Germany’s social market economy in the 1960s and 1970s
The term “Sozialemartwirtschaft” was first coined in 1946, and has since been used as a definition of the policy regime of the Federal Republic of Germany, and now the unified German state. The ambiguity of the English translation of the phrase is indicative of the problems of arriving at a clearcut definition of the ideal.
`Sozialemartwirtschaft has been translated as “regulated free market economy” and “socially conscious free market economy”. By phraseological definition then the term implies a “regulated”, meaning controlled economy, and “free” meaning just a market economy.
`The theoretical work of Ludwig Erhard provides the ideological framework for this Social market, though the initial movement centred around the University of Frieburg and W. Euken. This movement had alot in common with a ‘laissez-faire’ liberal view of market forces in generating economic efficiency, but was maybe closest to the Von Hayek (Austrian) school of thought, whereby governments do have an fundamental role in constructing a competitive market environment.
`I will first look to see if there are any underlying principles in the “Sozialemarkwirtschaft” ideology to see if there is an acceptable definition for the principle. And further look in more specific terms to see if the policy doctrine of German governments in the 1960’s and 1970’s adhered to these fundamentals, (or was there an adaptation of principles?).
`The concept in general emphasises the need for a well functioning competitive system as the means of preventing the concentration of public and private power. There was a desire also for various government measures to assure market competition and economic stability, since an unregulated free market of the lassiez-faire variety had historically led to monopolistic practices and cyclical fluctuations.
`To ensure competition the government was to restrict, if not totally forbid, cartels and monopolies and to actively combat any other kinds of restraint of trade. Pre-war Germany was a haven for the cartel and monopoly, moreso than in other major European states. The enthusiasm for change in this area came from the Frieburg/Von Hayek schools and also from the Allies in particular the USA who clearly believed this form of economic organisation underpinned the Nazi regime.
`Social cohesion would be fostered by mitigating major income inequalities if they appeared, in spite of competition through a progressive income tax regime, mild enough not to thwart incentives. Post war Germany was also initially ruled by a coalition of Christian Democrats, (CDU/CSU), and the Free Democrats, (FDP). Thus there was a strong call for more generous welfare provision, linked to this Catholic concern. But also in the period there existed strong minority support for the SPD, they being more interested in the social side of the Sozialemarkwirtschaft meant the government of the right needed to be conscious of the social tradition going back to Bismark.
`An anathema towards economic planning existed, unlike European counterparts. The French indulged in ‘indicative planning’ post war, as did the British Labour government of the time. Proponents of the social market economy desired a complete break with the past and especially the Hitler regime , itself a strong planner.
`Monetary stability was also an objective of the social market. there was constitutional provision for an independent Central Bank. The ambitions of this institution was to provide a stable price level, that is to take an anti-inflationary stance. The problems and consequences (namely the fuel it gave to the National Socialist movement) of hyper-inflation in post World War I Germany were still strongly felt and a determination that this should not occur again existed. Although the Bundesbank is probably the most independent of Central Banks worldwide the constitution was still ambiguous towards its’ allegiance. The Bundesbank should also take into account the views expressed by Federal government. But in saying this although government officials were entitled to attend the deliberations of the Banks’ highest decision making body, the Central Bank Council, they had no vote on the policy decision, only a delaying privilege.
`Fundamental to the post war German recovery was a reliance on exports of capital goods as a means of wealth creation. The social market then was based around a theory of supply side economics as opposed to the Keynesian demand led growth. It was a common theme that national income should be increased through a growth in exports.
`We can say then that the social market was an amalgam of a general framework built around free market competition, incorporating a welfare provision, thus a ‘happy medium’ was driven between the two extremes of the ‘free market’ and the ‘centrally planned economy’. The general policies were investment led and export orientated growth strategies, a tight monetary policy and a paternalistic social welfare system. Together these policies are known as the ‘social market’, a free market with a heavy legislative framework. But to what extent these initial intensions implemented into the German economic fabric is another question.
`The deconcentration of the German economy began in the immediate post war period, with the help of the occupying forces. The industries that underwent radical change were firstly the chemical industry, principally I.G. Farben, a company that had ’employed’ slave labour during the war years, the national railway system, the iron and steel industry and the banking system, all highly monopolistic in Germany. Initial intensions to alter further this factor in the German economy became disemphasised as the threat of the cold war and Communism grew. In the debate over the ‘Cartel Law’ in 1957 the Economics Ministry showed great flexibility in watering down a law that could have had a severe impact on the large oligopolistic export orientated firms, who were a mainstay of the economic recovery.
