The Social Market Economy – From a German to a European Development Strategy Matthias Schäfer Konrad-Adenauer-Foundation Berlin 030/26996-3515 [email protected]@kas.deBaku,

The Social Market Economy – From a German to a European Development Strategy

Matthias SchäferKonrad-Adenauer-Foundation Berlin030/[email protected] Baku, April 9th 2013

Social Market Economy as a Development Strategy

Outline

1. Historical Background

2. Ideologies behind the concept of Social Market Economy

3. Structure and implementation of Ordoliberalism within a social market economy

4. Social Market Economy and the EU/Globalization

5. Past and present of Social Market Economy

Social Market Economy as a Development Strategy

1. Historical Background

The postwar period in Germany

Both capitalist and socialist approaches have proven to be „historical aberrations“ (Walter Eucken)

• Strong discrediting of the capitalist economic model• Experiences of Industrialization and the Weimar Republic (esp. cartel formation) • Big Industry, Trade Unions and (social) government constitute a „German Triangle“ (Paul

Nolte)• Immediate proximity of soviet influence (Soviet zone of occupation)• Experience of massive state interventions (Third Reich)• Dramatic shortages for the German people after the war (Winter of Hunger)

Consequences of the global financial crisis (Great Depression of the 1930s):

Development of two major concepts:Keynes: government intervention to stablize economic developmentEucken/Röpke: government establishes a regulatory framework, but does not directly intervene in

the economy

Social Market Economy as a Development Strategy

2. Ideologies behind the concept of Social Market Economy

a. The human idea of the social market economies

Principles of human dignity and social behaviour (inspired by Christian Social Teaching)

Personality:Man is free, mature and bases his decisions in responsibility towards god and society.

Common Good:Man bases his decisions as part of a social environment.

Solidarity:The stronger parts of society help out their weaker counterparts, if these contribute to the overcoming plights.

Subsidiarity:The responsiblity for the solutions and risks of life starts on the lowest level, which may only be helped, if it cannot sustain itself.

1891: Social encyclica „Rerum Novarum“ (Papst Leo XIII.)1991: Encyclica „Centesimus Annus“ (Papst Johannes Paul II.)1920: „The protestant ethic and „spirit“ of capitalism“ (Max Weber)

Social Market Economy as a Development Strategy

2. Ideologies behind the concept of Social Market Economy

a. The human idea of the social market economies

Further principles of the human image

- Cardinal virtues of the european cultural areaSagacity, justice, courage, moderation (Platon)

- German resistance against Hitler1938-1943: Contacts of the Freiburg School to Carl Goerdeler and Dietrich BonhoefferWilhelm Röpke in Istanbul and in GenfAlexander Rüstow in Istanbul

The Social Market Economy is a principle „beyond supply and demand“ to overcome Germany‘s economic, social and moral destruction, as well as establishing it an accredited partner of the global community.

Social Market Economy as a Development Strategy

2. Ideologies behind the concept of Social Market Economy

b. Role of the State (government)

- "Freiburg School“ and the (german) ordoliberalismWalter Eucken at the University Freiburg

The state is responsible for a functioning system of competition. It takes the role of a referee and not that of a player (Politics of competition, law and security)

The state empowers its people, by securing equal starting opportunities (Education, Infrastructure, Social Policy)

Quotes:

„Free economy, strong state“ (Alexander Rüstow)„I want to grow out of my own power and stand in for the risks of life. The state shall only make sure that I am able to do so.“ (Ludwig Erhard)

Social Market Economy as a Development Strategy

2. Ideologies behind the concept of Social Market Economy

Ludwig Erhard (Director for money and currency in the american-english bizone and first economic minister in the cabinet of Konrad Adenauer) and his secretary of state Alfred Müller-Armack turned the theoretical principles into a concrete draft for political implementation.

Their names become synonym for „economic wonder“ and „prosperity for all“.

Alfred Müller-Armack‘s connecting formula turns out to be his most famous sentence:

The Social Market economy connects the freedom of the market with social balance.

Conclusion:

The social market economy is a „third way“ (Wilhelm Röpke) beyond socialism and capitalism.

It realizes a „new“ form of liberalism (Neoliberalism). Germans also use the term ordoliberalism.

Social Market Economy as a Development Strategy

Germanys Social Market Economy does not stand for liberal market capitalism as

practised for example in the US.

It was introduced in Germany by Ludwig Erhard after World war II as the new post-war economic system.

His decisions as first Minister of Economics laid the foundations for Germany’s economic system, which has been quite successful in the last sixty years

“I want to prove myself under my own steam. I want to take my own risks in life; I want to be responsible for my own fate. So make sure, state, that I am in position to do this.” (Ludwig Erhard)

Social Market Economy as a Development Strategy

The trigger o economic development were the Currency reform (from Reichsmark to DM) and liberation of prices in 1948.

