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Home , Economic Council Germany, Price system, Social market economy, Walter Eucken

SUCCESS FACTORS OF THE SOCIAL Dr Daniel Nientiedt

ANALYSIS Imprint

Publisher Friedrich Naumann Foundation for Freedom Karl-Marx-Straße 2 14482 Potsdam

/freiheit.org /FriedrichNaumannStiftungFreiheit /FNFreiheit

Author Dr Daniel Nientiedt, New York University and Institute

Editors Justus Lenz, Ruben Dieckhoff, Julia Ebenauer Liberal Institute/International Department Friedrich Naumann Foundation for Freedom

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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 (CC BY-NC-ND 4.0) Contents

1. FUNDAMENTAL PRINCIPLES OF THE SOCIAL 4 1.1 The ’s approach to economic policy 4 1.2 What is social about the ? 6

2. DEVELOPMENT OF THE SOCIAL MARKET ECONOMY IN GERMANY 7 2.1 Early years of the Federal Republic and the ”“ 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 system, which ensures optimal supply of . Secondly, this way restrictions of citi- The social market economy has been the 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 as put stems not least from the historical experience of national by the Freiburg School, which must be read as a res- . 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. and mass . 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 . 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 . Both emerged sätze der Wirtschaftspolitik (1952/2004; ”Principles of Eco- as clearly distinctive from the laissez faire 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 . 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 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 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 (e.g. Douglass North) and of constitutional economics (e.g. James M. 2. Primacy of . Changes vis-à-vis the value Buchanan). of a currency — i.e. inflation or deflation — pose a threat to the informative function of . 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 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 . 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 , 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 act, guiding principles bill passed

US Marshall plan for the reconstruction Currency reform: appointed of Western Europe announced Deutschmark Minister of Economic Affairs introduced

Special Unit on 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 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 , 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 , a minimum wage should be set. 6 Success Factors of the Social Market Economy

Applying constitutive and regulatory principles, attention instance, can come under threat from a lack of political free- must be paid to the fact that the rules of the game of the dom (ibid, p 332–334). The rule of law, division of power and economic entity and other societal factors are interdepen- a network of democratic institutions, on the other hand, sup- dent. within the competitive order, for port the functioning of the competitive order.

Recommended Literature

j Dold, M., Krieger, T. 2020. j Goldschmidt, N., Wohlgemuth, j Vanberg, V. J. 2004. The Freiburg Ordoliberalism and European Eco- M. 2008. Social Market Economy: School: Walter Eucken and Ordo- nomic Policy: Between Realpolitik Origins, Meanings and Inter- liberalism, Freiburg Discussion and Economic Utopia, Abingdon, pretations, Constitutional Political Papers on Constitutional Routledge. Economy 19 (3), p 261–276. Economics 04/11, Freiburg.

1.2 What is social about the social market mented in a marktkonform (”market-conforming“) way, i.e. in economy? line with market order. This market conformity in particular suggests that the price mechanism remains intact: ”As op- The principles indicated above constitute the prerequisites posed to intervention that touches on pricing per for a functioning market economy encompassing fair com- se, it appears to be more appropriate to effect direct income petition and economic dynamism. Such an economic sys- equalization between higher and lower incomes by means of tem creates material prosperity and this way fulfils a vital immediate diversion of income“ (Müller-Armack 1946/1976, social function. The social market economy presents the p 132; own translation). best possible solution to the issue of scarcity of goods and as such deserves to be termed social. The market provides Which social policy measures are to be taken is not explored people – in line with their preferences – with products and in greater detail by Müller-Armack. He does however hint at services, the prices of which tend to decrease owing to com- the fact that this is a matter for politics to clarify, with answers petition. Social policy follows this as a secondary factor. potentially differing across different contexts. After all, Müller- Armack believes the dominant sense of justice in a society as The social policy element of the social market economy well as the citizens’ desire for social security to be the decisive was further narrowed down by Alfred Müller-Armack (1901- factors in the fleshing out of social policy elements of the so- 1978). Müller-Armack had joined the Policy Department of cial market economy (Müller-Armack 1978, p 327). the German Federal Ministry of Economic Affairs in 1952, where he was one of the people tasked with the political Müller-Armack’s conceptualizations made a crucial contri- implementation of Freiburg School thought. He coined the bution towards political acceptability of the market economy term social market economy, defining it as follows:”The pur- system in Germany. In the post-war years, the introduction of pose of the social market economy is to connect the principle the market economy was hardly uncontroversial; other com- of freedom on the market with that of social equity“ (Müller- munity or socialist approaches had been under considera- Armack 1956/1976, p 243; own translation). This tallies with tion. Yet, as early as in the mid-1950s, Müller-Armack noted: the contemporary reading of the concept. Chancellor Angela ”The fundamental assumption of the social market economy Merkel, for instance, characterized the social market econo- – that we should be able to garner trust in the social power my as an economic and social order which ”connects econo- of the market economy among broad groups in society – has mic prowess and social equity“ (Merkel 2014; own translation). already shown to be the case.“ (Müller-Armack 1956/1976, p 248; own translation). In this sense, the concept of the social How is this social equity to be achieved? Not unlike Eucken, market economy can be understood as a ‘formula for politi- Müller-Armack argued that great store should be placed cal integration’ (Zweynert 2008). To sceptics of the market on safeguarding competition. Social policy measures thus economy it points out that economic dynamism and social should not interfere directly with market activity, but be imple- equity are not mutually exclusive.²

