Abstract
What has been found when a country's economy is weak, its social system suffers more than anything else, whereas a stable currency safeguards the beneficial social effects of a competitive system. Social regulation needs as much attention as financial regulation as it is only in this way that states can guarantee that their citizens profit from the economic system. The scope of the article is international even though the author places much focus on the German social market economy, suggesting that it serve as a model for an international financial and economic system.
‘Human dignity shall be inviolable. To respect and protect it shall be the duty of all state authority.’ This is the first article of the Basic Law of the Federal Republic of Germany, but it is more than that. This often-quoted sentence from the constitution, which ‘the German people’ gave themselves 60 years ago, ‘conscious of their responsibility before God and man’, also laid the foundation for an exceptionally successful economic system, the influence of which extended well beyond national borders. At present, however, this idea faces a remarkable dilemma: whereas approval for the social market economy has steadily declined in Germany over the past few years, this basic concept for a sustainable market-based economic system still has considerable attraction internationally, especially in times of crisis.
Particularly in the current financial and economic crisis, the application of some of the basic principles of the social market economy to an international order of whatever nature appears to make sense. It is something of a miracle that German Chancellor Angela Merkel's proposal to develop a ‘charter of sustainable business’ in the context of the G-20 summit was very well received despite widely diverging interests. This shows as well that the almost hackneyed saying that a crisis can also be an opportunity is not entirely unfounded. Rarely before has the window of opportunity for the establishment of a reliable and value-based international regulatory framework been as open as in the past few months. If the German social market economy is indeed to serve as the model for such an international financial and economic system, it is above all necessary that its basic principles be well defined and put into practice within national borders. To mark the 60th anniversary of the social market economy in 2008, several political institutions, organisations and think tanks formed an alliance in Jena and outlined a plan to reactivate this social and economic model. The present article is based on the main features of the so called Jena Manifesto, which the author of this article co-authored, but also supplements it with current references and applications to the international arena.
What makes the social market economy so very attractive as the only pragmatic alternative to the excesses of radical, free-market liberalism and socialist economics? The first sentence of the German Basic Law quoted above, the reference to inviolable human dignity, is an important key to understanding this economic concept. It is its particular image of the human being that makes this concept so idealistic and pragmatic at the same time. Christian and humanist-liberal teachings emphasise the personhood and the equality of all human beings before God. ‘The measure of the economy is the human being; the measure of the human being is his relationship to God,’ says Wilhelm Röpke, one of the founders of the social market economy.
On this basic understanding the individual should be regarded neither as a malleable object in the hands of collectivist social engineers nor as an exploitable resource for particular economic interests. It is also a contradiction of this image of the human being when politicians hold the opinion that redistribution by itself is a sustainable form of social policy.
Human beings have to be free in order to be able to assume responsibility before God as well as for themselves. According to this understanding, human dignity also includes the possibility to make one's own living, in so far as the individual is capable of this. Self-respect arises above all from one's capability to work.
This is certainly not just about the self-fulfilment of the individual. It is an expression of human dignity ‘not to live for oneself’. A community is therefore always more than a collection of individuals. As social beings, humans are prepared to contribute sociably to a community. In the long term no society is able to survive without broad acknowledgement of the importance of civic spirit. The two sides of the nature of the human being, wanting to be free in order to prove oneself and at the same wanting to feel safe as an integral part of a community for which one is also prepared to make an effort, is the basis of the social market economy. If this balance between freedom and responsibility is upset, individuals or entire groups can feel unjustly dealt with and unfairly burdened whilst others enjoy excessive liberties. In this context the state has to play an important role. As part of the dynamics within the social market economy, the state has to play the role of a ‘robust referee’, as Wilhelm Ropke put it. It has to use clear regulations to ensure that no entity unfairly burdens another while at the same time ensuring that the market as a whole stays intact. It was the latter function that the state fulfilled with its intervention in the ‘game’ after the looming collapse of the financial markets towards the end of 2008, thereby protecting its citizens and the economy from damage. This intervention only served to stabilise the financial system and the monetary framework necessary for the functioning of the economy. Without the governmental bailout packages a systemic collapse of the financial system would not have been inconceivable. The consequences of such a collapse for economic growth and employment would have been incalculable. Against this background the intervention of the state was actually ‘in line with the market’ even though some steps–-for example, the state's temporary acquisition of a minority holding in certain banks–-have to be a measure of last resort.
