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Competition and the Legal System
by Bernhard Nagel
Email: mbatko (nospam) lycos.com
12 Jul 2007
Competition is not always a fountain of econmic development..Certain academic findings are dangerous for the functioning of norm systems. The critic becomes the delinquent. Several wicked mosquitos may be criticized, not mosquitos in general
COMPETITION AND THE LEGAL ORDER
By Bernard Nagel
[This address published on 2/1/2007 on NachDenkSeiten is translated abridged from the German on the World Wide Web, http://www.nachdenkseiten.de/wp-print.php?p=2109. This was Professor Bernhard Nagel’s farewell address at the University of Kassel.]
In the last years, the competition policy of the European Commission adopted the model of neoliberal followers of Milton Friedman. A framework for competition through a strong state is not urged any more. Rather state interventions should be reduced as much as possible. Public enterprises should only be allowed under very restricted conditions.
A competition policy abstracted from economic power loses legitimacy and could collide with constitutional principles of equality and solidarity, above all in the freedom of association.
If a new European constitution should be passed, the freedom of association and the welfare state principle must be immediately acknowledged in all member states. These could be bulwarks countering the abso0lutizing of competition.
COMPETITION AND THE LEGAL ORDER
…In the last decades, we have witnessed internationally a constantly accelerating corporate- and capital-concentration that spreads globally and does not stop at national borders. Many international corporations and financial groups have a financial power exceeding medium-sized nation states. The chances of small enterprises diminish. Isn’t competition endangered by concentration and globalization? What is the purpose of competition in society and the legal order?
1. COMPETITION IN THE LAW
…The academic discussions on the basic theoretical understanding of competition are very controversial. Controversies run through the history of competition theories. The starting point of discussion is the classical liberalism of Adam Smith. Competition is understood as a process controlled by an invisible hand of the market. Everyone pursues his or her individual advantage. The invisible hand guides this process to everybody’s advantage. An aggregate economic balance allegedly arises. This claim of the blessed beneficial effect of the invisible hand cannot be empirically corroborated. But the theory legitimates a society that cannot be ruled any more by an enlightened absolutist monarch.
At the beginning of the 20th century, the static neoclassical theory of competition prevailed. This theory sought an optimal state of balance and competition. The worldwide economic crisis of 1929 invalidated this approach. A concept of functional competition developed as a counter-movement in the 1930s. The market structure, market conduct and market results are analyzed in this dynamic concept. Market structures allowing a functional competition are sought.
In 1967 Erhard Kantzenbach described the vast oligopoly with moderate product differentiation as very conducive to competition. From the start, this concept faced a vigorous opposition of theoreticians who understood competition as creative destruction (Joseph Schumpeter) or as a discovery process (Friedrich v. Hayek). Both analyzed competition as a process. Schumpeter and v. Hayek bid farewell to the neoclassical theory of balance. With Schumpeter, the importance of the entrepreneur and ultimately the creative individual was emphasized. For v. Hayek, competition is a kind of neo-Darwinian process where inefficient solutions are eliminated. For both, competition is a fountain of youth of overall economic development.
After the Second World War, the so-called law-and-order competition theory founded by Walter Eucken and Franz Bohm in the 1970s prevailed in the Federal Republic of Germany. This theory requires a functioning price system and starts from the ideal of complete rivalry. It tries to balance the different interests of the whole society and the individual. Competition policy is understood as controlling market power or restraining policy. Dominant market positions should be dethroned. Therefore law and order liberalism requires a strong state that sets the framework of competition and controls the rivalry. However corporations should operate freely within this framework. Different from v. Hayek, competition is not automatically the fountain of youth of economic development for law and order liberals. Rather state policy is necessary to promote good competition and combat bad competition. The theory separates “evil” repression competition from “good” or performance competition (price- and quality competition). The 1957 German law against competition restrictions and the competition norms of the European Common Market treaty were influenced by this theory.
Neoliberal positions going back to Milton Friedman are predominant today. According to Friedman, markets stabilize themselves when left to themselves as much as possible. Only price- and quota-cartels should be prohibited right from the start. Otherwise competition policy should be limited to dismantling barriers against market access. Only a restricted importance comes to control of mergers. According to Friedman, a corruption (Vermachtung) of the market can be justified with arguments of overall economic efficiency.