2 This particularly is the case since increased economic output will defuse conflicts over distribution and create greater financial leeway for social policy. 7

2. Development of the social market economy in Germany

2.1 Early years of the Federal Republic ensured that the supply of goods was coordinated via the and the ”Wirtschaftswunder“ price mechanism.

Besides Müller-Armack, Ludwig Erhard (1897–1977) in parti- These events marked the beginning of the long phase of eco- cular put Freiburg School economic policy suggestions into nomic upturn in , sometimes referred to as practice. Since 1948, Erhard had been Director for Econo- the Wirtschaftswunder, or economic miracle. Between 1948 mic Affairs in the British and US sectors, from 1949 to 1963 and 1960, real GDP grew by 9.3 percent on average annu- he was Minister of Economic Affairs and from 1963 to 1966 ally(Spoerer and Streb 2013, p 219). Unemployment shrunk Chancellor of the Federal Republic of Germany. It was him from 11 percent in 1950 to 1.3 percent in 1960, tantamount who had brought about the swift and decisive introduction to full (Bundesagentur für Arbeit 2020). On the of market economy principles in post-war Germany. He devi- global stage, the Federal Republic was increasingly inte- sed his very own tagline to summarize his aspirations: ”Pro- grated into Western alliances and trading structures, which sperity for all” (Erhard 1957). saw exports sky-rocket. The Wirtschaftswunder not least was an Exportwunder, an exporting miracle (Spoerer and Streb The strategic course-setting of summer 1948 is seen as the 2013, p 249). birth of the social market economy. In parallel to the Allies in- troducing the Deutschmark on 21 June 1948, Erhard passed Erhard himself steered clear from Wirtschaftswunder ter- the price liberalization act (”Leitsätzegesetz“, Guiding Prin- minology. Germany’s economic success to him was “merely ciples bill), which had been drafted by Leonhard Miksch, a the result of honest efforts by a whole people, which has student of Eucken’s. Within the shortest of times, shop win- been given – following liberal principles – the opportunity to dows were full with commodities that had previously been again apply human initiative, human energy” (Erhard 1957, hoarded or traded on the . Erhard’s reforms p 157; own translation).

Figure 2 | Development of purchasing power Innovation and higher productivity allow a good standard of living doing less work.

Average working hours which have to be worked to purchase consumer goods in West Germany.

SUGAR BUTTER

250 g 1 kg 0,5 l

PAST (1960) 347 HOURS 221 HOURS 154 HOURS 39 MINUTES 30 MINUTES 15 MINUTES

NOW (2017) 21 HOURS 21 HOURS 17 HOURS 6 MINUTES 3 MINUTES 3 MINUTES

One milestone in the development of the social market eco- in the assumption that agreements between nomy was the 1957 passing of the Act against Restraints of that limit competition would always be at the expense of Competition (”GWB“). In 1949, Böhm had been involved in a consumers. A second important provision was the ban on first draft. The key demand put forward by the ordoliberals – the abuse of a monopolistic position. Both elements were a ban on cartels – had largely been implemented, against later introduced into the competition law of the European German industry opposition. The ban on cartels was grounded Union via the Treaty of Rome (Gerber 1994). 8 Success Factors of the Social Market Economy