If, however, the state enters the game as one of the players in the absence of an extraordinary crisis, for example by mediating between group interests increasingly through redistribution, it risks stifling private initiative. Public spirit, innate to human beings, then threatens to wither.
Besides the specific image of the human being and the ensuing balance between freedom and responsibility, free competition, protected by a regulatory framework, is the second basic precondition for realising Ludwig Erhard's dictum about ‘prosperity for all’. ‘Prosperity for all and prosperity through competition belong together inseparably; the first postulate is the goal, the second is the path that leads to this goal,’ says Erhard, the father of the political implementation of the social market economy in Germany. Healthy self-interest is not only at the core of every market economy, it is also an important point of reference for the social market economy. A baker does not bake bread out of compassion for the hungry alone, and a bank does not grant loans primarily because of its sense of social responsibility.
Since time immemorial people have been spurred on to greater achievements through the pursuit of happiness and personal gain. In keeping with the social nature of humans this striving has continuously led to higher forms of cooperation–-up to the highly complex division of labour with electronic money transactions in global markets. This increasingly sophisticated division of labour and specialisation, together with the accompanying technological progress, have made enormous increases in productivity possible. These developments form the decisive basis of prosperity for all. This requires free competition protected by a strong state from concentrations of power, in other words, free access for everyone to the market where all can offer goods and services. The market is the people's day-to-day vote on the services offered to the customer by the entrepreneur. Only those entrepreneurs who satisfy the needs of the consumer are successful. Thus, the effects of a market economy system are also social. This applies particularly to family businesses where entrepreneurs feel themselves personally responsible for their staff. Their credo is not that of US economist Milton Friedman, who said that ‘the responsibility of business is business’, but an orientation towards long-term goals. It pays to think beyond the present. When there are long-term perspectives, employees identify with their company; they are more motivated and consequently more productive. In a sense they repay the entrepreneur's loyalty to the company with a greater willingness to work. Politics also has to think beyond the present and particularly keep in mind the concerns of the owners of small- and medium-sized enterprises and of skilled workers. They are the backbone of our society.
The third constitutive element of the social market economy, besides the combination of freedom and responsibility based on the Christian image of the human being and free competition, is social adjustment. Alfred Muller-Armack, who coined the term ‘social market economy’, understood it as the combination of freedom in the market with social adjustment. This is not an arbitrary mix, but a political idea regarding economic systems. Within a competitive economy, social adjustment endeavours to combine free initiative with social progress, which is safeguarded precisely by market economy achievements. For this reason a system of social security has to correspond with the principle of staying in line with the market. Since the market signals the urgency of needs and the scarcity of resources via price mobility and thus also provides the stimuli for innovations–-F. A. v. Hayek's formulation of ‘competition as a method of discovery’–-redistribution contrary to the market destroys the basis which creates ‘prosperity for all’.
Within the framework of a social policy which stays in line with the market, it is an affirmation of personal dignity that each individual is primarily responsible for earning his or her own living. Everybody must still have sufficient leeway to make private provisions for the future and accumulate assets. This is a decisive precondition for a social system in which the individual assumes responsibility and also feels responsible for his or her fellow human beings. When he or she is incapable of earning the necessary income, then the mutual support of the community comes into effect. Initially this includes families, church institutions and other self-help organisations. The entire mutual support community is ultimately responsible for guaranteeing the humane subsistence level of each and every person. The individual's ability to work plays a decisive role in the relationship between the subsidiary primary responsibility and the supportive ultimate responsibility of the community based on the principle of solidarity. The community's duty to support a person who is incapable of working and incapable of helping him- or herself, because of disability or age, is not the same as the duty towards an able-bodied person who can help him- or herself and is thus bound by a self-help obligation.
In the development of social policy, any redistribution that is in line with the market has to make a strict differentiation between insurance benefits based on the achievement principle and financed by contributions on the one hand, and tax-financed social benefits based on the principle of need on the other.
Ludwig Erhard declared that ‘individuals can only be truly free as persons and truly free vis-à-vis the state and its institutions when they can rest assured that they are able to survive on the strength of their own achievements and their own labour, with neither protection nor hindrance from the state’. The aspiration to climb the social ladder must not be stifled by burdens and restrictions. Individual well-being is decisively influenced by the goals people set for themselves and by the satisfaction they feel on achieving them. This is an essential driving force in the dynamics of the economy.
