The social market economy is a form of
market capitalism combined with a social policy favoring social insurance, and is
sometimes classified as a coordinated market economy. The social market
economy was originally promoted and implemented in West Germany by the
Christian Democratic Union under Chancellor Konrad Adenauer in 1949. Its
origins can be traced to the interwar Freiburg school of economic thought.
The social market economy was designed to be a third way between laissez-faire
economic liberalism and socialist economics. It was strongly inspired by
ordoliberalism, social democratic ideas, and the tradition of Catholic social
teaching or, more generally, Christian ethics.
The social market economy refrains from attempts to plan and guide production,
the workforce, or sales, but it does support planned efforts to influence the
economy through the organic means of a comprehensive economic policy coupled
with flexible adaptation to market studies. Effectively combining monetary,
credit, trade, tax, customs, investment, and social policies, as well as other
measures, this type of economic policy creates an economy that serves the
welfare and needs of the entire population, thereby fulfilling its
ultimate goal. Some authors use the term social
capitalism with roughly the same meaning as social market economy. It is also
called Rhine capitalism, typically when contrasting it with the Anglo-Saxon
model of capitalism. Rather than see it as an antithesis, some authors describe
Rhine capitalism as successful synthesis of the Anglo-American model with social
democracy. The German model is also contrasted and compared with other
economic models, some of which are also described as “third ways” or regional
forms of capitalism, including Tony Blair’s Third Way, French dirigisme, the
Nordic model, Japanese corporate capitalism and the contemporary Chinese
model. A 2012 comparative politics textbook distinguishes however between
the “conservative-corporatist welfare state” and the “labor-led social
democratic welfare state”. Social capitalism as a theory or
political or philosophical stance, challenges the idea that the capitalist
system is inherently antagonistic to social goals or to a political economy
characterized by greater economic equality. The essence of the social
market economy is the view that private markets are the most effective
allocation mechanism, but that output is maximized through sound state
macroeconomic management of the economy. Social market economies posit that a
strong social support network for the less affluent enhances capital output.
By decreasing poverty and broadening prosperity to a large middle class,
capital market participation is enlarged. Social market economies also
posit that government regulation, and even sponsorship of markets, can lead to
superior economic outcomes, as evidenced in government sponsorship of the
Internet or basic securities regulation. Model
Social market economies aim to combine free initiative and social progress on
the basis of a competitive economy. The social market economy is opposed to
laissez-faire policies and to socialist economic systems and combines private
enterprise with regulation and state intervention to establish fair
competition, maintaining a balance between a high rate of economic growth,
low inflation, low levels of unemployment, good working conditions,
social welfare, and public services. The term “social” was established by
Adenauer to prevent further reference to “christian Socialism”, which was used in
the early party agenda “Ahlener Programm” in 1947.
Although the social market economy model evolved from ordo-liberalism, this
concept was not identical with the conception of the Freiburg School as it
emphasized the state’s responsibility actively to improve the market condition
and simultaneously to pursue a social balance. In contrast to Walter Eucken,
who sought an answer to the social question by establishing a functioning
competitive order within a constitutional framework, Müller-Armack
conceived the social market economy as a regulatory policy idea aiming to combine
free enterprise with a social programme that is underpinned by market economic
performance. In putting social policy on par with economic policy,
Müller-Armack’s concept was more emphatic regarding socio-political aims
than the ordo-liberal economic concept. This dual principle also appeared in the
name of the model. Although the adjective “social” often attracted
criticism as a decorative fig leaf or conversely, as a gateway for antiliberal
interventionism, it meant more than simply distinguishing the concept from
that of laissez-faire capitalism on the one side and of ordo-liberal conceptions
on the other. In drawing on Wilhelm Röpke’s anthropo-sociological approach
of an economic humanism leading to a Civitas Humana, Müller-Armack pursued a
“Social Humanism” or “Social Irenics” – the notion “irenics” derives from the
Greek word εἰρήνη, which means being conducive to or working toward peace,
moderation or conciliation – to overcome existing differences in society.
Therefore, the Social Market Economy as an extension of neo-liberal thought was
not a defined economic order, but a holistic conception pursuing a complete
humanistic societal order as a synthesis of seemingly conflicting objectives,
namely economic freedom and social security. This socio-economic imperative
actively managed by a strong state – in contrast to the ordo-liberal minimal
state solely safeguarding the economic order – is often labelled by the
ambiguous but historical term “Der Dritte Weg”.