In the last years, the competition policy of the European Commission has adopted the model of the neoliberal followers of Milton Friedman… The neoliberals and the commission trust the self-stabilization of the market. A framework for competition by a strong state is no longer urged. Rather state interventions should be reduced as much as possible. The state should only fix the rules of the game so the competition process can run as freely as possible. The model of this policy is the “level playing field,” a metaphor from team sports. The state’s function is to create a “level playing field” for the freest possible competition… The state itself is declared the problem. The corruption of the economy is faded out. The state as arbitrator should only observe whether the rules of the game are followed.
Is state policy on competition policy right and proper? How are these competitive ideas anchored in people and how do they encroach in their vocational activity and life world? This second question extends beyond the economy. Sports and science could be considered alongside the economy. The answers to these two questions will be examined on their consistency with the constitutional guidelines on the formation and control of society.
2. COMPETITION IN THE ECONOMY, SCIENCE AND SPORTS
I begin with sports. The sports idea is that the best is determined in a fair contest. This is not only an idea but becomes a material authority as seen in the excesses of football games that can often only be controlled with a massive police detachment. These games are not mere hobbies of millionaires. Investors expect a “return on investment” through the athletic achievement and media presence that serves their business. Sports teams become economic enterprises.
A new competitive idea also penetrates science. In Germany, excellence initiatives are governmentally prescribed and controlled. Elite universities, excellence clusters and graduate colleges compete and should be promoted. The success of this concept is uncertain. With competition over the best applications, the best results do not occur. Science is an open process where scholars subject their results to criticism. The quality appears in the result, not in the presentation of applications.
The governmentally-decreed competition idea grasps academics because elite universities, graduate schools and excellence clusters are expensive. The power of competition leads academics to present themselves like athletes. Universities must also offer themselves as institutions promoting excellence. The presentation threatens to become more important than the content. Universities focus on themselves and divert their attention from so-called marginal areas. The strength of German universities, their traditional breadth and diversity, threatens to be lost since the state withholds funds from “non-excellent” universities.
Hardly anyone can evade competitive thinking. The competition discourse is socially powerful. The French sociologist Michel Foucault understands discourse as writing and speaking. Structures and institutions control writing and speaking. According to Foucault, power refers to the complex strategic situation in a society. Power relations arise and operate everywhere. Power is not only the might of several powerful persons. Power relations do not unconditionally need force. Opposing ideas are excluded from discourse. Schools and cartels form. Jurisprudence and theories provide doctrines and models of explanation. Standardization and institutionalization occur for social appropriation in sports, play and science.
In surveying developments in the economy, sports and science, the competition discourse mutates into a hegemonial discourse. People are marked by competition. The old characteristic of the feudal age was the honor manifested in the games and culture of this time, e.g. the knight duels and the minnesingers. In the 17th century, a new characteristic developed – economic success – starting from England. Success in competition was central, not happiness. Not by chance, modern sports developed in England. The original development of sports in ancient Greece was taken up and further developed. Initially the Olympic Games founded in 1896 were permeated with the themes of success and honor. Up to the middle of the 20th century, participation was more important than victory. Athletes were urged to accept amateur status. In the US, this status limit was quickly violated in professional sports. In Olympic sports, its observance was ensured by severe sanctions against athletes who accepted money. Today victory even in the Olympics is more important than participation. Earning money is very compatible with athletic success. Great bonuses and advertising contracts beckon.
The goal of competition in the economy and sports is winning. Money is the standard by which success is measured. To win, one takes as few risks as possible. This generates a pressure to adapt. To be as successful as possible, many competitors reduce activities where quick success cannot be expected. These competitors concentrate on short-term success. The less successful competitors in the economy follow the more successful. The economy “concentrates.” Diversity disappears. Competition becomes the lubricant of a normalization society.