The German basic Law (Grundgesetz) took over many regulations which framework a Social Market Economy

The economic order provides the institutional framework for a free market economy including:

Rule of law (“Ordnungspolitik”)• Free Markets and personal rights

• Relative price system, built by supply and demand (not by public intervention)

• Sound money and sound public finance

• To keep the economic order stable a tough state is needed.

•It has to create and adjust the framework for the economic process; the state is not the better entrepreneur

Social Market Economy as a Development Strategy

It aims to achieve a synthesis between efficiency and equity by combining the efficiency gains of a free market economy with a publicly induced social balance. (But note: SME in the perspective of the founding fathers is a clealy liberal concept.)

economicorder

social order

What makes the social market economy so very attractive as the only pragmatic alternative to the free-market liberalism? Its a dynamical concept, which can be adapted to political and economic changes.

Sustainable Society

Social Market Economy as a Development Strategy

The provisions of the social order are oriented towards the needs of society’s members and also attempt to provide equal opportunity for each individual in the society. The main components:

• a tax system based on a progressive income tax that forces people with higher incomes to finance a bigger share of public expenditures.

• a systems of social security protecting against the risks of unemployment, diseases and ageing;

• labour unions and employers associations decide autonomously on the conditions and wages on the markets.

• an educational system based on the equality of chances.

Social Market Economy as a Development Strategy

Some Conclusions

• The concept of the Social Market Economy is a market oriented and non-socialist approach.

• The term Social Market Economy is used for two not necessarily in every detail identical concepts: for the economic system in Germany since 1948 and for a theoretical concept.

• The concept of Social Market Economy is a dynamical concept, which has to be adapted to political and economic changes. The consensus on what the word “social” means, must be redefined continuously. Therfore, it is not a blueprint.

• Protection of the individual’s freedoms and independence in the face of arbitrary actions by the state.

• Safeguard of the free market rule, i.e. competition, private property of production means, free prizing, contract freedom, warranty systems and controls against monopolies and power abuses, free international trade and monetary stability.

• Guarantee of the principles of solidarity and subsidiarity with respect to the safeguard of social peace.

Quote:„The most social with the Social Market Economy is, that it creates efficient markets and

makes the biggest possible number of people independent of the welfare state.“ (Ludwig Erhard)

“All we are asking for is the creation of an economic and social order which equally guarantees economic activity and humane living conditons. We call for competiton because it can be utilized to reach this goal – in fact, the goal cannot be reached without it. It is a means, not an end in itself.“

Social Market Economy as a Development Strategy

4. Social Market Economy and the European Union/Globalization

The European Union has adopted many principles of social market economies:

• Common internal market (single market)• Free movement of goods, services, capital and workers• Common currency / independence of monetary policy• competitive framework, competition commission• Framework (Rules) for social standards and common taxation• reduction of bureaucratic burden (deregulation)• Social Fund to mitigate the effects of structural change

Social Market Economy as a Development Strategy

4. Social Market Economies and the European Union/Globalization

The principles of social market economies also enables finding a consensus with other cultures (i.e. China, India) about the conventions of mutual exchange (justice of merit, fair exchange, social standards and a stable legal framework)

In this context, it is important to consider the incorporation of international organizations (WTO, UNO, ILO) and reliable cooperations of the EU and the world (USA).

WTO: “…recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development,…”

OECD: “convinced that broader co-operation will make a vital contribution to peaceful and harmonious relations among the peoples of the world; recognising the increasing interdependence of their economies; determined by consultation and co-operation to use more effectively their capacities and potentialities so as to promote the highest sustainable growth of their economies and improve the economic and social well-being of their peoples…”

Social Market Economy as a Development Strategy

4. Social Market Economies and the European Union/Globalization

IMF: “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy”.

Worldbank: “the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labour in their territories.”

ILO: “all human beings, irrespective of race, creed or sex, have the right to pursue both their material well-being and their spiritual development in conditions of freedom and dignity, of economic security and equal opportunity...”

Social Market Economy as a Development Strategy

5. Social Market Economies – Past and Present

Past Present

Low public debt High public debt

Strong growth Smaller growth rates

Demographic stability Demographic change

Full employment Long-term unemployment

Social Market Economy as a Development Strategy

5. Social Market Economy – Past and Present

Past Present

Justice of merit Justice of distribution

Personal responsibility before Collective Responsibilitiy beforecollective responsibility personal responsibility (Centralism)(subsidiarity)

Balance of Rights and obligations one-sided claims against welfare state

Less Regulation (labor market) Higher regulation

High rate of investment low rate of investmentLow rate of social expenditures high rate of social expenditures

High liability of labor agreements low liability of labor agreements(strong role of social partners)

Social Market Economy as a Development Strategy