International Perspective

For the founders of German regulatory theory from the Freiburg School, the initial focus was on “national economics,” i.e. the economic order within a state. Nevertheless, the interrelationship between national economies, as established by trade and cross-border investment, was important to regulatory theorists from the outset. Fundamental contributions to systems competition by Friedrich August von Hayek and to integration theory by Wilhelm Röpke are just as much an outgrowth of this preoccupation with international regulatory policy as the comparative analysis of economic systems by Walter Eucken. Recently, international competition between different institutional systems (systems competition, institutional competition) has been examined from a regulatory policy perspective. First of all, the basic principles of international regulatory policy are no different from those of national regulatory policy. This is made quite explicit, for example, in the postulate of free markets (part of the constitutive principles of the market economy according to Walter Eucken), which must be applied both to the internal market, where, for example, cartels and monopolies threaten market freedom, and to foreign trade. The close connection between the two areas is demonstrated, for example, by the fact that transition states often opened their closed markets to foreign trade at the beginning of the transformation in order to compensate for the lack of internal competition - in many industries there were only a few monopoly-like companies. Three major sub-systems are particularly important for international regulatory policy: the monetary system, the trade system, and the regulation of cross-border factor movements, i.e. investment and migration.

International order

International Monetary System

The international monetary order consists of the sum of the monetary systems participating in international exchange, as well as their international connections and institutions. Monetary systems encompassing a large number of states emerged as early as Roman times, more than 2,000 years ago, and later in the Middle Ages, as well as in East Asia's Chinese cultural area. In the 19th century, alongside monetary unions in the newly unified states (Italy, Germany) and regional monetary unions (Latin Monetary Union, Scandinavian Monetary Union), the gold standard, for the first time, gave rise to a monetary system that functioned virtually universally. It was not dependent on a central authority or international institution. After the Second World War, a differentiated international monetary order emerged with the International Monetary Fund (IMF) and other international financial institutions, particularly the World Bank, which, after the end of the Cold War, extended almost entirely across the globe. Until 1973, the countries that belonged to this monetary system were linked to one another in a system of fixed exchange rates with the dollar as its anchor currency. Since then, a mixed system of flexible, quasi-fixed and regionally fixed exchange rates has prevailed. Whether the normative goal of the international monetary system, to ensure monetary stability and convertibility worldwide and thus the unhindered exchange of goods, services and factors of production, has been achieved is controversial. Critics point to the currency crises at the end of the 20th century in particular, which were partly a result of the IMF's intervention as an international "lender of last resort" (i.e. with the IMF's aid programs for crisis-hit countries). Proponents of the IMF, on the other hand, point out that the IMF's aid is not for individual countries or groups of investors, but serves to stabilize the world monetary system. What is certain is that the IMF is now far more involved in aid programs than originally planned, even for long-term, structural problems in national economies.


International Trade Order

The international trade order encompasses bilateral and multilateral trade relations between states. In addition to the fundamental decision for free trade or protectionism, the question of multilateral versus bilateral or regional trade agreements is particularly important. The question of free trade versus protectionism is the fundamental debate in trade theory. In the 17th century, mercantilism developed as a theoretical framework that combined protection against imports with an export orientation of newly founded, often state-owned, manufacturers in order to increase the state's wealth, measured in gold reserves. The fight against this theory was a central tenet of classical liberal economic theory, as advocated by Adam Smith, Jean-Baptiste Say, and David Ricardo. Protectionism to protect one's own industry in its formative phase ("infant industries"), as advocated by Friedrich List in Germany, which was just beginning to industrialize, was a minority opinion. After free trade (with tariffs that were not completely abolished, but mostly very low) initially prevailed worldwide in the 19th century, a protectionist countermovement began at the end of the 19th century, which reached its peak in the period between the two world wars, when world trade shrank dramatically due to increasing protectionism.