When power succeeds in promoting competition as desirable, people orient themselves in the given norm “success” and accept the winners. When money and power count above everything in a society, the legitimation of the winner from the competition idea consists in having money or power. He or she doesn’t need to become justified in any other way. However this only gives a precarious security mediated by success. This peculiar “precariousness” needs constant expansion of money and power.
Since success and not competition is most important, competition in the economy has been limited since time immemorial. Whoever can form a monopoly, cartel or trust is “successful.” This means elimination of competition. In sports, agreements and market processes, divisions occur regularly, leading to a multiplication of success possibilities through the splitting of disciplines, the splitting of leagues and manipulation of game results by players or arbiters. The goal is the success of the athlete or team. Unfair competition through doping and its combating become increasingly important. The cry for stronger sanctions becomes louder. This will now be codified by a German law…
Competition is not always a fountain of economic development. Under certain presuppositions, development can be controlled better by planned state-guided economies. Renewable energy is one example. Without state intervention, alternative energy would still lead a wallflower existence. Alternative energy would not hold its ground in competition with the established oligopolists. Windmills would still exist for tourists today, not for energy production.
The development of renewable energy is a good example of the revolutions occurring from time to time. The creative one breaks out and creates new norms. Competition becomes re-oriented. A new characteristic opens up in the play of the normalization society. A new dimension of competition arises in that the economy falls increasingly under the control of the financial markets. Hedge funds and private equity firms are active on the market. They amass foreign capital with which they buy a corporation to resell it again for profit either whole or divided in its parts. The only goal of these businesses is making more money out of money. Production processes only play an indirect role in their calculations. Risks are no longer reduced by diversification of products or services of businesses but through the diversification of the portfolio in business partnerships holding these funds or private equity firms. People are unimportant to these firms. Their logic is the highest abstraction of the competition principle: making more money out of invested money without regard to the changes and consequences. In this new type of normalization society, the power foundations are fragile. Acceptance is trifling; controls are necessary.
The answers to this development are different. As I explained, law-and-order liberals only want to protect the good performance competition, not the repression competition. Competition is analyzed and politically assessed, not idealized or immunized against criticism. A completely free competition does not exist. With neoliberals, the state should withdraw to the role of umpire on the playfield. Regular competition supposedly controls itself. The reality is different. There is no free competition in the economy. Competition left to itself helps the powerful. The corruption (Vermachtung) of the economy spreads. When the energy giant Won sought to takeover the Spanish Endosa, this was a case of freedom of capital traffic, not a merger control for European Union competition. The Spanish state that wanted to takeover Endosa through a smaller Spanish enterprise stressed the “order” of the freedom of capital traffic in favor of the economically stronger.
There is no free competition in science. Many outsiders cannot prevail because the material funds for realizing these ideas are lacking. As a rule, the sciences develop according to the principles of cooperation and affirmation. Scientific revolutions are rare. They hold to the norm. The science marked by science is a normalization- and norm-observing society. Who sets the norms? Politics often gives the norms today. Firstly, it intervenes through the excellence initiative. Then it guides and controls science through its application processes. Power stimulates a normalization society. The peculiarity of the new regulation policy today is that it pretends to be only help to self-help. Parts of the law regulating higher education are repressed. Deregulation is the priority. In reality, deregulation prescribes new regulations. This increased complexity after deregulation can be seen in the law regulating universities.
Certain academic findings are dangerous for the functioning of norm systems. Knowledge is especially dangerous when the discourse justifying and supporting the norm is analyzed. The critic becomes the delinquent. The normalization society expels the abnormal and the ab-norms. Several “wicked” mosquitoes may be criticized, not mosquitoes in general. This principle is also true for sports. Whoever fundamentally criticizes the habits of sports or a field of sports and not only the excesses is abnormal… The rule is also valid for science or academics: Success in the normal “mainstream is rewarded. Successful divergence is the exception.