2.2 Developments since 1966 to date (Michaelis et al. 2015). Since there might be conflicting goals, it is referred to as a magic square. It contains 1) sta- The members of the Freiburg School chiefly aimed to design ble price levels, 2) high levels of employment, 3) balanced a solid framework for the market economy. In times of econo- foreign trade – a balanced current account – as well as 4) mic crisis in particular, however, there was additional need for consistent, adequate . macroeconomic stabilization measures. This task was emp- hasized by Karl Schiller (1911–1994) who served as Minster While in the early years of the Federal Republic market eco- of Economic Affairs from 1966 to 1972. During his time in nomy reforms were in the focus, the element of social equi- office, the 1967 Act to Promote Stability and Growth was ty only gained traction over time. In 1957 the government passed, which anchored stabilization policy measures as an decided to raise outputs within the system. In the instrument of German economic policy-making. following, Germany saw an extensive expansion of the wel- fare state. The share of government social expenditure was The macroeconomic targets of economic policies at State at 18.3 percent of GDP in 1960 and increased to 27.6 percent and Federal level, as defined in the Act Promoting Stability of GDP in 1995. Today, the share of social expenditure has and Growth, continue to be seen as authoritative to date plateaued at just below 30 percent of GDP (BMAS 2019, p 8).

Figure 3 | Development of the social benefit ratio Share of government social expenditure in gross domestic product (social benefit ratio) in percent. From 1991 onwards including new countries.

29,9 30 28,8 28,9 29,2 27,6 26,3 25,7 25,2 25 24,1

20,2 19,4 20 18,3

15

10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: Bundesministerium für Arbeit und Soziales

At the time of German reunification in 1990, the social mar- able time and again over the past 70 years. Even acid tests ket economy was first enshrined in the law as the economic such as high levels of unemployment in the early 2000s system of the Federal Republic of Germany (in the treaty es- were overcome through clever order policy frameworks and tablishing a monetary, economic and social union with for- social partners cooperating in .3 The economic up- mer East Germany). The 1949 Constitution does not include turn that was to follow turned Germany into Europe’s growth such a stipulation, albeit that basic rights such as private engine in the 2010s. , freedom of contract and free choice of profession do suggest a free-market system. In the Treaty of Lisbon Today, the social market economy is at an important cross- concluded in 2007, the , too, subscribes to roads, having to respond to global uncertainties, structural ”a highly competitive social market economy, aiming at full change triggered by digitalization as well as deteriorating employment and social progress“ (Art. II-3). demographic conditions (see chapter 4 below). For these reforms to be successful, political decision-makers should The concept of the social market economy enjoys recogni- refocus on the strong suit of the social market economy: tion beyond party lines (Fuerst 2018). There are detractors, providing a reliable framework of rules for the unimpeded deeming the salience of social policy measures too high or economic and personal development of each and every one too low; yet the German economic system has proven reli- in society.

3 At the beginning of the 21st century, growth stagnated in Germany. Simultaneously, unemployment increased, peaking in 2005 at 11.7% (Bundesagentur für Arbeit [Federal Employment Agency] 2020). The Federal Government responded to the situation with large-scale structural reforms, which also improved the flexibility of the labour market. Moderate approaches to wages by parties to collective wage agreements further helped improve Germany’s competitiveness long-term (Sachverständigenrat 2013, p 248–301). 9

3. Characteristics and success factors of the social market economy

3.1 Characteristics of the social market When the social market economy was introduced in Germany, economy the very institutions required for a functioning market econo- my were established. They can be read as a direct realization The social market economy in Germany emerged and deve- of Eucken’s constitutive and regulatory principles: an anti- loped as a result of specific historical circumstances, which trust authority preventing excessive market power; a central without doubt cannot simply be replicated. In the following, bank committed to price stability; a legal system protecting this paper will identify the main characteristics of this eco- private ownership and ensuring compliance with complex nomic system. contracts. Prerequisites for a functioning market economy furthermore expand to include the political realm. Only liberal Mark Spoerer and Jochen Streb (2013) indicate three approa- can ensure that rights of the individual can be ches as to how the concept of the social market economy can protected in perpetuity. be delineated in abstract terms. First, as a ”type of economic order […] which by means of appropriate order policy instituti- A well-performing market economy has social policy implica- ons ensures the functioning of market forces“ (ibid, p 265; own tions. This is true two-fold. First, the market economy fulfils translation). Second as a market-based system in which so- an important social function by enabling people to earn their cietally undesired results are corrected through social policy livelihoods themselves. Erhard in particular highlighted this intervention. Third, an economic model linking market econo- aspect. In addition, incomes generated on the market form my, social policy and . the foundation for later redistribution.