After the Second World War, parallel to the International Monetary Fund and the World Bank, there were plans to establish a World Trade Organization. Although this organization could not be established at the onset of the Cold War, the General Agreement on Tariffs and Trade (GATT) took over this task from 1947 onwards, until the World Trade Organization (WTO) was formally founded in 1995. For a long time, the GATT focused on tariff reductions and tarification (i.e. the conversion of non-tariff trade barriers such as quotas into customs duties). Although a steady reduction in tariffs and other trade barriers can be observed over the long term, particularly in the area of trade in industrial goods, important exceptions remained, including in particular the agricultural sector and, for a long time, services and textiles. But even in these areas there have been gradual changes over the last two decades. New, non-tariff and often hidden trade barriers, such as "voluntary" self-restraints, and new demands, e.g. for social and environmental standards in trade agreements, pose new challenges for global trade. The relationship between global trade and development is currently being discussed in the WTO's Doha Development Agenda. Another current focus of discussion is the compatibility of the regional free trade areas seen around the world with multilateral free trade. While critics see this as a deviation from the ideal of international free trade, they also point to the simplification effect that the trade agreements of various large regional blocs with free trade could have in the internal market.


Order of cross-border factor movements

The third important sub-order of international regulatory policy is the regulation of international factor movements, i.e., of capital and labor. Cross-border direct investment was already an important source of capital for developing economies over 100 years ago. Due to falling transport and communication costs, the technical possibilities for factor movements have become considerably easier again (globalization). This has also increased the demand for an international regulation of factor movements. However, this is countered by economic, political, and cultural reservations in many countries. Dependence on foreign capital, as well as competition from immigrant workers, is one of the feared consequences of globalization. Regionally, a number of agreements already exist that, in particular, enable the free movement of capital across borders, and in some cases, as in the European Union, also the free movement of labor. Multilateral agreements, analogous to the regulations in the areas of currency and international trade, are more difficult to achieve. A multilateral investment agreement failed due to resistance from many countries for the reasons mentioned above. As in the field of national economics, the interdependence of subsystems is important in international regulatory policy. International capital flows can only occur with free currency convertibility, and global economic integration through competition is also based on the substitutability of investment and trade.


Global governance

The biggest difference between global governance and economic governance within a national context is the lack of a universally recognized rule-setter with a monopoly on enforcement. While the founders of ordoliberalism view the setting of a framework by a strong (and assertive) state as the hallmark of regulatory policy, this is not the case in international regulatory policy. It is not about an international "superstate" or "world government," as envisioned by David Mitranyi, for example, but rather about the effective enforcement of treaties that guarantee freedom in exchange and competition. Hayek (1979) therefore writes:


“What we need are not international authorities possessing powers of direction but merely international bodies (or, rather, international treaties which are effectively enforced) which can prohibit certain actions of governments that will harm other people.”

In fact, the international economic order is home to many competing, more or less effective enforcement mechanisms. In addition to regional integration areas with relatively strong institutions, most notably the European Union, which has proven itself assertive in competition policy, for example, there are many tiered forms of international enforcement. At the WTO, arbitration tribunals have proven relatively successful so far. However, with the IMF's terms and conditions, depending on a country's political importance, policies vary widely, from compliance to almost complete ignorance. The weakest form of enforcement is voluntary cooperation, which plays a particularly important role in East Asia. In the Asia Pacific Economic Cooperation (APEC), for example, peer pressure, the model of more liberalized economies, is intended to serve as an incentive for laggards. While such institutional arrangements can certainly prove their worth in individual cases, they reach their limits whenever there are conflicts of economic interest.


Since international regulatory policy lacks a rule-making authority, the rules themselves become the subject of competition, meaning that system competition or institutional competition prevails. The basic idea of the theory of system competition is that institutional arrangements or systems compete with one another, and that there are parallels, but also differences, to competition in the goods market. In system competition, immobile factors of production (labor) compete for mobile factors of production (capital). There is a market with suppliers and demanders of institutions, the analysis of which is the focus of the theory of system competition.


Sources / Literature:

Hayek, FA of - Choice in Currency: A Way to Stop Inflation, in: DC Colander (ed.), Solutions to Inflation, New York et al. 1979, pp. 93-103.

Röpke, Wilhelm - International Order and Economic Integration, Dordrecht 1959, Holland: D. Reidel Publishing Company.

Seliger, Bernhard - Basics of a theory of system competition, Economic Studies, Vol. 27 (1998), No. 5, pp. 263-266.