The concept of the social market economy received fundamental impulses from
reflection and critique of historical economic and social orders, namely
Smithian laissez-faire liberalism on the one hand and Marxian socialism on the
other. Furthermore, various “Third Way” conceptions prepared the ground for the
socio-economic concept. Already in the late nineteenth century, the
Kathedersozialisten, engaged in social reforms in the Verein für Socialpolitik,
turning away from pure liberalism to demand a purposive state policy designed
to regulate economic life and advocating a middle course between anarchic
individualism, traditionalistic corporatism and bureaucratic etatism. In
the early twentieth century, the Frankfurt sociologist and economist
Franz Oppenheimer postulated a so-called “Liberal Socialism”, i.e. socialism
achieved via liberalism, as the pursuit of a societal order, in which economic
self-interest preserves its power and persists in free competition. This
desirable order of freedom and equality was labelled by a later programmatic
publication entitled Weder so – noch so. Der dritte Weg [Neither thus, not thus.
The third way]. This position was widely shared by
Oppenheimer’s doctoral student and friend, Ludwig Erhard; although the
latter displaced adjective and subject by promoting a ‘Social Liberalism’ and
never liked the expression ‘Third Way’. In his opinion the term was tainted,
reminding him too much about ideas of a mixed economy, somewhere between a
market economy and central planning. He vehemently and consistently argued
against the view that models were converging.
Further, in contrast to Müller-Armack who emphasised the social aspect, for
Erhard the Social Market Economy was always first and foremost a market
economic system. By proclaiming ‘the freer an economy is, the more social it
is,’ Erhard once told Friedrich Hayek that the free market economy did not
need to be made social but was social in its origin. Ludwig Erhard was rather
inclined to Walter Eucken’s ordoliberal competitive market order. Although he
even considered himself an ordoliberal, Erhard based his economic conception
neither on Eucken nor on Müller-Armack. In fact, his doctoral supervisor Franz
Oppenheimer and especially Wilhelm Röpke, like Erhard a student of
Oppenheimer, was his source of inspiration. Erhard perceived Röpke’s
books as works of revelation and considered the economist a brother in
spirit. On 17 August 1948, however, Erhard referred to Müller-Armack by whom
he was strongly impressed most of all not as a theorist, but instead as one
who wanted to transfer theory into practice, and his concept of the Social
Market Economy. Soon after, at the second party congress of the
Christlich-Demokratische Union in the British zone in Recklinghausen on 28
August 1948, Erhard circumscribed the concept as a ‘socially committed market
economy’. Whereas most neo-liberal economists viewed the concept not only
as an economic path between the Scylla of an untamed pure laissez-faire
capitalism and the Charybdis of a collectivist planned economy, but also
as a holistic and democratic social order, Erhard and in particular
Müller-Armack, however, emphasised public acceptance and civic engagement
as prerequisites for the success of the socio-economic model. For instance,
Müller-Armack stressed that by ‘more socialism’ he meant the social
engagement for and with the people. Equally, Ludwig Erhard pointed out that
the principles of the Social Market Economy could only be achieved if the
public was determined to give them priority.
Important figures in the development of the concept include Walter Eucken,
Wilhelm Röpke, Alexander Rüstow, Franz Böhm, Franz Oppenheimer, Constantin von
Dietze and Alfred Müller-Armack, who originally coined the term Soziale
Marktwirtschaft. They share an involvement in the Anti-Nazi Opposition,
whose search for a post-nazi order for Germany is an important background for
the development of this concept. Early protagonists had close contacts to the
oppositional church-movement “Bekennende Kirche” and Dietrich Bonhoeffer and
emphasized the reference of their concept to Catholic and Protestant
social ethics.=Rhine capitalism=
Michel Albert described a similar concept, “Rhine capitalism”. He compared
the so-called “neo-American model” of a capitalistic market economy, introduced
by the administrations of Ronald Reagan and Margaret Thatcher with what he
called “Rhine capitalism”, present in Germany, France and in some of the
Northern European economies. While the neo-American model builds
largely on the ideas of Friedrich von Hayek and Milton Friedman, Rhine
capitalism, according to Albert, has its foundations on publicly organized social
security. Albert analyzes the Rhenish model as the more equitable, efficient,
and less violent one. However, according to Albert, complex psychological
phenomena and the functioning of the press lets the American model appear
more attractive and dynamic to the general public.
