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Social Market Economy as a Development Strategy
The Social Market Economy From a German to
a European Development Strategy Matthias
Schäfer Konrad-Adenauer-Foundation
Berlin 030/26996-3515 matthias.schaefer_at_kas.de
Baku, April 9th 2013
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Social Market Economy as a Development Strategy

• Outline
• Historical Background
• Ideologies behind the concept of Social Market
  Economy
• Structure and implementation of Ordoliberalism
  within a social market economy
• Social Market Economy and the EU/Globalization
• Past and present of Social Market Economy

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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 development
• Eucken/Röpke government establishes a regulatory
  framework, but does not directly intervene in the
  economy

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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. Solida
rity 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)
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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 area Sagacity, justice, courage,
moderation (Platon) - German resistance against
Hitler 1938-1943 Contacts of the Freiburg School
to Carl Goerdeler and Dietrich Bonhoeffer Wilhelm
Röpke in Istanbul and in Genf Alexander Rüstow in
Istanbul The Social Market Economy is a
principle beyond supply and demand to overcome
Germanys economic, social and moral destruction,
as well as establishing it an accredited partner
of the global community.
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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)
ordoliberalism Walter 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)
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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-Armacks 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.
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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.
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
His decisions as first Minister of Economics laid
the foundations for Germanys 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)
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Social Market Economy as a Development Strategy
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

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Social Market Economy as a Development Strategy
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 order
economic order
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.)
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Social Market Economy as a Development Strategy
The provisions of the social order are oriented
towards the needs of societys 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.

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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 individuals 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.

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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

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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 worlds
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
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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...
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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
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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 before collective
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 investment Low rate of
social expenditures high rate of social
expenditures High liability of labor
agreements low liability of labor
agreements (strong role of social partners)