and overall economic welfare. The determine the incentives and constraints faced
focus is on achieving optimal outcomes within by individuals and organizations, thereby shaping
the given constraints and incentive structures.[1] their behavior and the resulting economic
outcomes. By understanding and improving
2. **Equilibrium Analysis** these rules, constitutional economics aims to
Mainstream economic theory heavily relies on create a more effective and fair economic
equilibrium analysis, which examines the system.
conditions under which supply and demand
reach a stable equilibrium point. The emphasis is 2. Predictability and Stability
on the equilibrium outcomes, such as market Rules provide predictability and stability, which
prices and quantities, rather than the underlying are essential for economic planning and
rules or processes that lead to those outcomes. decision-making. When economic agents know
[1] the rules and trust that they will be consistently
applied, they can make long-term plans and
3. **Welfare Analysis** investments with greater confidence. This
A significant portion of traditional economics is stability is crucial for fostering economic growth
dedicated to welfare analysis, which evaluates and development.
the desirability of different economic outcomes
based on criteria such as consumer surplus, 3. Alignment of Interests
producer surplus, and overall social welfare. The Constitutional economics seeks to design rules
focus is on assessing and comparing the that align individual incentives with collective
outcomes of various economic policies or market goals. By creating a set of rules that encourage
conditions.[1] cooperation and discourage opportunistic
behavior, it is possible to achieve better
4. **Empirical Observation** collective outcomes. This alignment helps in
Traditional economics places a strong emphasis mitigating issues like the tragedy of the
on empirical observation and data analysis. commons and other collective action problems.
Economists often study and measure economic
outcomes, such as GDP growth, unemployment 4. Normative and Positive Analysis
rates, and income distribution, to understand The field blends normative and positive analysis,
and predict economic phenomena.[1] recognizing that the design of rules involves
value judgments about what is desirable
5. **Methodological Approach** (normative) as well as empirical observations
The methodological approach of traditional about what works (positive). This dual approach
economics is largely based on deductive allows for a more comprehensive understanding
reasoning and mathematical modeling. These of how rules can be designed to achieve desired
models are designed to predict and analyze outcomes.
economic outcomes based on certain
assumptions and constraints, rather than 5. Evolutionary Perspective
examining the underlying rules or institutional Constitutional economics adopts an evolutionary
frameworks.[1] perspective, viewing rules as evolving over time
through a process of trial and error. This
6. **Historical Context** perspective acknowledges that institutional
The focus on outcomes in traditional economics change is often gradual and path-dependent,
can be traced back to the historical context in influenced by historical contexts and previous
which the field developed. Early economists developments. By studying the evolution of
were primarily concerned with understanding rules, constitutional economics aims to
and improving economic outcomes, such as understand how better rules can emerge and be
increasing productivity and wealth, in the sustained.
context of industrialization and market
economies.[1] 6. Public Choice Theory Integration
By integrating insights from public choice theory,
constitutional economics recognizes that political
actors, like economic agents, are motivated by
self-interest. This understanding helps in
designing political and economic institutions that
can better manage these self-interests to achieve
more effective governance and economic
performance.

7. Institutional Design
The emphasis on rules is also about the
principles of institutional design. Effective
institutions are those that create rules which
promote desirable economic behaviors and
outcomes. This involves careful consideration of
how rules are formulated, implemented, and
enforced to ensure they serve the intended
purpose

### 3. **Public Choice Theory**

Vanberg integrates insights from public choice theory, which applies economic principles to political
processes. This theory suggests that political actors, like economic agents, are motivated by self-
interest. Understanding this can help in designing better political and economic institutions.

### 4. **Normative and Positive Analysis**

The lecture differentiates between normative and positive analysis. Normative analysis deals with
what ought to be, focusing on value judgments and ideal states. Positive analysis, on the other hand,
is concerned with what is, focusing on empirical and objective observations. Vanberg argues that
constitutional economics requires a blend of both to be effective.

### 5. **Role of Constitutions**

Vanberg highlights the role of constitutions in shaping economic and political behavior. Constitutions
are seen as the fundamental rules that govern society, and their design can significantly impact the
efficiency and fairness of economic systems.

### 6. **Methodological Individualism**

The lecture underscores the importance of methodological individualism, the principle that social
phenomena can be explained by analyzing the actions and interactions of individuals. This approach
is crucial in both economics and political science for understanding how collective outcomes emerge
from individual behaviors.

### 7. **Institutional Design**

Vanberg discusses the principles of institutional design, stressing that institutions should be designed
to align individual incentives with collective goals. This involves creating rules that encourage
cooperation and discourage opportunistic behavior.

