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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