=Main elements=The main elements of the social market
economy in Germany are the following: The social market contains central
elements of a free market economy such as private property, free foreign trade,
exchange of goods, and free formation of prices.
In contrast to the situation in a free market economy, the state is not passive
and actively implements regulative measures. Some elements, such as pension
insurance, universal health care and unemployment insurance are part of the
social security system. These insurances are funded by a combination of employee
contributions, employer contributions and government subsidies. The social
policy objectives include employment, housing and education policies, as well
as a socio-politically motivated balancing of the distribution of income
growth. In addition, there are provisions to restrain the free market.
These elements help to diminish many of the occurring problems of a free market
economy. History
The social market economy was born and formed in times of severe economic, but
equally socio-political crises. Its conceptual architecture was set by
particular historical experiences and political prerequisites: Germany’s
preoccupation with the social question since the late nineteenth century, the
criticism of liberal capitalism triggered by the world economic crisis
of the early 1930s, and a pronounced anti-totalitarianism as well as
anti-collectivism formed by the experiences of the Third Reich. These
led to the eventual development of the social market economy as a viable
socio-political and economic alternative between the extremes of laissez-faire
capitalism and the collectivist planned economy not as a compromise, but as a
combination of seemingly conflicting objectives namely greater state
provision for social security and the preservation of individual freedom.
One of the major factors for the emergence of the German model of
capitalism was to ameliorate the conditions of workers under capitalism,
and thus to stave off the threat of Marx’s militant socialist movement.
Germany implemented the world’s first welfare state and universal healthcare
program in the 1880s. Chancellor Otto von Bismarck developed a program in
which industry and state work closely to stimulate economic growth by giving
workers greater security. To trump the militant socialists, Bismarck gave
workers a corporate status in the legal and political structures of the German
Empire. In March 1884, Bismarck declared:
The real grievance of the worker is the insecurity of his existence; he is not
sure that he will always have work, he is not sure that he will always be
healthy, and he foresees that he will one day be old and unfit to work. If he
falls into poverty, even if only through a prolonged illness, he is then
completely helpless, left to his own devices, and society does not currently
recognize any real obligation towards him beyond the usual help for the poor,
even if he has been working all the time ever so faithfully and diligently. The
usual help for the poor, however, leaves a lot to be desired, especially in large
cities, where it is very much worse than in the country.
Bismarck’s program centered squarely on providing universal social insurance
programs designed to increase productivity, and focus the political
attentions of the German workers on supporting Kaiser Wilhelm I. The program
included universal healthcare, compulsory education, sickness
insurance, accident insurance, disability insurance, and a retirement
pension, none of which were then in existence to any great degree anywhere
else in the world. After the collapse of the totalitarian
Third Reich with its statist, corporatist economic policy, economists
and academics at the University of Freiburg im Breisgau in Germany
advocated a neo-liberal or new liberal and socio-economic order. In this
context, it is important to distinguish between the ordoliberal Freiburg School,
or Freiburg School of Law and Economics, and the Freiburg Circles. Frequently,
the two schools of thought were believed to be the same although the first
emerged from the latter and among the members of the Freiburg School only the
founders Walter Eucken and Franz Böhm belonged to the Freiburg Circles and,
conversely, no member of the Freiburg Circles can be attributed to the
Freiburg School, which partly advocated different economic objectives. Both
schools of economic thought considered that a certain form of planning was
necessary for a transitional period following the war. However, whereas the
pivotal members of the Freiburg Circles, Erwin von Beckerath, Adolf Lampe and
Jens Jessen, favoured ‘productive’ governmental intervention, i.e. an
economy regulated by a relatively strong state, Walter Eucken, Franz Böhm and
Constantin von Dietze believed in self-regulating market forces and
limited indirect state interference. According to Eucken and his competitive
order labelled ordoliberalism, the state must solely create a proper legal
environment for the economy and maintain a healthy level of competition through
measures that follow market principles. Thus, the paramount means by which