### 8. **Evolutionary Perspective**

An evolutionary perspective is also presented, suggesting that institutions evolve over time through a
process of trial and error. This perspective implies that institutional change is often gradual and path-
dependent, influenced by historical contexts and previous developments.

### 9. **Interdisciplinary Approach**

The lecture advocates for an interdisciplinary approach, combining insights from economics, political
science, law, and sociology to understand and improve institutional frameworks. This holistic view is
necessary for addressing complex social and economic issues.

These insights collectively provide a comprehensive understanding of constitutional economics and

its implications for both economic theory and policy-making.

Neo Librealism Ordo-librealism

Neoliberalism is a term used to describe a Ordoliberalism is a German variant of liberalism
resurgence of 19th-century ideas associated with that emerged in the early 20th century. It
laissez-faire economic liberalism. It emphasizes combines a commitment to free markets with a
the importance of free markets, deregulation, recognition of the need for a strong regulatory
and reduction in government spending. Key framework to ensure that markets function
points from the document include: properly. Key points from the document include:
1. Market Efficiency 1. Order and Regulation
 Neoliberalism advocates for  Ordoliberalism emphasizes the
minimal government importance of a well-ordered
intervention in the economy, and regulated market economy.
arguing that free markets are the It argues that markets need a
 most efficient way to allocate strong legal and institutional
resources and generate wealth. framework to function
2. Individual Freedom effectively and to prevent
 The theory places a strong monopolies and other forms of
emphasis on individual freedom, market failure.
particularly in economic 2. Role of the State
activities. It posits that  Unlike neoliberalism,
individuals should be free to ordoliberalism assigns a more
pursue their own economic active role to the state in
interests without excessive ensuring that the market
government interference. economy operates within a
3. Role of the State framework of rules that promote
 While neoliberalism supports competition and prevent abuses
limited government intervention, of market power. The state is
it does recognize a role for the seen as a guarantor of economic
state in providing a legal order.
framework that ensures 3. Social Market Economy
property rights, enforces  Ordoliberalism is closely
contracts, and maintains the rule associated with the concept of
of law. However, the state's role the social market economy,
should be restricted to these which seeks to balance free-
functions to avoid market market principles with social
distortions. policies that ensure a fair
4. Criticism of Welfare State distribution of wealth and social
 Neoliberalism is often critical of security. This approach aims to
welfare state policies, arguing combine economic efficiency
that they create inefficiencies with social justice.
and dependency. Instead, it 4. Preventing Concentration of Power
promotes policies that  A key concern of ordoliberalism
encourage self-reliance and is the prevention of the
market-based solutions to social concentration of economic
issues power. It advocates for policies
that promote competition and
prevent monopolies, cartels, and
other forms of economic
concentration that can
undermine the functioning of
the market.
5. Ethical Foundations
 Ordoliberalism is grounded in
ethical considerations,
emphasizing the importance of a
moral and legal order that
supports individual freedom and
responsibility within a
competitive market framework.
Social Market Economy: Theoretical Conception
The concept of the "social market economy" is a central theme in the document by Viktor J. Vanberg.
This economic policy framework, which was notably implemented in post-World War II West
Germany, combines free-market principles with social policies aimed at ensuring fair distribution and
social security. Here are the key points from the document:
Theoretical Foundations
1. Historical Context
 The social market economy was developed in contrast to the central economic
planning of the National Socialist regime and the administered economy of the early
postwar period. It was designed to address skepticism about the market economy's
ability to function without generating intolerable social problems.
2. Intellectual Founders
 Key contributors to the theoretical foundation of the social market economy include
Walter Eucken, Franz Böhm, Wilhelm Röpke, Alexander Rüstow, and Alfred Müller-
Armack. These scholars, often associated with the Freiburg School, emphasized the
importance of a legal and institutional framework for a functioning market economy.
3. Ordnungspolitik
 The concept of Ordnungspolitik, or policy aimed at the legal and institutional
framework, is central to the social market economy. The focus is on creating and
maintaining a competitive market order through appropriate rules and institutions.
4. Ordnungstheorie
 Ordnungstheorie, or the theory of the economic and social order, underpins the
social market economy. This theory emphasizes the importance of the rules and
institutions that define the market order and ensure its proper functioning.
Key Principles
1. Role of the State
 Unlike laissez-faire liberalism, the social market economy assigns a crucial role to the
state in ensuring that the competitive process functions properly. The state is
responsible for monitoring and maintaining competition, preventing monopolistic
tendencies, and addressing disproportions of private power.
2. Social Policies
 The social market economy integrates social policies to address issues that the
market alone cannot solve. These policies include income redistribution, social
security, promotion of small and medium-sized enterprises, urban and regional
planning, and reforms in the institutional structure of firms to improve workers'
positions.
3. Economic and Social Order
 The social market economy is viewed as an economic, social, and political order. It
aims to create a socio-economic system that is efficient in a broader sense, taking
into account concerns for economic security and distributional fairness.
4. Broad Acceptance
 A key objective of the social market economy is to create a socio-economic order
that is broadly acceptable to all participants. This involves ensuring that the market
process is perceived as fair and that its outcomes meet normative standards of social
justice and equity.
Differences from Neoliberalism
1. Emphasis on Social Policies
 While both neoliberalism and the social market economy advocate for free markets,
the latter places a stronger emphasis on social policies to correct market outcomes
and address broader social objectives.
2. Institutional Framework
  The social market economy stresses the importance of a robust institutional
framework to support the market order, whereas neoliberalism tends to focus more
on reducing government intervention and promoting market efficiency

