The German Social Market Economy and its transformations
by Michael Rösch
The German Social Market Economy
is one of the most famous political and economic strategies of
this century. This essay wants to show what has been changed or
transformed in its history and how adaptable it is. This essay
will focus in the beginning on the historical situation before
the theoretical concept, as it was introduced mainly by Andreas
Müller-Armack, will be explained. This is followed by a short
description of the most important transformations through the
years, in theory as well as in practical political actions. The
last part tries to present an outlook on what could happen in the
future.
The historical situation
To understand the Social Market Economy it is important to take into account the historical situation of its genesis. Therefore, this paragraph will give a short overview on the situation at the end of World War II. In a state of total destruction and political and societal confusion and distortion, the main task was to assure the basic living conditions of the population and to build up a new state and a new economy. The discussions on what the "New Germany" should be like concerned almost every political sector. Both the economy and the social policy were two points of great importance, especially when regarding the background of the Cold War and in comparison with the eastern part of Germany. The debate in this sector mainly represented two counterparts. The one side was the socialistic or the communist and the other side was the liberal or capitalistic one. Since it was not possible to take a decision between these alternatives in the "Parlamentarischer Rat" (the constitutional convent) the "Grundgesetz" (the German constitution) does not contain any article which prescribes a certain economic policy. As a compromise, the Social Market Economy was introduced and established by Ludwig Erhard. The Social Market Economy was the German contribution to the third way debate.
The theoretical basis
The theoretical conception of the Social Market Economy refers to the classical liberal thinking with a few changes. We can regard it as the German variety of neoliberalism. It is usually called ordoliberalism. It has been developed since the 1940s mainly by the school of Freiburg. The most important theorists were Walter Eucken and Andreas Müller-Armack, who invented the name Social Market Economy (vgl. Müller-Armack 1947).
Social Market Economy means a mixture between a classical liberal way of thinking and social, state managed elements. Therefore, not only the economic aspects but, freedom and social justice were the major aims of the Social Market Economy. To justify this, it is necessary to mention the theory of man on which this conception is based. It is characterized by the Christian idea of brotherly love and the self responsible individual. For Müller-Armack, responsibility needs freedom as a necessary condition to enable the individual to select responsible among different options. The moral concept of the Social Market Economy consists of three elemental principles:
The liberal rights of the individual and the economic freedom can be seen as frame conditions in which social justice and solidarity are implemented. The Social Market Economy aims to balance the market-principle and the social-principle. Hence it is an economic, social and political program.
The Social Market Economy gives up the typical liberal confidence in the market forces in contrast to the neoliberal believe. The ordoliberalists believed that it would be necessary to install social security mechanisms beside the market forces which are controlled by the state. Another aim of the Social Market Economy was to create and develop an economic order which could be accepted by any ideology so that all forces in society could be focused on the common task of assuring the basic living conditions and the rebuilding of the economy. That was one reason why the Social Market Economy was the compromise which could be found in the early years of the Federal Republic of Germany (FRG). Finally, one could summarize that the concept of Social Market Economy is based beyond supply and demand on a strong moral concept.
The changes in the Social Market Economy
As Andreas Müller-Armack stated in one of his early works, the Social Market Economy is more a shaping principle and, therefore, can be changed and adjusted to the political situation better than a fixed and inflexible theory. Therefore, many changes in its usage took place in the history of the FRG. The development can be divided in different phases.
The founding phase
It lasted from the beginning of the FRG until the middle of the 1960s. In this first period the "fathers" of the Social Market Economy, Ludwig Erhard (minister of trade and commerce then chancellor) and Andreas Müller-Armack (permanent secretary in the ministry of trade and commerce) held the most important positions in economic policy. Therefore, the theoretical concept could be carried through with little reductions and changes. In this first time, important sectors like agriculture, traffic and house building remained out of the market and the open competition (Andersen, Uwe/Woyke, Wichard 19952: 518). These years of founding offered the possibility and necessity to create and pass fundamental laws to organize state and economy. The model of the Social Market Economy could be built up then. The law about the German Bundesbank and the law against hindrances of competition were among these fundamental laws for example. In 1950 full employment was reached in the FRG and the Social Market Economy could refer to many great successes. The problems like the very unequal distribution of fortune especially the productive fortune lead to societal problems in the relations of trade unions and entrepreneurs. Additionally, the problem of imported inflation and the discussion about the widening of aims and tasks of the state, forced to rethink the existing measures and policies.
Since the beginning of the 1960s Müller-Armack demanded the initiation of a second phase in which a new society policy should complete the Social Market Economy. This meant increased expenditures in the health and formation sector but also in the ecological and traffic sector.
The "Globalsteuerung"
The first economic crisis in Germany led to the resignation of the chancellor Ludwig Erhard in 1966. This government was followed by the great coalition between the CDU and the SPD. This resulted in the attempt to create a sensible synthesis between the "Freiburger imperative of competition" (the liberal theory of the school of Freiburg) and the keynesianic message of steering demands effectively (Andersen, Uwe/Woyke, Wichard 19952: 520). These new ideas can be subsumed under the headword "Globalsteuerung" (overall steering). That means the economic and finance policy takes the macro-decisions while the market and the entrepreneurs can only take micro-decisions. The most important measures of the "Globalsteuerung" were fiscal-policy, the money-policy, the international economic-policy and the income-policy.
