The German Social Market Economy

An Option for the Transforming and Developing Countries

Detlef Radke

• Publisher: Routledge
• Year: 2005
• eBook ISBN: 9781135778064
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This study presents the economic system of the Federal Republic of Germany, the Social Market Economy. Its aim is to describe the elements of this system that ensure its openness, dynamism, efficiency, stability and social balance. Taking Germany as an example, the study thus seeks to identify what is specifically German about its market economy system rather than to explain how a market economy system works.

1
Conceptual Foundations

After the end of the Second World War Germany faced the task, unique in its history, of creating a new economic order, an order which not only broke with the National Socialist war economy but also took account of the negative experience of the Weimar Republic and especially the disastrous effects of hyperinflation and the world economic crisis. This explains why conceptual ideas had a far greater influence on the economic system of the Federal Republic of Germany than on the economic systems of other countries.

The concept of the Social Market Economy has its roots in the ordoliberalism established by the Freiburg school.¹ Ordoliberalism is based on the realization that none of man’s various spheres of life exists in isolation: they are closely linked. It follows from this interdependence that subsystems must be shaped in accordance with uniform criteria. This “unity of style” is to be achieved on the normative foundations of political liberalism. The freedom of the individual must be preserved in all spheres of human existence against the background of natural economic scarcities and the conflicts inherent in any society.

The concept of the Social Market Economy can be seen as a comprehensive attempt to shape the economic sphere and thus of the social system in line with this unity of style. Neither a capitalist market economy nor a centrally administered economy is capable of this since both are unable to safeguard, or even explicitly proscribe, the civil rights and liberties of the individual. The Social Market Economy, on the other hand, is a synthesis of liberalism and socialism with which the relationship between competition and solidarity, between market economy and social balance is redefined. It can also be defined, therefore, as an order that seeks to combine the individual’s free enterprise with social progress on the basis of the competitive economy.

An efficient competitive order is the crucial element of the Social Market Economy. Establishing and preserving this order is one of the most important and comprehensive tasks to be performed by government economic policy. Performance-based competition is encouraged as the economic basis of social security and social progress and also accepted in principle as the regulator of income distribution. However, to contain the disparities that would occur in society if market forces were given a completely free rein, government is assigned the task of pursuing an active social policy. Those who are unable to participate in performance-based competition and do not therefore earn a market income are not only to be assured of survival but also to participate in economic progress.

Government economic policy is thus essentially Ordnungspolitik, i.e. a policy geared to the establishment and preservation of an order which gives the individual the greatest possible freedom and is economically efficient and socially just. Since the 1980s this Ordnungspolitik has been extended to include the protection of the natural environment. It is not for government, on the other hand, to pursue active structural, industrial and technology policies, especially if they restrict the independence of individual enterprises in their decision-making. Nor does the formulation of binding national technology or foreign trade objectives and strategies have a place in the concept of the Social Market Economy, even if they were to be the outcome of a dialogue between government and the business community.

Over the past 40 years the concept of the Social Market Economy has not been fully implemented. In a pluralist society, with its numerous particularist interests, it is evidently not possible to gain more than limited acceptance for a consistent economic policy geared to the overall system. Furthermore, the political parties have themselves en couraged developments that run counter to the Social Market Economy model. The individual’s freedom of action has been increasingly restricted, for example, by a constantly growing flood of laws and regulations, and government social policy has largely supplanted the individual’s responsibility for his own welfare.

Presenting the Social Market Economy as a concept of an economic order that has sound theoretical foundations is not therefore without its problems. For this reason the Social Market Economy will not be described in the following in terms of this concept. Instead, the study singles out those factors which can be assumed to have contributed to the success of the Social Market Economy, whether or not they form part of the concept.

2
The Social Market Economy as
Part of the General Order:
Political, Normative and
Historical Background

Stability of the internal and foreign policy
environments

Germany’s Social Market Economy is integrated into its political system, parliamentary democracy. The economic and political subsystems have been linked in the past forty years to good effect. The high level of internal acceptance of parliamentary democracy has helped the Social Market Economy to develop in an extremely stable political environment. Conversely, the economic successes of the Social Market Economy have enhanced the acceptance of the political system.

