Germany's "social market economy": between social ethos and rent seeking.

AuthorWitt, Ulrich

The successful reconstruction of the West German economy after World War II and its spectacular rise to the leading position in Europe since then is undisputed. However, the persistently high unemployment rate of the past two decades and the stagnation in the New Laender since unification have tarnished the splendor. Among the reasons for both the early success and the later mediocrity, a most influential one lies in Germany's economic constitution. From this relationship a more general lesson may be drawn. A country's economic constitution reflects an unwritten social contract. In constructing a constitution, the framers may strive for a balance between the interests of the members of society. Yet such a balance may turn out to be infeasible in the actual operation of the economy. In the United States, the Founding Fathers of the U.S. Constitution noted this problem in their debates, and it influenced the choices they made (Hamilton, Madison, and Jay [1788] 1947). The experience with Germany's postwar economic constitution, manifested in its social market economy, differs. Still heavily influenced by their experience of the Great Depression and its mass unemployment and hardship, which had paved the way for the Nazis' rise to power, the framers of Germany's economic constitution considered a social ethos a moral imperative. In their decision to lay that ethos down in the constitution, they seem to have overlooked the dilemma inherent in the attempt to achieve simultaneously freedom, efficiency, and security from the pitfalls of life.

Both Germans and others often attribute Germany's postwar recovery to its social market economy (see, for example, Giersch, Paque, and Schmieding 1993; Kerber and Hartig 1999). This type of political economy has on the one hand a basic free-trade orientation and on the other hand some "social" precepts that modify the outcome of the market process by redistributive and social security measures (for a broader portrayal, see Peacock and Willgerodt 1989). The blending of ideas from liberal thought, social welfarism, and corporatism in the conception of a social market economy may appear discordant to the non-German observer. It results from a politically motivated merger of two different approaches to economic order and policymaking, a merger popularized and politically implemented by Germany's great first minister of economic affairs, Ludwig Erhard (1897-1977). In some respects, this merger was the offspring of ordoliberalism, whose most prominent advocate was Walter Eucken, a professor of economics at the University of Freiburg and a liberal in the European sense. (Unfortunately, his influential manifesto [Eucken 1952], which anticipated many ideas of public-choice theory and constitutional political economy [Vanberg 1998], has not been translated into English.) In other respects, it was the realization of a socially conditioned market regime that its major proponent, Alfred Muller-Armack (1950), called social irenic, clearly indicating his indebtedness to the social doctrine of the Roman Catholic Church. (For a good survey of the beginnings of social market economics, see Watrin 1979.) The widespread acclaim that the social market economy soon came to receive from the German public may reflect only that everyone can associate the term social with whatever suits his own interests and ideology. Indeed, right after the war, when socialist ideals dominated all of Europe, making a concession to such expectations might have been the only way to ensure majority support for free markets in the young German democracy. As time went by, however, conditions changed.

Today, the social ethos of the social market economy continues to be widely regarded as legitimate. Moreover, many Germans--not least, the German Constitutional Court--still believe that active pursuit of that social ethos is compatible with reaping the benefits of free markets. Thus, the government is held responsible for providing protection against the pitfalls of life, including the consequences of too fierce competition in free markets, and the consequent government actions are not viewed as attenuating either the individual freedom to participate in markets or the efficiency of those markets. Yet, in practice, interest groups have learned to exploit the vague notion of the "social" in their rent-seeking activities. Hiding their particular interests behind accusations of social injustice or appeals to establish social balance, they have increasingly pressed the government to grant all sorts of advantages to their members. The consequences of their successful endeavors include the present heavy tax burden on the German economy as a whole as well as extensive economic regulations (Kerber and Hartig 1999). Moreover, the old corporatist idea of "correcting" competitive market outcomes in bilaterally cartelized labor markets by means of central negotiations was soon brought under the social precepts of the social market economy, resulting in the legalization of a major departure from a competitive market regime.

Such a development is to be expected when a constitutional dilemma is preprogrammed, as it was in the German social market economy. In practice, I argue, the pursuit of a social ethos cannot easily be aligned with economic efficiency and robust individual freedom. I examine first the government's social policy interventions. Those, I maintain, may well be legitimate reflections of a fairness norm in a social contract, but their implementation tends to threaten either efficiency or liberty. Next, I discuss the corporative "correction" of the market process. In negotiations between cartelized employer groups and trade unions, the latter usually seek to obtain an income distribution different from the competitive outcome and, at the same time, to protect employed workers against layoffs and other job risks. This policy approach has been revived recently in the context of the so-called new corporatism (Giddens 1998; Streeck 1993) and has gained significant political influence after the recent establishment of social democratic governments in many European countries. This method of "socially" correcting free markets, however, also gives rise to a dilemma, one that casts doubt on whether the implementation of such a method has anything to do with the pursuit of social goals.

Social Contract, Social Policy, and the Implementation Dilemma

The ambiguity of the social market economy derives from the very intention "to combine the principle of freedom in the market place with that of social balance" (Muller-Armack 1956, 243, my translation). Evidently the objective is to allow free...

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