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SUCCESS FACTORS of the SOCIAL MARKET ECONOMY Dr Daniel Nientiedt

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SUCCESS FACTORS of the SOCIAL MARKET ECONOMY Dr Daniel Nientiedt SUCCESS FACTORS OF THE SOCIAL MARKET ECONOMY Dr Daniel Nientiedt ANALYSIS Imprint Publisher Friedrich Naumann Foundation for Freedom Karl-Marx-Straße 2 14482 Potsdam Germany /freiheit.org /FriedrichNaumannStiftungFreiheit /FNFreiheit Author Dr Daniel Nientiedt, New York University and Walter Eucken Institute Editors Justus Lenz, Ruben Dieckhoff, Julia Ebenauer Liberal Institute/International Department Friedrich Naumann Foundation for Freedom Contact Phone: +49 (0)30 2201 2634 Fax: +49 (0)30 6908 8102 Email: [email protected] As of October 2020 Notes on using this publication This publication is an information service of the Friedrich Naumann Foundation for Freedom. The publication is available free of charge and not for sale. It may not be used by parties or election workers during the purpose of election campaigning (Bundestags-, regional and local elections and elections to the European Parliament). Licence Creative Commons (CC BY-NC-ND 4.0) Contents 1. FUNDAMENTAL PRINCIPLES OF THE SOCIAL MARKET ECONOMY 4 1.1 The Freiburg School’s approach to economic policy 4 1.2 What is social about the social market economy? 6 2. DEVELOPMENT OF THE SOCIAL MARKET ECONOMY IN GERMANY 7 2.1 Early years of the Federal Republic and the ”Wirtschaftswunder“ 7 2.2 Developments since 1966 to date 8 3. CHARACTERISTICS AND SUCCESS FACTORS OF THE SOCIAL MARKET ECONOMY 9 3.1 Characteristics of the social market economy 9 3.2 Social market economy in practice: the ”Mittelstand“ 10 4. OUTLOOK: ”ORDNUNGSPOLITIK“ AS A PERENNIAL TASK 11 BIBLIOGRAPHY 13 4 Success Factors of the Social Market Economy 1. Fundamental principles of the social market economy 1.1 The Freiburg School’s approach to behaviour of market participants continues to be coordina- economic policy ted via the price system, which ensures optimal supply of goods and services. Secondly, this way restrictions of citi- The social market economy has been the economic system zens’ freedom are kept to a minimum. Within the framework of the Federal Republic of Germany since it was first introdu- of rules, everyone is free to pursue their own goals. ced after the end of WWII. The approach to economic policy in which it is grounded, however, was developed as early as Eucken’s particular emphasis on liberty throughout his work in the 1930s and 40s. This approach is ordoliberalism as put stems not least from the historical experience of national forward by the Freiburg School, which must be read as a res- socialism. A protestant and liberal, Eucken had refused na- ponse to economic and social struggles experienced during tional socialist ideology from the very beginning. Jointly with the interwar period, e.g. inflation and mass unemployment. the lawyer Franz Böhm (1895–1977) and others he was an active member of the Freiburg Circles, an opposition group, The Freiburg School was a research and education commu- and put forward ideas for a liberal and market-oriented post- nity comprising economists and legal experts at Albert Lud- war order (Rieter and Schmolz 1993). wig University of Freiburg. Its most prominent representative was Walter Eucken (1891–1950), an economist. Ordolibera- Eucken’s main text — published posthumously — Grund- lism is the German variation of neoliberalism. Both emerged sätze der Wirtschaftspolitik (1952/2004; ”Principles of Eco- as clearly distinctive from the laissez faire liberalism of the nomic Policy“) contains hands-on examples as to how the 19th century.¹ Eucken and his colleagues, too, upheld perso- state can ensure both the material prosperity and freedom nal liberty as of the greatest political value. Yet they believed of its citizens by means of ordoliberal policy. Eucken refers that a functional market economy would require the state to to what he considers an ideal economic constitution as play an active role. the competitive order (”Wettbewerbsordnung“). He defines it along seven constitutive and four regulating principles, Economic constitution (”Wirtschaftsverfassung“) is at the which shall be outlined in detail below. First and foremost, heart of the Freiburg School’s theoretical approach. Econo- the seven constitutive principles form the foundation of the mic constitution refers to the totality of all (legal) rules and functionality of a free market economy (ibid, p 254–291). institutions governing economic life (Eucken 1940/1989). Eucken also uses the metaphor of ”rules of the game“ of the 1. Basic principle. The basic principle is the creation of a market. While economists generally explore the question functioning price system in a competitive environment. The how people act within a framework of set rules, the Freiburg price system transmits information