All three of these approaches each describe one central aspect Social policy. In the social market economy, the market-ba- of the social market economy as we would observe it in reality. sed system is complemented with social policy measures. This includes social insurance schemes (pension, health and Free market economy. To an extent greater than any other unemployment insurance) as well as promotion and care sys- economic system, the free market economy is able to ensure tems (such as training grants and basic social security). the supply of goods to people. This is because only in a free market economy can knowledge and skills of all people be put The central aim of social policy is to be in solidarity with the to use. Coordination via the price system further ensures an weakest in society. The founding fathers of the social market efficient utilization of the means of production and dynamic economy demanded the principle of be applied in adjustment of production over time (Hayek 1945). social policy making, a concept that has its origins in Chris- tian social ethics. Subsidiarity suggests that personal initia- A central argument of the Freiburg School is that free market tive takes priority over state care. The community is to act in will not create themselves out of their own accord solidarity wherever individuals are unable to help themselves but that their existence is bound to institutional conditions. (Eucken 1952/2004, p 319, 348). The crucial importance of institutions – the rules of the game of the market – for the of an econo- Another objective of social policy is to ensure equal oppor- mic entity has proven true countless times. It can be shown tunities. People will only accept a liberal market economy if internationally that income disparities between different anyone can rise within the system. Anyone must be able to countries can be traced back chiefly to different institutions. develop their skills and dispositions and to improve their lot in Alternative factors such as geographical location or culture life through efforts invested (Rüstow 1949, 146–152). play hardly any role.4 In practice, equal opportunities are achieved by means of A free market economy as envisaged by ordoliberalism requi- government investment in education, especially at the early res a state that guarantees the functioning of markets. To this childhood and school stages. end, the state has to enforce competition in particular – inclu- ding against that would rather not face competi- Successful social policy is characterized by it not hampering tion. In this, the actions of the state use consumer interests market processes but being implemented in line with the mar- as guidance, not the interests of businesses. Generally, the ket (marktkonform in Müller-Armack’s taxonomy) or jointly state should refrain from creating economic advantages for with the market (Goldschmidt 2004). In this context it must be individuals or groups. Its task rather is to provide a stable fra- pointed out that social policy must not be abused to protect mework for entrepreneurial activity. individual societal groups – such as entrepreneurs of a spe- cific sector – from the hardness of competition. Social policy should be geared towards helping individuals and not groups.

4 One of the most central questions addressed by development economics is why per capita incomes across different countries differ as much as they do. Daron Acemoglu, Simon Johnson and James A. Robinson (2001; 2005) have argued that these discrepancies are the result of different institutions. More specifically, they have shown that institutions protecting ownership rights lead to markedly higher economic growth as they provide an incentive for entrepreneurial activity. 10 Success Factors of the Social Market Economy