Besides competition, there are other mechanisms that can advance economic development. One mechanism is solidarity. Play theory is an important measure for analyzing these mechanisms. Play theory does not share the basic assumptions of traditional theories of competition, e.g. individual action of all against all as the rule and solidarity in the cartel as a violation of the rule. Rather it analyzes the formation of coalitions. How does interest in collective action arise? The larger the group, the more difficult is collective action. Whether someone acted cooperatively or malevolently is important. The incentive disappears when cooperative action is unknown… The incentive for cooperative action increases when one needs the other. The other can avenge himself for faulty action. The new information technologies improve information possibilities. The number of possible cooperative partners increases. The competition discourse only reluctantly accepts the findings of play theory.
3. COMPETITION AND THE LEGAL ORDER
Most recently the EU commission has relied on legislative competition between the member states… In the US, the largely deregulated commercial law of the state of Delaware prevails. A similar development is now marked out in the EU in favor of Britain. Every entrepreneur chooses the law that harms him least. Is it also the best law? Neoliberal economic policy affirms the legislative competition and demands a reduction of state activity. Neoliberal policy relies on deregulation. The economy should regulate itself more and more through competition. This does not work in commercial law because the protection of the shareholder and the stakeholder must be regulated. However only the shareholders decide over the choice of the form of society.
Legislation faces a dilemma in other areas like competition law. To finally come into the neoliberal fool’s paradise of self-regulation through competition, it must bore through increasingly complex regulatory mountains. This dilemma of regulation as help to self-regulation is clear in the expansion of protection in the competition- and cartel law. The responses of the concerned to the regulations must be captured by new regulations. Re-regulation becomes a permanent state. The complexity of rules on merger control and abuse surveillance increases. Controls on unfair competition and commercial legal protection are strengthened. That an exception from cartel prohibition was given for the central marketing of sports broadcasts in the 1998 law against competition restrictions is remarkable!
Deregulation for supposedly free competition in commercial law opening up free spaces so the economically powerful can gain advantages at the expense of the weaker is an even greater problem. This is propagandistically sold as success in competition. Nevertheless these free spaces must be measured by the constitutional principles. This measurement does not always end in favor of the policy of free spaces. The constitution is not hostile to competition… The constitution also protects vocational freedom. Vocational freedom means competition. The constitution protects property but insists property is obligated and should serve the well-being of the general public and the equal opportunities developed out of the equality axiom also safeguard competition. The basic law altogether contains many rules promoting competition, e.g. the competition- and cartel law, the law of commercial legal protection, the automation of business and the guarantee of entrepreneurial creative freedom in the corporation. German law trusts competition but not boundless and unconditional competition.
In the US, the relations of competition and the constitution are different than in Germany. This is connected with the American social order. In the US, normal citizens in the middle class and low wage-earners, white and black employees, immigrants – legal and illegal – and the unemployed live alongside the rich. Potential immigrants above all from Latin America stand in the background as a vast reserve army. The constant influx of these immigrants ensures that everyone seeks demarcation and exclusivity and feels economically most secure through private property. Competition means the others. The others are actual or potential rivals. This is one root for the hyper-individualism of the Americans and their unstable and fragmented society. If fragmentation and individualization are reified constitutionally, one is for freedom of opinion and freedom of speech but against the welfare state and protection from unlawful termination, for freedom of worship, freedom of travel and freedom of economic activity but against property taxes, higher income taxes for the rich, health care insurance and conservation.
Europe is different. In the French revolution, the battle cry was liberte, egalite and fraternite. A democratic constitution founded on these three guiding principles does not allow a total orientation of society in competition. Freedom of association, the welfare state and basic social rights are indispensable. In continental Europe, the US fragmentation and individualization and their constitutional reification do not have the support of the majority. Remembering how much competition influences people, one has to ask about the effect of this characteristic on constitutional principles like equality and solidarity… Cartel members who eliminate competition and cooperatives act in solidarity. Successful economic- and social forms of competition develop in political movements, particularly in South America. Two reasons are that European immigrants and socialist ideas are influential and the societies are strongly marked by Catholicism. Early forms of the solidarity economy existed in the medieval monasteries of the Benedictines and Cistercians and in the Jesuit state of Paraguay. Common goals were always the prerequisite for solidarity forms of the economy. These goals did not need to be absolutely established in religion or only in religion. For some time, the Cistercians who originally viewed work only as asceticism on the way to the kingdom of heaven pursued the changed goal of an efficient economy realizing the greatest possible success with investment. Living behind cloister walls, they could be described as “heralds” of capitalism. Today there are solidarity economies only in marginal areas. Absolutizing competition harms solidarity.
