Social market economy
Encyclopedia
The social market economy (German: Soziale Marktwirtschaft) is the main economic model
used in West Germany
after World War II
. It is based on the economic philosophy of Ordoliberalism
from the Freiburg School
. The economic-political instruments were implementated first by Ludwig Erhard
, Minister of Economics under Konrad Adenauer
's chancellorship (from 1949 to 1963) and Alfred Müller-Armack
, head of the policy department of the economic ministry.
and laissez-faire
economic liberalism
(i.e. a mixed economy
), combining private enterprise with government regulation
to establish fair competition, maintaining a balance between a high rate of economic growth
, low inflation
, low levels of unemployment
, good working conditions, social welfare, and public services
, by using state intervention
. The term "social" was chosen rather than "socialist" to distinguish the social market economy from a system in which the state directed economic activity and/or owned the means of production, which are usually privately-owned in the social market model.
In a social market economy, collective bargaining
is often done on a national level not between one corporation and one union, but national employers' organizations and national trade unions.
Important figures in the development of the concept include Walter Eucken
, Wilhelm Röpke
, Alexander Rüstow
, Franz Böhm
, Franz Oppenheimer
, and Alfred Müller-Armack
, who originally coined the term Soziale Marktwirtschaft.
) was identified with it. From the 1960s, the social market economy was the main economic model in mainland Western Europe, pursued by administrations of both the centre-right
(led by the Christian Democratic Union
) and the centre-left
(led by the Social Democratic Party
). In early 1960s former Yugoslavia adopted modified social market economy and after that had average GDP growth of 6.1% for 30 years until the 1980s.
The term "Social market economy" is still the common economic basis of most political parties in Germany and a commitment to some form of social market economy was present in the European Union Constitution
(a project which was abandoned in 2005 following the negative outcomes of referenda in France
and the Netherlands
).
Economic system
An economic system is the combination of the various agencies, entities that provide the economic structure that defines the social community. These agencies are joined by lines of trade and exchange along which goods, money etc. are continuously flowing. An example of such a system for a closed...
used in West Germany
West Germany
West Germany is the common English, but not official, name for the Federal Republic of Germany or FRG in the period between its creation in May 1949 to German reunification on 3 October 1990....
after World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
. It is based on the economic philosophy of Ordoliberalism
Ordoliberalism
Ordoliberalism is a school of liberalism that emphasised the need for the state to ensure that the free market produces results close to its theoretical potential . The theory was developed by German economists and legal scholars such as Walter Eucken, Franz Böhm, Hans Grossmann-Doerth and Leonhard...
from the Freiburg School
Freiburg School
The Freiburg School is a school of economic thought founded in the 1930s at the University of Freiburg.It builds somewhat on the earlier Historical school of economics but stresses that only some forms of competition are good, while others may require oversight. This is considered a lawful and...
. The economic-political instruments were implementated first by Ludwig Erhard
Ludwig Erhard
Ludwig Wilhelm Erhard was a German politician affiliated with the CDU and Chancellor of West Germany from 1963 until 1966. He is notable for his leading role in German postwar economic reform and economic recovery , particularly in his role as Minister of Economics under Chancellor Konrad Adenauer...
, Minister of Economics under Konrad Adenauer
Konrad Adenauer
Konrad Hermann Joseph Adenauer was a German statesman. He was the chancellor of the West Germany from 1949 to 1963. He is widely recognised as a person who led his country from the ruins of World War II to a powerful and prosperous nation that had forged close relations with old enemies France,...
's chancellorship (from 1949 to 1963) and Alfred Müller-Armack
Alfred Müller-Armack
Alfred Müller-Armack was a German economist and politician.He was professor of economics at University of Münster and University of Cologne. Müller-Armack coined the term "social market economy" in 1946....
, head of the policy department of the economic ministry.
Model
The social market economy seeks a middle path between socialismSocialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
and laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
economic liberalism
Economic liberalism
Economic liberalism is the ideological belief in giving all people economic freedom, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and...
(i.e. a mixed economy
Mixed economy
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...
), combining private enterprise with government regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
to establish fair competition, maintaining a balance between a high rate of economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, low inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, low levels of unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
, good working conditions, social welfare, and public services
Public services
Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...
, by using state intervention
Economic interventionism
Economic interventionism is an action taken by a government in a market economy or market-oriented mixed economy, beyond the basic regulation of fraud and enforcement of contracts, in an effort to affect its own economy...
. The term "social" was chosen rather than "socialist" to distinguish the social market economy from a system in which the state directed economic activity and/or owned the means of production, which are usually privately-owned in the social market model.
In a social market economy, collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
is often done on a national level not between one corporation and one union, but national employers' organizations and national trade unions.
Important figures in the development of the concept include Walter Eucken
Walter Eucken
Walter Eucken was a German economist and father of ordoliberalism. His name is closely linked with the development of the "social market economy".-Life:...
, Wilhelm Röpke
Wilhelm Röpke
Wilhelm Röpke was Professor of Economics, first in Jena, then in Graz, Marburg, Istanbul and finally in Geneva, and the main spiritual father of the German social market economy, theorising and collaborating to organise the post-World War II economic re-awakening of the then destroyed German...
, Alexander Rüstow
Alexander Rüstow
Alexander Rüstow was a German sociologist and economist. He originated the term neoliberalism meant as a synonym for Ordoliberalism but the term has undergone a change of meaning. He was one of the fathers of the "Social Market Economy" that shaped the economy of West-Germany after World War II...