Corporatism. Finally, the social market economy can be de- Mittelstand or family businesses have witnessed excellent scribed as an economic model that brings together free-mar- development in recent years. In surveys carried out between ket economy, social policy and corporatism. Corporatism — 2017 and 2019, Mittelstand companies report average re- now more commonly known as social partnerships — means venue growth at around 10 percent per annum (Oskar-Pat- the incorporation of a range of different economic groups in zelt-Stiftung 2019). Businesses offset global competition political decision-making processes. This aims to achieve a by creating efficiency and cost advantages: 70 percent of balancing of opposing interests. SMEs claim they were able to keep pace with non-German competitors owing to competitive prices (Astor et al. 2016, p In international comparisons the German economic system 62–63). This suggests that the Mittelstand is successful not is described as a ”coordinated market economy“ owing to its in spite but rather because of competitive pressure. corporatist elements.5 Peter Hall and David Soskice (2001) posit this is a free-market economy in which businesses co- The literature identifies four factors that contribute to the operate more closely with each other as well as with the state. Mittelstand’s high performance and economic success: Coordinated market economies are distinct from ‘liberal’ mar- responsible management, investment in training, ket economies which are shaped by competitive relations to specialization, and innovation. a greater extent. Responsible company management. Monitoring and lia- The classification of any market system ultimately is determi- bility working hand in glove is constitutive for the Mittel- ned by the behaviour of businesses. Hall and Soskice inves- stand. Those who – as managing directors – are tasked tigate the relationships between businesses in an economy with operational decision-making for the company also bear vis-à-vis its employees, partners, competitors as well as the the financial consequences of these decisions since they state. Instances of behaviour in Germany would are (co-)owners. This reflects Eucken’s principle of liability, be employee representatives on supervisory boards, coordi- expressly referring to corporate liability: ”Those who nated wages through industry-wide collective wage agree- must equally bear the damage“ (Eucken 1952/2004, p 279, ments or cooperation of businesses and the state within own translation). dual vocational training which combines part-time vocational schooling with practical work experience (ibid, p 21–27). A company being managed by its owner implies that their actions will in their entirety be focused on making the com- pany a success. Principal-agent problems we commonly 3.2 Social market economy in practice: see in the relationship between executive management and the Mittelstand owners as well as the associated costs can be avoided this way (Jensen and Meckling 1976). This renders owner-ma- The principles of the social market economy not merely naged businesses more efficient. Beyond this, an owner-ma- guide German economic policy, they rather form the foun- nager’s behaviour will be shaped by long-term perspectives. dation of success of German businesses. This in particular This distinguishes them from employed management which applies to German Mittelstand businesses, which are com- would rather focus on the short-term success of the busi- monly considered as the ‘backbone’ of the German econo- ness (Nyberg et al. 2010). my (Berlemann et al. 2018, p 22). Investment in training. Mittelstand companies are parti- Mittelstand as a term has a twofold meaning. First, it is com- cularly invested in the German vocational training system monly held to be synonymous with smaller and medium-si- (BMWi 2019).6 Businesses behaving this way can be unders- zed enterprises (SMEs). In Germany, SMEs are defined as tood as an investment in future qualified staff. By participa- businesses of fewer than 500 staff and an annual turnover ting in the training system businesses avoid transactional of up to €50m. Applying these quantitative criteria, more costs otherwise typical for the labour market. For instan- than 99% of registered businesses are SMEs or Mittelstand ce, businesses can observe the individual character traits businesses (ibid, p 25–26). These businesses account for of trainees prior to offering them an employment contract more than 50% of the gross value added and nearly 60% of (Acemoglu and Pischke 1999).7 jobs (BMWi 2019, p 3). Specialisation. Germany is the world’s third largest exporting In a narrower sense, however, Mittelstand refers to a quali- and importing nation and displays a high level of openness tative business feature, i.e. a business being led by its ow- (measured against the total of imports and exports in relation ner. Taking this benchmark, approximately 70% of German to GDP) compared to the rest of the world. Eucken’s principle businesses would be Mittelstand businesses (Berlemann et of open markets has paid off for Germany for decades. al. 2018, p 26). In the following, this paper will solely use the latter definition, i.e. owner-led businesses. In that sense, it Focus on foreign trade equally is a distinguishing feature of practically perfectly overlaps with the term family business the Mittelstand. Many Mittelstand companies pursue a certain (Jahn 2018, p 3). strategy to remain competitive internationally despite high

5 Further instances of coordinated market economies are Japan, Switzerland, the Netherlands, Belgium, Sweden, Norway, Denmark, Finland and (Hall and Soskice 2001, p 19–21). 6 One cannot simply translate the dual system onto other countries, as it requires a range of complementary institutions (Eichhorst et al. 2015, p 323–324). 7 This is further evidenced by the fact that employees in family businesses stay with the company for an average of 13.7 years, which is markedly higher than the German company average of 10.8 years (Die Familienunternehmer 2014). 11

costs in their place of production. They specialize in produ- Likewise, the share of German SMEs introducing product or cing one single product type which can help achieve a high process innovations — i.e. the innovator rate – is very high global market share for this product. Often, these would be compared to other European nations (Astor et al. 2016, p 20). niche products. Due to their inconspicuous nature, this type of business is often referred to as unknown global market lea- Innovative activity sustains the strategy of specialization ders or ‘hidden champions’ (Simon 2009, p 59–88). outlined above since it solidifies the market position of a company (Simon 2009, p 159–190). Yet, there are signs Innovation. Finally, Mittelstand businesses are set apart by that the Mittelstand is becoming less ready to innovate. For their particularly innovative nature. For Germany, evidence example, the innovator rate has been taking a downward shows that the number of Mittelstand companies in a given trend since the early 2000s. Expenditure for innovation is region correlates positively with the number of new now increasingly shouldered by large enterprises (Astor et registered (Berlemann and Jahn 2016). In this, the number al. 2016, p. 14). of applications is seen is a yardstick for innovation.