economic policy can seek to improve the economy is by improving the
institutional framework or ‘ordo’. In drawing on both Eucken’s ordoliberal
competitive order and Wilhelm Röpke’s ‘Economic Humanism’ leading to a
‘Civitas Humana’, the ordoliberal competitive order was further developed
by the Cologne School around the economist and anthropologist Alfred
Müller-Armack, who therefore coined the term ‘Soziale Marktwirtschaft’ in a
publication in December 1946. Although it evolved from ordoliberalism as a new
variant of neo-liberalism, this concept was not identical with the conception of
the Freiburg School. In contrast to Eucken, who favoured a strictly
procedural or rule-oriented liberalism in which the state solely sets the
institutional framework and abstains generally from interference in the
market, Müller-Armack emphasised the state’s responsibility actively to
improve the market condition and simultaneously to pursue a social
balance. In putting social policy on a par with economic policy,
Müller-Armack’s concept was more emphatic regarding socio-political aims
than the ordoliberal economic concept. However, the Social Market Economy as an
extension of neo-liberal thought was deliberately not a defined economic
order, but an adjustable holistic conception pursuing a complete
humanistic societal order as a synthesis of seemingly conflicting objectives,
namely economic freedom and social security. Although it is often viewed as
a mélange of socio-political ideas rather than a precisely outlined
theoretical order, the conception possessed an effective slogan, which
facilitated its communication to both politics and the public. The eventual
implementation, however, required not only communication, but also political
backup. Here, Müller-Armack’s concept soon met
with the conception of the then Chairman of the Sonderstelle Geld und Kredit
within the Administration for Finance, i.e. an expert commission preparing the
currency reform in the then Anglo-American Bizone, Ludwig Erhard.
Although Erhard was rather inclined to Walter Eucken’s ordoliberal competitive
market order and even considered himself an ordoliberal, he was strongly
impressed by Alfred Müller-Armack most of all not as a theorist, but instead as
one who wanted to transfer theory into practice.
When Erhard succeeded Johannes Semmler as Director of the Administration for
Economics in the Bizonal Economic Council on 2 March 1948, the Social
Market Economy entered the political sphere. Soon after, on 21 April 1948,
Erhard informed the parliament about his economic policy and introduced the
concept of the Social Market Economy. Although there was no unanimous
applause, both the Liberal Democrats and the conservatives widely welcomed the
transition to a more market-oriented economy. Thereupon, the Chairman of the
Christlich-Demokratische Union in the British zone of occupation, Konrad
Adenauer, invited Erhard to also inform the party members about his
socio-economic conception at the party convention in Recklinghausen, Germany on
28 August 1948. In a visionary and stirring speech, entitled
Marktwirtschaft im Streit der Meinungen, Ludwig Erhard defended his concept of
the Social Market Economy alluding to the dualism between a controlled economy
and a market economy. In view of the upcoming regional and federal elections,
Adenauer, who was initially sceptical about Erhard, was not only impressed by
the polarising slogan, i.e. ‘Controlled or Market Economy’, but also by the
efficacy of Erhard and his programme. The foundation for a successful
political alliance was laid. Chancellor Konrad Adenauer of the ruling
Christian Democratic Union implemented a new novel economic order amalgamating
the promotion of free competition with the responsibility of the social
government. The Wirtschaftswunder or ‘economic miracle’ of West Germany could
not have been brought about without secure social peace in the country.
Adenauer’s program centered on legislation establishing
co-determination in the coal and steel industry, the system of employee
property formation, the equalization of burdens, the creation of subsidized
housing, child benefits, the agricultural Green Plan, and the
dynamism of pensions. On June 20, 1948, the principles of the “social market
economy” espoused by the CDU became the foundation of modern German economic
policy: The “social market economy” is the
socially anchored law for the industrial economy, according to which the
achievements of free and able individuals are integrated into a system
that produces the highest level of economic benefit and social justice for
all. This system is created by freedom and responsibility, which find
expression in the “social market economy” through genuine
performance-based competition and the independent control of monopolies.
Genuine performance-based competition exists when the rules of competition
ensure that, under conditions of fair competition and equal opportunity, the
better performance is rewarded. Market-driven prices regulate the
interaction between all market participants.