on the relative scarcity School rather asks what effect different rules might have on of goods and serves as a foundation for economic decisi- the actions of the people involved. The economic salience ons. The economic process is governed in a decentralized of institutions has more recently also been investigated by manner by the individual consumers. proponents of new institutional economics (e.g. Douglass North) and of constitutional economics (e.g. James M. 2. Primacy of monetary policy. Changes vis-à-vis the value Buchanan). of a currency — i.e. inflation or deflation — pose a threat to the informative function of prices. A stable currency hence In economic policy-making, the Freiburg School distinguis- is a prerequisite for reliable price signals, functioning credit hes two different forms of governmental intervention. First, markets and long-term savings schemes. the state may influence market results by setting rules. This is referred to as ordoliberal policy (”Ordnungspolitik“). Further- 3. Open markets. Provisions and regulations that hamper more, the state may directly intervene in market develop- market access for competitors should be eliminated. This ments. This is referred to as interventionist policy (”Prozess- applies both domestically (e.g. concessions) and internatio- politik“). One central assertion of the Freiburg School is that nally (e.g. customs duties). ordoliberal policies should in principle be given precedence over interventionist policies. 4. Private ownership. Private ownership ensures any indivi- dual’s freedom of action. In a competitive environment, pri- Ordoliberal policy interventions entail two central advan- vate means of production are leveraged so that all members tages. First, it maintains the functionality of the market. The of society benefit from it. 1 The historical definition of the term neoliberalism does not tally with its contemporary usage as a buzzword denoting market fundamentalism. 5 5. Freedom of contract. Everyone is free to enter into any 7. Consistent economic policy. People’s economic plans contract and choose their profession within the scope of le- are based on expectations vis-à-vis the future. Economic gal provisions. However, this freedom of contract must not policy should provide a reliable framework for long-term in- be abused to conclude contracts that hamper competition, vestment projects to be implemented. such as cartel agreements. Eucken had been aware that markets governed by competi- 6. Liability. Everyone is to accept liability for their own eco- tion could fail. Hence, the constitutive principles of the com- nomic actions. Losses must not be shifted onto the general petitive order are complemented by four regulatory princip- public. Only then can the reward/punishment effect of the les to offset disruption (ibid, p 291–304). market play out as intended. Figure 1 | Social Market Economy Timeline Price liberalization act, guiding principles bill passed US Marshall plan for the reconstruction Currency reform: Ludwig Erhard appointed of Western Europe announced Deutschmark Minister of Economic Affairs introduced Special Unit on Money and Federal Republic Treaty of Rome establishing the Credit under the chairmanship of Germany European Economic Community of Ludwig Erhard established founded 05 23 01 02 18 21 23 24 20 25 03 01 June July March March June June May June Sept March July Aug 1947 1947 1948 1948 1948 1948 1949 1949 1949 1957 1957 1957 Bank of German First draft of an German States founded anti-cartel law Central Bank by the Allied powers (“Josten draft”) (“Bundesbank”) established Ludwig Erhard becomes director Act against Restraints of the Economic Council of of Competition (“GWB”) the Combined Economic Area passed 1. Control of monopoly power. Anti-trust authorities are to 3. Economic calculation. Negative impacts of economic acti- prevent the emergence of harmful economic positions of vity on third parties – such as environmental pollution – are power, notably cartels and monopolies. In the event that a to be included in any business calculation and be reduced this monopoly cannot be dissolved, its behaviour must be regu- way. Typically, this would be achieved by means of a steering lated. tax (”Pigouvian tax“). 2. Income policy. Income is to be redistributed to a certain ex- 4. Unnormal behaviour of supply. If the labour market does tent in order to satisfy the needs of the poorest in society. This not follow the laws of supply and demand, the state may inter- principle implies the establishing of a basic security system vene as a corrective. Should decreasing wages lead to an in- at the level of the respective society’s minimum subsistence. crease in labour supply, a minimum wage should be set. 6 Success Factors of the Social Market Economy Applying constitutive and regulatory principles, attention instance, can come
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