4. Outlook: Ordnungspolitik as a perennial task

The social market economy is a model for success. Over They do not prescribe a rigid system of rules but rather outli- the past 72 years, its principles have shown to be a reliable ne general principles crucial for the smooth functioning of a guide for German economic policy. It has made Germany the market economy. country it is today, merging economic dynamism and social participation. The first step on the road to reform is political agreement vis- à-vis the aims of the social market economy: individual free- Pivotal for this is that the social market economy enables peo- dom under the law, material prosperity and life in dignity for ple to pursue their own individual goals within a stable legal all. These aims surely are appreciated around the world. The framework. Its success is grounded in the freedom, personal principles of a social market economy can provide valuable initiative and creativity of all citizens. The productivity of the assistance in implementing these aims. free market economy creates the financial leeway required for social policy in solidarity with the less well-off. The institutions of the social market economy are not static, they rather need to be adaptable to changeable conditions. In The central principle of the social market economy is com- further development, particular care must be taken to ensure petition. Its founding fathers were convinced that economic that future economic policy issues are chiefly solved through positions of power are harmful and – if required – must be the means of Ordnungspolitik, i.e. the setting of rules. Cruci- forestalled by means of . Businesses should vie for al challenges Germany is facing include the development of people’s custom in fair competition. Social policy should not global trade and , structural change brought ab- impede market competition. out by digitalization, demographic change as well as environ- mental destruction. Solving some of these issues will require The social market economy proves that market forces can European or even international engagement. be given the necessary space they need while simultaneous- ly preventing the excesses of laissez faire . This Globalisation. The free global trading system created over way, they provide valuable input for economic policy deci- the past decades has come under political pressure. Politi- sions not solely for Germany but for the world: ”To achieve cians demanding strategic trade diplomacy and the closing- inclusive economic growth – i.e. prosperity for all in Ludwig off of national markets find ever greater approval – in Europe, Erhard’s words – under the given conditions will remain one too. Germany is a prime example of how the global division of of the core economic policy challenges not just in Germany labour creates prosperity. Hence, Germany should advocate but in the world“ (Fuest 2018, p. 44; own translation). further development of the principles of open markets within the multilateral, rule-based system of the WTO. Transferring institutions into other cultural contexts is all but an easy feat. Generally, attention must be paid to how new Digitalisation. Technological change has affected a range institutions interact with existing formal and informal socie- of sectors. Business models of platform enterprises such as tal rules (Goldschmidt and Zweynert 2006). Nonetheless, the Amazon or Facebook require adjusting competition law. La- social market economy is a model to be emulated. Transfer bour law needs to be more flexible, for instance with regard is possible not least as its underlying principles are relatively to working hours.8 For innovative business models to arise in broad and leave ample space for individual configuration. Germany, too, financing for start-ups needs to be improved.

8 For instance, the German Working Hours Act stipulates uninterrupted rest of no less than 11 hours after a day’s work (para 5 sect 1). This clashes with flexible working hours when working from home. 12 Success Factors of the Social Market Economy

Furthermore, to successfully leverage digitalization Germany . Progressive environmental needs to further invest in education and continuing professio- destruction stems from the fact that no adequate price is nal development. levied on the use of natural resources. In line with Eucken’s principle of economic calculation, use of environmental Demographic change. Not unlike in other developed eco- goods should be part and parcel of the economic calcula- nomies, Germany’s population, too, is aging. This leads to a tions of businesses and private individuals. This has been decreasing employable population and a shortage of skilled achieved to a certain extent through emissions trading with- staff, which further dampens growth prospects. Difficulties in the European Union. To ascertain sustainable climate po- also arise from social policy: Within the pension system, un- licy, Germany should call for such and similar international due burden is placed on younger generations. A rules-based agreements to protect the environment (Weimann 2020). solution would be to peg the statutory retirement age to the Market interference to the benefit of certain technologies development of life expectancy. Additionally, immigration of are however to be avoided. skilled staff must be facilitated.

13

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Author

Dr Daniel Nientiedt is a Postdoctoral Research Fellow in the Department of Eco- nomics at New York University. During his dissertation at the University of Freiburg, he was a research associate at the chair of Professor Lars P. Feld, research associate at the Walter Eucken Institute and Research Fellow at the Center for the History of Political Economy at Duke University. His research interests include Public choice, Constitutional eco- nomics and the history of economic thought.