Aspect Freibrug School: Theoretical Approach

The Freiburg School was founded by economists such as Walter Eucken,

Founders Franz Böhm, and others.

The primary focus is on the legal and institutional framework necessary for a
Core Focus functioning market economy.

This term refers to policy aimed at creating and maintaining a competitive

Ordnungspolitik order through appropriate rules and institutions.

The theory of economic and social order, emphasizing the importance of

rules and institutions that define and ensure the proper functioning of the
Ordnungstheorie market.

The state is seen as essential in ensuring that the competitive process

functions properly, preventing monopolistic tendencies, and addressing
Role of the State disproportions of private power.

The Freiburg School views the market economy as part of a broader

Economic and economic, social, and political order, aiming for efficiency, economic
Social Order security, and distributional fairness.

The Freiburg School's ideas significantly influenced the development of the

Social Market social market economy, which combines free-market principles with social
Economy policies to ensure fair distribution and social security.

Normative The approach includes normative considerations, aiming to create a socio-

 Aspect Freibrug School: Theoretical Approach

economic system that is broadly acceptable and meets standards of social

Standards justice and equity.

The Freiburg School critiques laissez-faire liberalism for its lack of attention
Critique of Laissez- to the institutional framework and the potential for market failures without
Faire proper regulation.

Emphasizes the need for a strong regulatory framework to prevent market

Preventing Market failures, monopolies, and other forms of economic concentration that can
Failures undermine the functioning of the market.

The approach is grounded in ethical considerations, stressing the

Ethical importance of a moral and legal order that supports individual freedom and
Foundations responsibility within a competitive market framework.

Freiburg School: Policy Paradigm

Historical and Intellectual Context
 The Freiburg School, also known as the Ordoliberal School, emerged in Germany during the
early 20th century. It was a response to the economic and political challenges of the time,
including the failures of laissez-faire capitalism and the rise of totalitarian regimes.
 Key figures associated with the Freiburg School include Walter Eucken, Franz Böhm, and
Hans Grossmann-Doerth. These scholars were instrumental in developing the theoretical
foundations of ordoliberalism, which later influenced the concept of the social market
economy.
Core Principles
1. Ordnungspolitik (Order Policy)
 The Freiburg School emphasizes the importance of Ordnungspolitik, which refers to
policies aimed at establishing and maintaining a proper legal and institutional
framework for the market economy. This framework is essential for ensuring that
markets function efficiently and fairly.
2. Competition as a Discovery Procedure
 Competition is viewed as a discovery procedure that reveals information about
consumer preferences, production possibilities, and resource scarcities. The Freiburg
School argues that a competitive order is necessary for the efficient allocation of
resources and the promotion of innovation.
3. Role of the State
 The state has a crucial role in creating and enforcing the rules that govern economic
activity. This includes preventing monopolies, ensuring fair competition, and
addressing market failures. However, the state's role should be limited to providing
 the necessary framework and not intervening directly in economic processes.
4. Legal and Moral Order
 The Freiburg School stresses the importance of a legal and moral order that supports
the functioning of the market economy. This includes the protection of property
rights, enforcement of contracts, and adherence to ethical standards in economic
transactions.
Policy Implications
1. Regulation and Anti-Monopoly Policies
 The Freiburg School advocates for strong regulatory policies to prevent the
concentration of economic power and ensure that competition remains effective.
This includes anti-monopoly laws and measures to promote market entry and
competition.
2. Social Policies
 While the primary focus is on creating a competitive market order, the Freiburg
School also recognizes the need for social policies to address issues such as income
inequality and social security. These policies should complement the market order
and ensure that its benefits are broadly shared.
3. Economic and Social Stability
 The policy paradigm of the Freiburg School aims to create a stable economic and
social order. This involves not only economic efficiency but also social justice and
political stability. The goal is to create a socio-economic system that is resilient and
capable of adapting to changing conditions.
Influence on the Social Market Economy
 The ideas of the Freiburg School significantly influenced the development of the social
market economy in post-World War II Germany. The social market economy combines free-
market principles with social policies to create a balanced and inclusive economic system.
The Freiburg School's emphasis on a strong legal and institutional framework is a key
component of this mode