Policymakers must stimulate individual initiative and thus contribute to greater self-confidence. The motivation to achieve is stifled when many people discover that there is little or no reward for their own efforts to find work. On the other hand, the effect of a policy that constantly draws on the earnings of those with existing jobs through compulsory social security contributions is that it grows increasingly difficult to become involved in society through one's own achievements: companies offer too few traineeships; young people wanting to work are systematically discriminated against in comparison to those who already have a job; and professional alternatives abroad are often more attractive, especially for younger people.
‘Social justice’ also comprises the opening up of opportunities whilst people are in education and training and during their professional lives. This includes strengthening people's determination to grasp the available opportunities as well as their ability to persevere through difficult phases. ‘Self-discipline, a sense of justice, honesty, fairness, chivalry, moderation, public spirit, respect for the human dignity of others, sound values–-those are required even before people enter the market and enter into competition with one another. They are indispensable pillars that prevent both from degradation,’ says Wilhelm Röpke. Ideas of freedom and self-responsibility and the accompanying willingness to see life's adversities as a challenge develop first in the family, then at school and in further education. The willingness to exercise freedom and individual responsibility has little to do with social status, inherited wealth or physical or intellectual gifts. This willingness is the determination of each individual to face up to the challenges of life. One of Ludwig Erhard's most frequently cited quotes condenses this into a simple but convincing formula:
‘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 a position to do this.’
Alexander Rüstow, another prominent founder of the social market economy, described the role of the family as the nucleus not only of society but also of the social market economy as follows: ‘The human being is by nature a social being; the attachment to his family and the group in and with which he lives is instinctive and inborn. Culture has partially deepened this attachment and partially extended it to further circles of mutual support–-the extended family, the clan, the tribe, the people, the nation.’
Everyone is reliant on learning how to independently earn the minimum amount needed to exist. This is a right without which no person can live and maintain his or her human dignity. The right to education, however, encompasses more than simply developing the capacity to earn an income. It is about developing a young person's whole personality, his or her conscience and heart. A one-sided economic understanding of education would be calamitous because, especially in a globalised economy and pluralistic society, young people must have the opportunity to mature into spiritually and culturally well-rounded personalities and to develop an ethical form of judgement.
According to the principle of subsidiarity, the primary responsibility for the upbringing and education of children lies with their parents. In the Christian image of the human being and in Germany's Basic Law, the upbringing and education of children is ‘the natural right of parents and a duty primarily incumbent upon them’ (Basic Law Art. 6 para. 2). In keeping with the principle of solidarity, this ‘right to education’ is seen as the ultimate responsibility of the entire community. The state must strengthen parents in performing their right and duty to educate their children.
The portion of parents’ income needed not only to secure their existence and that of their children, but also to ensure the realisation of their children's right to education may not be taxed by the state. It constitutes an existence-securing expenditure and as such should not be liable to taxation.
The same applies to portions of income that adults spend on further education and training in order to secure or improve their earning capacity. The appropriate tax-free allowances should be granted for different phases of life and education. If parents are not in a position to independently earn the means necessary to realise their children's rights, then society is obliged to provide the necessary funds according to the principle of solidarity. Family and education policy and the financing thereof must be given absolute priority as a responsibility of society as a whole.
A balance is needed between the principle of primary responsibility for providing one's own livelihood and that of one's children through gainful employment, and the primacy of the parents’ right to be in charge of their children's upbringing and education. The decisive criterion in weighing childcare and employment is the child's well-being. Sovereignty of decision-making in this matter lies with the parents. The community and the state play a supportive role, and in the case of child abuse or neglect they have a protective function. Flexibility and freedom of choice in the day-to-day operations of companies must enable parents to combine the raising of their children with their job in an individual way. The state system, society and the economy must be organised in a family-friendly way, as opposed to the family being organised in a business-friendly way.