After the Christlich-Soziale Union also expressed its commitment to a market
economy with social balance, and the then newly elected Bavarian Minister for
Economic Affairs, Hanns Seidel, advocated Erhard’s liberal and social
economic model at the CSU’s party convention in Straubing in May 1949, the
economic principles elaborated by the Working Committee of the CDU/CSU as
liaison body and information centre of the two political parties commonly
referred to as the ‘Union’, centred the Social Market Economy. Finally, these
principles were adopted as party platform and manifesto for the upcoming
federal elections at the CDU’s party conference in Düsseldorf on 15 July
1949. In contrast to the previous ideological Ahlener Programm suggesting
a rather abstract and anti-materialist ‘Gemeinwirtschaft’, these so-called
‘Düsseldorfer Leitsätze’ not only provided a concrete, pragmatic and
materialist economic programme, but also an attractive slogan to reach consensus
within the party and the public. While eventually the union of the two recently
established political parties, i.e. the CDU and the CSU, possessed a coherent
and unifying economic programme enabling a more consistent public front, the
oldest German political party, the Sozialdemokratische Partei Deutschlands
led by the advocate of economic planning and extensive socialisation, Kurt
Schumacher, did not introduce its own economic concept. This not only
complicated the parliamentary work of the party in the Economic Council, but
also limited the public relations of the party as a whole especially in times of
campaigning where the partially complex political programmes were simplified and
popularised. In the run-up to the federal elections
in August 1949, the CDU/CSU consequently aligned their party platforms, policies
and manifestos and campaigned with the Social Market Economy. In particular the
former advertising manager for consumer goods, Ludwig Erhard, who affirmed that
he would ‘go into the upcoming political party clashes with particular energy for
the CDU’, realised the potential of subtle and systematic marketing to
transform the concept from an economic theory, or even abstract economic
policy, into the basis of a political party’s propaganda and public image that
held broad appeal. Eventually, on Sunday 14 August 1949, around 31 million
Germans were called to cast a vote for the first German Bundestag and to decide
between the Social Market Economy and a controlled economy advocated by the SPD.
Of those eligible to vote 25 million or 78.5 per cent actually went to the
ballot boxes and showed a clear commitment to the emerging post-war
democracy. Although the SPD, gaining 29.12 per cent
of the votes, turned out to be the most successful single party, the CDU/CSU
combined attracted more votes, totalling 31 per cent, and 139 mandates compared
to 131 for the Social Democrats. However, in fact both Volksparteien had
suffered large percentage losses over their previous Land election totals by
failing to capture a comparable share of the enlarged electorate. The most
remarkable advance by winning over a million extra votes and achieving 11.9
per cent of the total votes was that made by the liberal Freie Demokratische
Partei led by the chairman Theodor Heuss. The economically liberal Free
Democrats were in fact the only political party consistently gaining
percentage of votes between 1946 and 1949. While these results affirmed the
then general pro-market trend in public opinion, eventually, the electorate made
its decision contingent on the satisfaction of its practical needs
rather than on any particular theoretical economic system. The
advantage of the CDU and the CSU lay precisely in the fact that they were
quasi-governing across the Bizone and thus increasingly identified with the
economic recovery and the improving economic conditions. Although the
implementation of the Social Market Economy benefited also from other
crucial factors – including the east-west conflict and a favourable
political and social climate within Germany and abroad, the stabilising
alliance between the conservative and liberal parties, the pro-market
composition of the Economic Council and even the Federal Republic’s own
Grundgesetz, which stressed individual freedom, human dignity, and the
subsidiarity of societal organisation – it was also the consistent efforts at
political communication of the cooperative and corporate model that led
to the implementation and eventual electoral validation of the Social
Market Economy in post-war West Germany. At first controversial, the model became
increasingly popular in West Germany and Austria since in both states economic
success was identified with it. From the 1960s, the social market economy was the
main economic model in mainland Western Europe, pursued by administrations of
both the centre-right and the centre-left. The concept of the social
market economy is still the common economic basis of most political parties
in Germany and a commitment to some form of social market economy is present in
Article 3 of the Treaty on European Union.
Criticism Critics identify the social market model
with the notions of the welfare state and sometimes mistakenly identify it as
being socialistic. However, one of the main factors for the emergence of the
European model of capitalism was to ameliorate the conditions of workers
under capitalism and thus stave off the emergence of socialism or socialist
revolution. See also
Christian democracy Dirigisme
Market economy Ordoliberalism
Social corporatism Social democracy
Cooperative Stock Market Tripartism
Types of capitalism Welfare capitalism
Notes References
External links The Social Market Economy – U.S. Library
of Congress Essay on Germany’s Social Market Economy
Short Definition from the Economist

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