In the beginning the "Globalsteuerung" showed great success in overcoming the economic crisis. But it was not possible to stabilize the achieved economic upturn. Therefore, the Minister of Trade and Commerce at that time, Karl Schiller, had to resign. During the 1970s the international economic situation, for example the crises of the oil price in 1974 and 1979 additionally worsened the internal problems of the "Globalsteuerung" and led to an increased unemployment rate (up to over two million jobless people). The decrease of the GNP and increase of the inflation rate and the debts of the state were side effects of this development. Again, these problems initialized a discussion about a new change of the social and economic policy. This discussion contained three main parts: the retention of the "Globalsteuerung", their enlargement and the reduction of the steering claims.
The third phase from 1982 to the reunification
In 1982, the German government changed and a coalition between CDU and FDP came to power. In this time, the discussion on how the Social Market Economy could be changed contained mainly three parts: on the one hand the keynesianists claiming for a retention of the "Globalsteuerung" and the Social Market Economy, on the other side, the followers of Milton Friedman stating a failure of the state and demanded the reduction of the "Globalsteuerung" and the Social Market Economy together with an empowerment of the market forces (the economic mainstream at that time). And as a third position, a small group which thought it was a failure of the market and, therefore, favoured an extension of the state sector and more intervention into the economy.
The result of this discussion can be described as a combination between Keynes and Friedman. In the following years state owned enterprises like the German Post or the German Telekom have been privatized and social measures were reduced slightly.
The economic upturn of this time can be seen as a result of this policy but also because of a world-wide positive economic situation and the success of the European integration. This phase ended with the German reunification.
The time after the reunification
The German reunification marks a deep cut in any analysis of the German history and development. Looking at the social and economic policy is a little different. Not the reunification in 1990 is the important date but the economic and financial union a few months before.
This happened in a situation of economic growth and very low state debts. In the beginning, the situation was characterized by euphoria on the reunification in general and in the economic sector on the new markets in eastern Germany and Europe. The enormous social costs of the reunification and a world-wide economic crisis in the following years led to great problems for the Social Market Economy. As the social structure had changed completely within an extremely short time and the weaknesses of the eastern German economy showed that the systems of social security had to deal with previously unknown problems and a huge amount of people who had no work or needed the support of the state for other reasons. Therefore, the Social Market Economy has to face nowadays the demands for a new change in its aims and measures. Politicians from almost any party bewail the high costs of the German Social Market Economy and demand a reduction of state activity.
The future of the Social Market Economy?
As the Social Market Economy showed during its first crisis in the middle of the 1960s it is able to change and rearrange itself. Similarly, it is possible to judge the situation in the 1980s. On the other hand the crisis and the problems connected with the reunification still last since a very long time and, the demands for principle changes either towards a liberal market economy like in the USA or to a new more socialistic form increased in the last years. Another great challenge is the necessity to integrate ecological aspects into a modern economic and social system. The headword of the Eco-Social Market Economy became more popular during the 1990s. The ongoing European integration and the assimilation of the other European social state models is one more point of great interest in the future.
Conclusion
The often raised question whether it could work as an example for other countries in the transition to democracy or rebuilding can hardly be answered because of the special historical situation in which the Social Market Economy had its biggest successes.
The Social Market Economy showed great adaptability in overcoming crises. The first crisis, as shown above increased the states intervention. The next crises led to a reduction of the state and the social elements. The demand of Müller-Armack to balance the market and the social elements has been shifted over the years to the market. An important point in this discussion is, if it would be possible to reduce the social elements and the state activities and still call it Social Market Economy or if this would be something completely different. But if the Social Market Economy can only be saved and changed by reducing the social elements and finally abolishing them and in that way changing the basic idea, it can not be a model for other countries and its future and further transformations must be regarded with scepticism. That means that the Social Market Economy obviously tends to reduce its social ambitions because they are too expensive. Regarding this way it is neither a successful strategy for economy nor for the social sector. I would like to discuss this in the newsgroup.
Literature:
- Andersen, Uwe (Hrsg.) 1996: Soziale Marktwirtschaft unter neuen Rahmenbedingungen
- Andersen/Bahro/Grosser/Lange1985: Der Staat in der Wirtschaft der Bundesrepublik
- Andersen, Uwe/Woyke, Wichard 19952: Handwörterbuch des politischen Systems der
Bundesrepublik Deutschland
- Grosser/Lange/Müller-Armack/Neuss 1990: Soziale
Marktwirtschaft: Geschichte-Konzept-
Leistung
- Müller-Armack, Andreas 1947: Wirtschaftslenkung und Marktwirtschaft
- Schlecht, Otto 1990: Grundlagen und Perspektiven der Sozialen Marktwitschaft