A child that is unable to speak German fluently on the first day of school or has difficulty forming complete sentences, that has poorly developed social skills or powers of concentration, often has little chance of ever compensating for these deficits. He or she may manage to find a traineeship, but admission to a university remains virtually unattainable. Thus there has to be a shift in emphasis in pre-school education, away from looking after and minding to raising and educating children. Since, in keeping with the principle of subsidiarity, the primary responsibility for raising and educating children lies with their parents, they have the right to organise this education for their children under their own initiative and responsibility. This includes the founding and maintenance of the appropriate educational institutions as well as the freedom to choose which educational facilities their children should attend. But the state–-in Germany it is each federal state–-has the right and the duty to specify and implement standards on the basis of its ultimate responsibility.
Besides the aforementioned constitutive elements of the social market economy, monetary policy also plays a prominent role which should not be underestimated. Walter Eucken said, ‘Experience shows that a monetary system which gives the decision-makers of monetary policy a free hand credits them with greater abilities than can generally be attributed to them. Ignorance, weakness towards interest groups and public opinion, incorrect theories, they all influence these decision-makers to the great detriment of the task that has been entrusted to them.’ This sentence almost sounds as if Eucken had critically looked over their shoulders and warned those who are partially responsible for the current worldwide financial crisis, who laid the foundation for the crisis through an expansive monetary policy in the US and who made it possible, through regulation of the credit-approval process, to indiscriminately grant loans to people to buy real estate regardless of their income.
Inflation is the core danger associated with wrong monetary policies. A stable currency safeguards the beneficial social effects of a competitive system; a depreciating currency undermines them. When people save to make provision for emergencies or their old age, then they are showing trust in the stability of the currency. Inflation destroys this trust and undermines to a certain extent even the credibility of the state. An inflation rate of ‘just’ 2% halves the value of financial assets after 35 years. A stable currency also disciplines politics because the lack of budgetary discipline drives up interest rates and hence deters businesses from investing in future jobs. Budgetary discipline for its part eases the central bank's difficult task of adjusting the money supply in the interests of stability. A stable currency and solid finances are two sides of the same coin. The Deutsche Bundesbank has gained and consolidated its reputation in Germany and the world through its stability-oriented course, which it has often pursued in the face of political resistance. The bank has introduced such a course into the European central banking system.
This legacy is constantly threatened by political pressure, as became apparent during the height of the crisis. It is all the more important to emphasise the commitment of the European Central Bank (ECB) to stabilisation policies. In the long term this will also be the best employment policy because of the resulting reliability. That the ECB in general paid a lot of attention to a stable money supply and that it only resorted to measures to expand liquidity on a relatively small scale and when absolutely necessary is shown by the fact that the Eurozone is relatively well positioned compared to other nations and economic unions. Even within a globalised economy it therefore stands a good chance to overcome the current crisis and get back on track towards growth.
The collapse of the Soviet empire opened up a new dimension of free trade as a basic requisite of globalisation. The accompanying division of labour and growth in productivity not only fosters prosperity, it also links up peoples through a network of mutual interests, which in turn increases the opportunity for peace. Germany in particular, as the leading exporter in the world, profits from globalisation. Before the bubble burst, the financial markets, which are currently not unjustly caught in the crossfire of worldwide criticism, also contributed through their innovations to greater growth in the world economy, to higher employment and to higher tax revenue. The expanding financial markets actually greatly facilitated the advance of globalisation. Through a free flow not only of goods but also of capital, they contributed quite successfully to a reduction in poverty in the world as well. The price that was paid for this success, however, was a dangerous undermining of the stability of the entire financial system.
The financial crisis has damaged the engine of prosperity, that is, the free exchange of capital. After the disastrous decision to allow Lehman Brothers to go bankrupt, state intervention in the market to avert a crisis was unavoidable and was also largely welcomed. One basic principle, however, remains true and important: The state is not the better entrepreneur and is not a good substitute for the market. This has to be taken into account when debating how better regulation of the financial markets is going to work. Klaus Peter Muller, the former President of the Association of German Banks and Chairman of the Board of Managing Directors of Commerzbank AG stated: ‘The task consists of devising a successful shakeout of the financial sector in such a way that a stable international financial system and an economy that is competitive for the long run emerge.’ In other words, a financial system has to be created that is as innovative as the former system, but considerably more stable.
In this context the prevention of imbalances in the world economy is certainly particularly important. A US current account deficit of almost 800 billion dollars is as detrimental as the correspondingly huge currency reserves of the Asian central banks.
