Social market thinkers have ruined the German economy

Although Germany has the third largest economy in the world, it suffers from rising unemployment, massive capital flight and a growth rate approaching zero. These problems can be traced to the beginnings of the Federal Republic, writes Norman Barry, a professor of social and political theory.

Following World War II, Germany's economy was resurrected by Ludwig Erhard, an obscure economics professor in a minor government post. Erhard's revolution contained two conflicting strains of thought that began harmoniously: liberalism and the social market. Ultimately, though, one triumphed – and it was the wrong one.

"Ordoliberalismus" was clearly free-market.

  • During the war its founders had produced a coherent theory
    of the ordered market economy.

  • They advocated a small state and a legal system designed
    to preserve freedom.

  • Under Erhard's influence, Germany created the strongest economy in Europe, and the freest next to Switzerland.

    "Sozialemarktwirtschaft" (social market economy), on the other hand, emphasized social consensus over economic freedom – achieved, for example, by having union representatives on every corporate board. It worked well for awhile; Germany, for instance, did not experience the crippling labour strikes of Britain. Unfortunately, the social market thinkers had a much broader agenda.

  • Beginning in the 1960s, Germany shifted to a costly, universal welfare system, including a ruinous extension of pension rights.

  • The social element gradually displaced the market as the chief economic concern.

    Today, the social market thinkers have won.

  • Germany has a vast welfare state, an almost completely unfunded pension system that will impoverish future generations and a regulatory and tax system that offer no incentives to invest in the country.

  • Now it pays not to work in Germany, and to stay in school until age 30.

  • Its admired consensus is now a barrier to innovation and change.

    Perhaps the biggest mistake of the free-market advocates was the failure to make their reforms constitutionally permanent.

    Source: Norman Barry, Germany must rediscover the market, Financial Times, January 23, 2003.

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    Benjamin Franklin

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