Example of Thatcherism

Great Britain: Thatcherism of the 1980s

In the late 1970s, Great Britain was characterized by a weakened economy and a comprehensive network of interest groups. At the time, this was referred to as the "English disease." Today, 30 years later, however, the situation is quite different: Both Great Britain and the USA, as well as numerous other Anglo-American economies, particularly New Zealand and Australia, have undergone a complete social transformation. While this process was often marked by severe conflict—for example, the famous Welsh coal miners' strike in the early Thatcher era—these societies now benefit from their less sclerotized structures.


The Thatcherism of the 1980s (named after then British Prime Minister Margaret Thatcher) contained all the principles of ordoliberal regulatory policy. Thatcher opposed the increasing nationalization of the economy, the restriction of market forces through state intervention, and the power of political-economic interest groups, especially trade unions. She recognized the model of "social democracy," the British form of the welfare state, as a misguided path and abandoned it. The key pillars of Thatcher's reforms were therefore the reduction of the power of trade unions ("curbing the power of the trade union barons") and the comprehensive liberalization of various economic sectors. Privatization policy, in particular, became a "flagship of Thatcherism" over the course of the 1980s. The outcome of this policy is impressive: The ongoing relative decline of the British economy was halted; between 1979 and 1990, the British economy grew by a total of approximately 27%. The elimination of labor market rigidities in the 1980s led to significant improvements in job creation. The unemployment rate in Great Britain has halved since the beginning of the 1980s. However, the level of prosperity in Great Britain today is only about average in Europe, although this cannot necessarily be attributed to Thatcherism.

Here is an excerpt from a speech by Margaret Thatcher "On Socialism":

Sources / Literature:

Brendan, E. (1999) Thatcherism and British politics, 1975 – 1999, Sutton.

Eichenhofer, E. (1999) Thatcherism and social policy: Welfare state under market economy conditions, Baden-Baden.

Sturm, R. (1991) Thatcherism – a review after ten years, Bochum.


Example Reaganomics

The USA: Successes and Failures of Reaganomics

The 1980s also saw a decisive shift in the United States' economic policy. Here, too, a supply-side economic policy was introduced by the new Republican president, Ronald Reagan. Upon taking office, Reagan reportedly described his economic and social program as follows: "Look guys, I don't like taxes, I don't like inflation, I don't like the Russians. Work something up!" The resulting economic policy strategy has become known as "Reaganomics."

In his government statement of May 2, 1981, Ronald Reagan described his goals as follows:

“Reaganomics” initially meant a significant reduction in income taxes. The goal of the American reform was to transform a graduated system with a top tax rate of 70% into a flat-tax system with a uniform tax rate of around 25%. In line with the concept of the “Laffer curve,” at least stable tax revenues were expected.

The tax reform was also embedded in a broader economic promotion program. For example, the dollar was stabilized, and the expansion of free trade (e.g., through the U.S.–Canada Free Trade Agreement) was supported. Similar to the approach in Great Britain, Reagan deregulated key industries such as the energy sector, financial services, and transportation.

In particular, this liberation of economic activity from regulatory perfectionism and dense regulations — even for small and very small initiatives — enabled a significantly higher growth path for the American economy during the 1980s. Another objective was the consolidation of public budgets (“Cut back Washington!”), which primarily affected social benefits. However, the budget deficit continued to rise — especially due to increasing defense spending.

By removing numerous economic restrictions, Reagan succeeded in enabling a wave of technological and economic innovations that rapidly strengthened the American economy. Stock prices soared. Inflation fell significantly during Reagan's years in office. However, the Reagan administration paid for this boom with a significant increase in the budget and trade deficits. The economic policy known as "Reaganomics" is therefore characterized not only by regulatory reforms but also by an expansionary fiscal policy.


What both concepts – Reaganomics and Thatcherism – have in common, however, is particularly important for regulatory policy: the "liberation" of economic activities through privatization and deregulation, tax reduction, and currency stabilization. Even if the reforms in the US and Great Britain can be assessed differently overall, they clearly demonstrate which regulatory measures are of central importance in sclerotized welfare states.

Sources / Literature:

Troy, G. (2004) Morning in America: How Ronald Reagan Invented the 1980s, New Jersey, Princeton University Press.

Wasser, H. (1988) The Reagan Era: A First Assessment, Stuttgart.