One often hears that because globalisation is changing the world, it is putting to the test the concepts on which politics are based. This is true. In a globally open society, entrepreneurs and the working population can make use of the alternatives in other countries. More and more highly qualified young people make use of this opportunity. It is mistaken, however, to think that globalisation is heralding the end of national policies because the major companies operate on an international scale while national policies are restricted to national jurisdiction. In the final analysis, international competition for business investment boils down to assessing the regulatory policy in the countries in question. Governments have lost their regulatory monopoly. But this does not mean that they are now helplessly exposed to the storms of globalisation. It is true especially for the highly globalised financial markets that new regulations have to be developed and coordinated multilaterally and then uniformly implemented in national jurisdictions. Unilateral regulatory attempts could actually cause damage in this situation.
However, it would be almost recklessly naive to invest with excessive expectations in ‘better regulation’. It should still send shivers down our spine to remember how much even the call for a European economic regulator led to scepticism. More modest but effective steps promise more success. This includes the utilisation of existing international organisations. Contrary to some assertions, the IMF can play a central role in this. As an institution with the appropriate capacity and experience, based on clear and encompassing analyses, it can certainly assume some functions within the framework of an international ‘early warning system’, provided that its members are willing to heed the recommendations of the IMF more carefully than they have done in the past and to see the stability of the financial markets as an overarching goal.
A clear commitment to open markets and free trade is certainly also very important. Messages of ‘Buy British!’ or ‘Stimulus money for the French auto industry only’ can lead to a disastrous spiral of protectionism, which could have incalculable consequences and lead to a new crisis.
We have to accept that competition will increase as the developing and newly emerging economies gain the ability to enter the international markets as strong competitors. At the same time their growing purchasing power turns them into potential customers for our goods and services, provided that they resist the temptation to resort to protectionist measures in order to secure the wealth they have gained. This shows how important success at the Doha Development Round is for overcoming the current crisis. With cooperation, prosperity levels will rise for everybody.
What is true for free trade is equally true for environmental and climate policies, which can only protect people if they become a worldwide concern. Consequently a global approach, as displayed in the efforts of the Kyoto Protocol, is the right one. However, this should not prevent any country, particularly Germany, from playing a pioneering role. Harmony between humanity and nature, between industry and the humane shaping of the environment, was a central concern of the founders of the social market economy. Walter Eucken already pointed out the need to correct business accounting whenever it neglected the environmentally damaging effects of agricultural or industrial production.
When environmental pollution is seen as a market failure, this creates the impression that the market economy is to blame for this and that salvation lies in state regulatory measures. The opposite is true: environmental damages occur because there is no market in which the opposite side is able to present the bill for polluting the environment. For this reason there should be something like a ‘trustee for nature’, which would assert these rights against polluters. It would then be a matter of considering which measures are suitable–-emission permits, tax solutions or even state regulations–-depending on the situation at hand. In such cases the economic and social circumstances involved also have to be taken into consideration. Overenthusiastic environmental protection that reduces a location's international competitiveness undermines the foundations that provide and guarantee prosperity, social benefits and also the funds for environmental protection. Emphasis has to be laid on economic efficiency precisely in the interests of environmental protection. Therefore we call on policymakers to utilise competition as a method for discovering the appropriate answers to eco-political challenges.
These challenges bring us back to the initial question of why the social market economy generates international interest and evidently holds attraction: the social market economy is so successful precisely because, as a ‘progressive style that awaits definition’ (Alfred Muller-Armack), it succeeds in integrating principles, goals and instruments in accordance with these challenges into a whole that is as consistent as possible. For Muller-Armack the social market economy was ‘not, in accordance with its conceptual design, a complete system that, once finished, could be forevermore applied in the same way. It is an evolving system, in which it is necessary to set new priorities again and again, according to the demands of changing times.’
If Ludwig Erhard's basic idea to generate ‘prosperity for all’ is to lead to a strengthening of the world economy by establishing common elements of monetary policy, accountability and binding regulations, it is vital that national governments keep striving to implement the guiding principles of ‘prosperity for all’ in their own countries. If we bear in mind the aforementioned central issues, the social market economy continues to guarantee that we will overcome the current crisis and that we will then be able to count on the conviction that all citizens will in the end profit from this economic system.
Footnotes