Aspect Social Market Economy Ordoliberalism

Emerged in early 20th century

Developed in post-World War II Germany Germany as a response to laissez-
to address economic and social faire capitalism and totalitarian
Historical Context challenges. regimes.

Walter Eucken, Franz Böhm, Hans

Key Figures Ludwig Erhard, Alfred Müller-Armack. Grossmann-Doerth.

Combines free-market principles with Emphasizes the importance of a legal

social policies to ensure fair distribution and institutional framework for a
Core Principles and social security. competitive market economy.

Role of the State Active role in providing social policies State's role is to create and enforce
and ensuring fair distribution of wealth. rules that ensure fair competition
 Aspect Social Market Economy Ordoliberalism

and prevent monopolies.

Focuses on economic efficiency

Economic Aims to achieve economic efficiency through a well-ordered competitive
Efficiency while also addressing social justice. market.

Integral part of the system, including Recognizes the need for social
income redistribution and social security policies but primarily focuses on
Social Policies measures. maintaining competition.

Views competition as a discovery

Ensures competition but also addresses procedure essential for efficient
Competition market outcomes through social policies. resource allocation.

Emphasizes a legal and moral order that Strong emphasis on a legal and moral
Legal and Moral supports both economic efficiency and order to support the functioning of
Order social justice. the market economy.

Preventing Advocates for policies to prevent Strong focus on anti-monopoly

Concentration of economic concentration and ensure fair policies and preventing the
Power competition. concentration of economic power.

Seeks to create a stable economic

Economic and Aims to create a stable socio-economic order through a competitive market
Social Stability system that is resilient and inclusive. framework.

Provided the theoretical foundation

Influenced the development of the social for the social market economy and
Influence on Policy market economy in post-war Germany. influenced its implementation.

TUTORIAL
unhampered markets
According to Ludwig von Mises, the idea of unhampered markets is central to his economic
philosophy. Here are the key points about his view on unhampered markets:
  The unhampered market economy, based on private property rights and free
exchange, is the only economic system that provides freedom and personal choice to
all members of society while coordinating the actions of billions of people in the
most economically rational manner.
 In an unhampered market, there is no compulsion or coercion - individuals freely
cooperate through voluntary exchanges directed by market prices, without
interference from the state beyond protecting property rights and contracts.
 The market process, driven by the interplay of individual actions under the division
of labor, directs resources to their most highly valued uses to satisfy consumer
demands in the most efficient way.
 Government intervention that distorts market prices, such as through taxation,
regulations or monetary manipulation, always results in misdirection of resources
and malinvestments.
 The unhampered market is not an accidental phenomenon but the product of a long
evolutionary process, emerging as the strategy that allowed humans to progress
from savagery to civilization by adjusting to economic realities.
 Mises argued that the unhampered market economy ultimately serves as the
foundation of civilization itself, outdistancing any government-planned system.

Refeudalization
Refeudalization refers to the process or phenomenon of recovering or reintroducing political
mechanisms, relationships, and structures that were characteristic of the feudal system in medieval
Europe. Here are the key points about the meaning of refeudalization:
 In a narrow sense, refeudalization means the literal restoration of an original feudal order,
with the return of feudal forms of organizing politics, economy, and society.
 More broadly, it refers to the introduction of mechanisms and relationships in the modern
economic phase that are reminiscent of European feudalism or an idealized feudal model,
even if not exactly replicating historical feudalism.
 It describes policies or trends that give special privileges to organized groups like NGOs,
corporations or wealthy individuals, akin to the nobility under feudalism.
 Historians have used the term to explain the social conditions behind events like the
Neapolitan Revolt of 1647, where the peasantry revolted against the feudal aristocracy and
financiers who had been granted noble titles and tax exemptions by the monarchy.
 Sociologists apply the concept to critique aspects of neoliberal globalization, such as the
privatization of public goods, extreme social polarization, unequal land distribution, and the
merger of economic and political power reminiscent of feudal lords.
 Jürgen Habermas used the German term "Refeudalisierung" to describe the colonization of
the public sphere by private interests and consumer capitalism, eroding the democratic
public space gained in previous centuries