In Germany, competition is not made absolute in the constitution or in the competition- and cartel-law. The German law is titled “Law against competition restrictions.” In reality, a series of restrictions on freedom of entrepreneurial conduct help “good” competition and protect competition as an institution. Thus a business for example cannot merge with another even though the idea of freedom of competition actually suggests this. Corporate mergers can lead to excessive concentration in the economy, a development endangering competition as an institution.
Does an absolutizing of competition threaten in European law? The new competition policy of the European Union commission replaces the goal of protecting competition as an institution with the model of the “level playing field.” The state can only look on from the edge of the field and punish rule violations but can no longer control the “discovery process of competition.” A competition policy derived from economic power loses legitimacy and can collide with the constitutional principles of equality and solidarity in the equality law and the welfare state principle in the constitution, above all the right of association.
The constitution protects the solidarity of employees and unions in wage negotiations and strikes through the basic right of freedom of association. Whoever would eviscerate wage agreements puts the collective bargaining of the constitution in question. It is contradictory to criticize on one hand the alleged leveling and rigidity of collective bargaining and on the other hand attack their diversity and quantity. The rights of association and solidarity are connected. Spontaneous solidarity forms of production, distribution and service arise. Examples from South America make us sit up and take notice. The constitutionally guaranteed right to strike can be used productively.
The competition system in Germany must be maintained in the normalization society. On the other side, the ruling elites are no longer protected from the question of an additional legitimation of their rule. Therefore the character of persons must be safeguarded by competition and success. Here solidarity is alarming. Therefore unions and worker parties in the EU are forced to the defensive. They need solidarity to mobilize people. At the same time they threaten the ideological foundation of a thought-system where success is legitimate and needs no further legitimation.
Norms of worker participation counter the absolutizing of competition. Worker joint-determination – constitutionally desired, not commanded – aims at compromise and leads to internal company solutions of conflicts that previously were settled outside the company. Worker participation leads to cooperation. Cooperation is ambivalent. Since a double loyalty is demanded of participating workers in the board of directors for example, they fall into a Catch 22-situation or quandary. They want both the success of the enterprise and their unions. But both can come into conflict. In a mirror image, the shareholder side can fall into conflicts of interest. Incidentally, compromises are limited to the business plane so the rivalry between the businesses is untouched. Thus cooperation and competition stand side by side.
Lastly, the relation of competition to the democracy principle is ambivalent. Every democratic choice is a competition of candidates. The people decide who is the most competent in this rivalry. The legitimation of politicians depends on this choice. On the other side, some economic captains complain about politicians who are unwilling or incapable of “reforms” and “efficient solutions.” For them, “politics” is obviously not adequately legitimated by the popular choice. Popular will is devalued to the pressure of the streets. To create the “level playing field” for globalization, politics according to the opinion of these economic captains should plan the conversion of the welfare state fortress. Some speak euphemistically of “reorganization” when they really want dismantling. No objections to reorganization can be raised from a constitutional perspective. The welfare state and basic rights change with the times. Constitutional obstacles oppose an absolutizing of competition. Dismantling these obstacles would be disastrous.
In Europe, a changed constitution was blocked in France and Holland. The opportunity for rebalancing the relation of basic rights and market freedoms is favorable. In the earlier draft, the market freedoms, the freedom of goods traffic – the freedom of settlement-, service- and capital traffic and employees’ freedom of movement – would have become immediate constitutional rights in all member states. Whether this should also be true for the right of association, other basic social rights and welfare state securities is very dubious.
The basic rights valid in the member states stand under the reserve of European constitutional norms that should be in force. If a new constitution should be passed, the right of association and the welfare state principle must be acknowledged with immediate authority in all member states. These could be bulwarks opposing the absolutizing of competition. The competition idea internalized by people and pressing to absolutizing the competition model has to be reconsidered. The solidarity elements should be further developed. More resistance should counter the absolutizing of competition.