NCPA - National Center for Policy Analysis

Social Market Thinkers Have Ruined the German Economy

January 27, 2003

Although Germany has the third largest economy in the world, it suffers from rising unemployment, massive capital flight and a growth rate approaching zero.

These problems can be traced to the beginnings of the Federal Republic, writes Norman Barry, a professor of social and political theory.

Following World War II, Germany's economy was resurrected by Ludwig Erhard, an obscure economics professor in a minor government post. Erhard's revolution contained two conflicting strains of thought that began harmoniously: liberalism and the social market. Ultimately, though, one triumphed -- and it was the wrong one.

"Ordoliberalismus" was clearly free-market.

  • During the war its founders had produced a coherent theory of the ordered market economy.
  • They advocated a small state and a legal system designed to preserve freedom.
  • Under Erhard's influence, Germany created the strongest economy in Europe, and the freest next to Switzerland.

"Sozialemarktwirtschaft" (social market economy), on the other hand, emphasized social consensus over economic freedom -- achieved, for example, by having union representatives on every corporate board. It worked well for awhile; Germany, for instance, did not experience the crippling labor strikes of Britain. Unfortunately, the social market thinkers had a much broader agenda.

  • Beginning in the 1960s, Germany shifted to a costly, universal welfare system, including a ruinous extension of pension rights.
  • The social element gradually displaced the market as the chief economic concern.

Today, the social market thinkers have won.

  • Germany has a vast welfare state, an almost completely unfunded pension system that will impoverish future generations and a regulatory and tax system that offer no incentives to invest in the country.
  • Now it pays not to work in Germany, and to stay in school until age 30.
  • Its admired consensus is now a barrier to innovation and change.

Perhaps the biggest mistake of the free-market advocates was the failure to make their reforms constitutionally permanent.

Source: Norman Barry, "Germany must rediscover the market," Financial Times, January 23, 2003.

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