No less important a requirement for the development of the Social Market Economy was a stable foreign policy environment. With Germany’s historical balance of power policy abandoned in favour of unequivocal orientation towards the West, the post-war period saw the establishment of an external policy framework that was reflected in the Federal Republic’s commitment to the European Community and NATO. From this framework its political and economic system has received a significant, fortifying impetus.

For Germany the positive links between the internal and foreign policy environments on the one hand and economic development on the other are so self-evident that they do not require further explanation here. Various elements of the political system and the effect they have had on the economic system will be discussed later.

Primacy of economic values

Economic successes and peak performances occur whenever people are prepared to subordinate everything to their economic interests. This is as true of individuals as it is of groups and societies. It is probably immaterial whether it happens because of external pressure or voluntarily.

Historically, it has been predominantly the societies of Europe that have developed an economic and work culture that manifests itself in the recognition of the economic potential in everything and in the use of everything to preserve and develop the material basis of life. This “mercantilist propensity of the European mind” was due to the unprecedented unleashing of productive forces and improvement of material living standards.² And it is this propensity that distinguishes the European from other advanced civilizations.

Today it is not only European societies that subscribe to the primacy of economic values. Besides the USA, various Asian countries in particular have devoted themselves almost unconditionally to a policy of growth. It is difficult to say why certain societies are prepared to subordinate all important spheres of life to the cause of economic success and attempt to become economically superior to other nations. All that seems certain is that this willingness does not stem from the way in which the economic system is organized, from the peculiarities of the political system or from a particularly favourable natural resource endowment, although natural resources may encourage or obstruct the full development of all productive forces.

In Europe the countries that were particularly active economically lay mainly in the west and middle of the continent. The countries to the north and south and certainly to the east usually had other priorities.³ Although the economic sphere was not despised in these regions, it was never rated as highly as in, say, Germany. “In these regions in tact social networks, relations and neighbours, for example, were (and are) far more important than mere economic success. Having or making time to enjoy creative leisure or even doing nothing at all, in short being economically unproductive, was (and is)—to varying de grees— the expression of a life worth living rather than reprehensible idleness.”⁴ The “economic content” of the relationship that society and the economic order enter into may thus vary. In the economic statistics it is reflected in higher or lower productivity figures. Even if every country in the world adopted a market economy system, there would still be a sizeable prosperity gap.

This background reveals the true significance of the adjectives used in other countries to describe Germany’s economic and work culture—industrious, diligent, punctual, disciplined, etc. What is meant is a basic human aptitude, which is evidently more pronounced in German society than in many others, an aptitude to make economic success the most important yardstick of life.

Germany’s economic success in the past forty years can be ascribed primarily to the strong desire of its people to build a new society from the ruins of the Second World War. If the people had not been prepared to work hard, the German “economic miracle” would not have been possible and Germany would not have been able to remain one of the major industrialized countries.

Even basic human aptitudes change with the passage of time. Just as a society’s will to perform well economically can grow, developments may occur that qualify the importance of the economic sphere. In Germany such developments have been discernible for some time. With prosperity increasing at an unprecedented rate, there are signs, as one generation gives way to the next, of a change of values, which will have a momentous impact on future economic development. In general, this change of values is reflected in a downgrading of economic goals. The economy and the environment are largely seen as forming a single entity today, as the call for a socially and ecologically compatible market economy shows. Similarly, there has been a shift in the relative importance of leisure and work. Fewer hours a year are now worked in Germany than anywhere else in the world.⁵ Attitudes to work and health have also changed. Among the OECD countries, Germany is second only to Sweden in terms of absenteeism due to illness.⁶ This can be partly attributed to abuse of the dense network of social security provisions. More important, however, is how well Germans believe they have to be to go to work. While absenteeis...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Preface
• Introduction and Summary
• 1. Conceptual Foundations
• 2. The Social Market Economy As Part of the General Order: Political, Normative and Historical Background
• 3. Openness of the System
• 4. Federal Structures
• 5. Institutional Infrastructure
• 6. Education System
• 7. Monetary and Financial System
• 8. Organization of the Labour Market: Free Collective Bargaining and Labour Market Policy
• 9. Democratization of the Economy
• 10. Social Security System
• 11. The Relevance of the German Model to Transforming and Developing Countries
• Notes