Certainly the 1957 law brought more monopolistic breakup than the equivalent 1948 Act in the UK, but throughout the 1950’s and 1960’s total German industrial production was supplied by some 100,000 enterprises, of which about 60,000 had less than twenty employees, 35,000 medium sized units of between 20 and 199 workers and roughly 7,000 large firms employing 200 plus individuals. By the late 1960,s the share of these three categories in total employment and sales was about 5%, 25%, and 70% respectively. The fifty largest concerns in German industry between 1954 and 1967 also expanded there share of total industrial turnover from 25% to 42%. It appears then that any breakup didn’t materialise. The initial legislative breakup tended to drive co-operation into more implicit channels, the German attitude both theoretical and governmental towards economic concentration in general and cartels in particular had always been one of mild acceptance. Contrary to the Anglo-American view of monopolistic situations leading to indeterminacy and disorder, it was held that cartels themselves were a form of ‘order’, and the continued existence of cartel like arrangements partly reflected this view.
`n the other hand the entrepreneurial role was seen as central to the social market. The dynamic role these actors played was seen as essential. Many government programs were instigated to promote the small and medium sized industrial and handicraft enterprises, intended to equalise the staring condition in branches were large companies due to their economies of scale and generally greater resources threatened smaller units with extinction.These policies were also part of a larger ideal to generate economic wellbeing of the ‘middle classes’ themselves seen as a stabilising factor in society.
`So one of the fundamental ideals of the social market, the banishment of cartels and monopolies in favour of a totally freely competitive system seems to have been watered down somewhat in favour of the continued existence of such practices that would inevitably benefit many of the large scale exporting outfits. But this was counteracted somewhat by the assistance granted to those at the opposite end of the scale. Evidence of the ‘happy medium’ attempts of the social market.
`Did economic planning occur in the Germany of the 1960’s and 1970’s and if so what form did it take?
`In the immediate post war period Germany was governed by a centre-right coalition of Christian Democrats, the CDU/CSU, and the Free Democrats, FDP. The CDU won and outright majority if 1957 but the FDP rejoined the coalition in 1961. In all these governments it was agreed that government policy should steer a middle course between the unpredictability of complete laissez-faire and the distortions that central planning might introduce into market mechanisms for the allocation of goods.
`There was though intervention in certain areas, small firms were recipients of Lander government support, as was agriculture as if is in most European countries . But public expenditure as a share of GDP was consistently lower in the early years than other states, and there was a strong commitment to a fiscal surplus.
`But there were elements of planning by industry itself .As we have seen before cartels still operated and a feature of post war Germany was the well organized private sector. Employers organisations were very active, the Chambers of Commerce demanding compulsory membership. There was alot of collective action, but whether or not this can be seen as a substitute for state planning is highly debatable.
`In 1966 social market economics became questioned, Erhard Chancellor since 1963 proved to be less proficient in this post, and the economic downturn of the year eventually led to a change in the form of the ‘Grand coalition’ of the CDU/CDU and the SPD (Social Democrats). with the advent of the SPD came a more Keynesian approach, or the ‘enlightened social market’.This started a period where governments took more control than in previous administrations.
`The 1967 ‘stability laws’ symbolises a shift towards some form of planning. All public bodies were obliged to use their revenue and expenditure in a contra-cyclical way, that is change spending and tax policy in order to regulate the level of economic activity. The political acceptance of ‘Tri-partite bodies came about, to pursue policies of ‘concerted action’. And also the Global steering idea of macro management came about with a commitment to balancing budgets over a cycle. All these factors tell us that from the late
`1960,s and into the 1970,s German economic policy moved away from our definition of the social market economy with governments intervening more often, in an ‘enlightened’ manner.
`The paternalistic welfare system was maintained throughout the period with the provision of a welfare base level through which no German should fall. And the rise in incomes per capita further reinforced the ideals of the social market ideal.
`One must not forget though the significant part played by institutions in the social market. It can be argued that when talking of the social market institutional considerations far outweigh any policy considerations. The kind of ‘corporatism’ in the high level of consensus and co-operation between government, employers and trade unions alike is an essential feature of the social market. The role of banks is also a telling factor, in that many banks hold large shares in individual enterprises and are thus represented on supervisory boards, meaning they play a strategic overseeing role in the running of firms. These factors have remained solid, still being an intrinsic part of the social market framework.
`We can see then some deviation from a strict definition of the social market as far as policy in the period is concerned. But they can only be seen as an attempt to better the ideal, and certainly not a deliberate break from the underlying principles of a framework that has greatly benefitted Germany.
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