, Franz Böhm
Franz Böhm
Franz Böhm was a German politician, lawyer, and economist.-Early Life:Franz Böhm was born on 16 February 1895 in Konstanz...
, Franz Oppenheimer
Franz Oppenheimer
Franz Oppenheimer was a German-Jewish sociologist and political economist, who published also in the area of the fundamental sociology of the state.-Personal life:...
, and Alfred Müller-Armack
Alfred Müller-Armack
Alfred Müller-Armack was a German economist and politician.He was professor of economics at University of Münster and University of Cologne. Müller-Armack coined the term "social market economy" in 1946....
, who originally coined the term Soziale Marktwirtschaft.
History
At first controversial, the model became increasingly popular in West Germany and Austria, since in both states economic success (WirtschaftswunderWirtschaftswunder
The term describes the rapid reconstruction and development of the economies of West Germany and Austria after World War II . The expression was used by The Times in 1950...
) was identified with it. From the 1960s, the social market economy was the main economic model in mainland Western Europe, pursued by administrations of both the centre-right
Centre-right
The centre-right or center-right is a political term commonly used to describe or denote individuals, political parties, or organizations whose views stretch from the centre to the right on the left-right spectrum, excluding far right stances. Centre-right can also describe a coalition of centrist...
(led by the Christian Democratic Union
Christian Democratic Union (Germany)
The Christian Democratic Union of Germany is a Christian democratic and conservative political party in Germany. It is regarded as on the centre-right of the German political spectrum...
) and the centre-left
Centre-left
Centre-left is a political term that describes individuals, political parties or organisations such as think tanks whose ideology lies between the centre and the left on the left-right spectrum...
(led by the Social Democratic Party
Social Democratic Party of Germany
The Social Democratic Party of Germany is a social-democratic political party in Germany...
). In early 1960s former Yugoslavia adopted modified social market economy and after that had average GDP growth of 6.1% for 30 years until the 1980s.
The term "Social market economy" is still the common economic basis of most political parties in Germany and a commitment to some form of social market economy was present in the European Union Constitution
Treaty establishing a Constitution for Europe
The Treaty establishing a Constitution for Europe , , was an unratified international treaty intended to create a consolidated constitution for the European Union...
(a project which was abandoned in 2005 following the negative outcomes of referenda in France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
and the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
).
Main Elements
The main elements of the Social Market Economy in Germany are:- The Social Market Economy contains central elements of a free market economy such as private property, free foreign trade, exchange of goods and free formation of prices.
- As a difference to the free market economy the state is not passive, but actively takes regulativeRegulationRegulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
measures. Some elements, such as pension insurance, universal health care and unemployment insurance are part of the social security system. These insurances are funded by a combination of employee contributions, employer contributions and government subsidies. The social policy objectives include employment, housing and education policies, as well as a socio-politically motivated balancing of the distribution of income growth. In addition, there are provisions to restrain the free market (e.g. anti-trust code, laws against the abuse of market power etc.). These elements shall diminish occurring problems of a free market economy.
See also
- CapitalismCapitalismCapitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
- SocialismSocialismSocialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
- Criticism of Capitalism
- Criticism of SocialismCriticisms of socialismCriticism of socialism refers to a critique of socialist models of economic organization, their efficiency and feasibility; as well as the political and social implications of such a system. Some criticisms are not directed toward socialism as a system, but are directed toward the socialist...
- Economic liberalismEconomic liberalismEconomic liberalism is the ideological belief in giving all people economic freedom, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and...
- Mixed economyMixed economyMixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...
- Welfare stateWelfare stateA welfare state is a "concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those...
- OrdoliberalismOrdoliberalismOrdoliberalism is a school of liberalism that emphasised the need for the state to ensure that the free market produces results close to its theoretical potential . The theory was developed by German economists and legal scholars such as Walter Eucken, Franz Böhm, Hans Grossmann-Doerth and Leonhard...
- Social Market FoundationSocial Market FoundationThe Social Market Foundation is a British public policy think-tank based in Westminster, London. It was set up by supporters of David Owen after the Social Democratic Party was disbanded in the late 1980s. It aims to promote and produce policies supporting the “social market”...
- Social democracySocial democracySocial democracy is a political ideology of the center-left on the political spectrum. Social democracy is officially a form of evolutionary reformist socialism. It supports class collaboration as the course to achieve socialism...
- Rhine CapitalismRhine CapitalismRhine capitalism or Rhenish capitalism is a contemporary economic order existing primarily in Western Europe. The term originates from the French economist and Chairman of the Board and CEO Assurances Générales de France , Michel Albert who first used it in his book Capitalisme contre Capitalisme...
- Socialist market economySocialist market economyThe socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...
- CorporatismCorporatismCorporatism, also known as corporativism, is a system of economic, political, or social organization that involves association of the people of society into corporate groups, such as agricultural, business, ethnic, labor, military, patronage, or scientific affiliations, on the basis of common...
- Social corporatismSocial corporatismSocial corporatism is a form of economic tripartite corporatism supported by social democratic political parties based upon "social partnership" between capital and labour interest groups as well as between the market economy and state regulation that is considered a compromise to regulate conflict...
External links
- The Social Market Economy - U.S. Library of Congress
- Essay on Germany's Social Market Economy
- Short Definition from the Economist