In 1948, the Social Market Economy was introduced in Germany by Ludwig Erhard as the economic system. Since then, Germany has been acting under this guiding principle and found a legal affirmation of the concept in 1990 as it fixed the Social Market Economy as the basis for the economic union of the Federal Republic and Democratic Republic of Germany (“Grundlage der Wirtschaftsunion ist die Soziale Marktwirtschaft”, Art 1-3). click here for more information on this paper
In times of economic growth and prosperity, the Social Market Economy seemed to work well and further expansion of the social system did not cause any serious problems, but soon the circumstances changed. Important driving factors and trends like the reunification, the demographic development and the globalization have altered the conditions for successful economic policy. In the last decade, excessive national debts and high unemployment rates have revealed a serious crisis and initiated a strong debate whether the Social Market Economy is still able to adapt to and master the challenges in the age of globalization. Globalization proceeds inexorably and affects all areas of life. More and more companies are relocating their production plants into low-cost countries in Eastern Europe or the Far East as a result of Germany’s labor costs, which seem far too high. Nowadays, globalization is held responsible for nearly every reduction of jobs and social disparities, so that many people are afraid of its consequences.
At the same time, several Scandinavian countries are known for their well-functioning economic policy and seem to have found an answer to the globalization challenge maintaining a high standard of living, social justice and international competitiveness. Even if in Germany the economic revival of the last two years has attenuated the debate, a fundamental solution to the problem has not been found and the serious continuing challenge of the globalization cannot be neglected.
The fast European Integration process as one expression of globalization yields many unexploited chances and opportunities. For a few years, an increasing number of politicians have been postulating the amendment of the European Integration by a social dimension. A European model of Social Market Economy would promise a solution to the current problems. Indeed, it is worthwhile and important to search for and discuss new models and opportunities in order to find answers to the challenges of globalization.
This thesis aims at making a contribution to the comprehension of the current debate whether Social Market Economies are still able to deliver what they promised and whether the concept is still adequate facing the challenges of globalization. It remains to be evaluated what needs to be done to fulfil the demands of modern societies. The thesis furthermore analyzes the question whether Social Market Economies are damned to fall behind other emerging societies in the fast developing world economy. The objective of the thesis is the investigation and evaluation of potential perspectives and opportunities of the German Social Market Economy.
Therefore, the thesis will first inspect how precisely the globalization is challenging the Social Market Economy. After the identification of the main problems and developments, the thesis will discuss in what way reforms such as the Agenda 2010 and other current programs solved the problems. Having identified the main problems and discussed actual reforms and approaches, an analysis of Denmark including a comparison of the Danish model of Social Market Economy will investigate if it is possible to take advantage of their success. Subsequently, potential benefits of a European model of Social Market Economy will be examined and discussed. It will be clarified whether a European model constitutes an efficient solution to the current crisis.
Concluding these perspectives, the thesis will try to give an outlook on how the Social Market Economy in Germany can adapt to and even benefit of globalisation.
2 SOCIAL MARKET ECONOMY IN THE GLOBALIZATION
2.1 The Concept of Social Market Economy
The concept of Social Market Economy was first introduced by Ludwig Erhard with the monetary union on 20th June 1948. More than the enactment of a certain, widely accepted policy the monetary union was rather a solo by Erhard and some of his colleagues like Mr. Müller-Armack (Cassel & Rauhut, 1998, p. 4). “We are committed to two big moral objectives: freedom and social justice.” Therefore, they tried to implement an economic policy which combines the principle of [market] freedom with the principle of social justice (Müller-Armack, 1956, p. 390). Although Germany maintained this principle of economic policy for 60 years, the term “Social Market Economy” does not have a generally accepted and precise definition but induces a lot of interpretations. Nevertheless, it has become a widely spread and accepted politico-economic overall concept, which aims at competition and social balance at the same time. Nowadays, the principle can be found in Article 20 of the German Constitution and in the preamble of the unification treaty in 1990 (Althammer, 2007, p. 193).
It has its roots in the teachings of Adam Smith and supports liberal positions such as the division of labor, free trade, and competition. There is a consensus that these traits, basically, guarantee economic growth, performance, as well as efficiency and, therefore, the best economic system. Nevertheless, social security and, therewith, the redistribution of income are favored objectives, which have been set from the very first, so that as many people as possible benefit from the achievements of the market economy (Paraskewopoulos, 1998, p. 225). However, the implied principle of subsidiarity signifies that social security is only required to maximize individual opportunities for development and, therefore, is rather a system of help for self-help. Based on this, personal provision, individual responsibility, and private initiatives have priority, which naturally demands that everybody has the means to accommodate himself and his family. This corresponds to the traditional image that a society is configured from the bottom up (Cassel & Rauhut, 1998, p. 12). Also, Müller-Armack once said that the social purpose must be ensured without disturbing the functioning of the market (Müller-Armack, 1956, p. 391).
Summarizing, the Social Market Economy is based on five principles and values. Primarily, the concept of Social Market Economy has the duty to respect and ensure the freedom of the individual, because freedom is a foundation of a pluralistic society enabling every individual to pursue its own wishes and self-actualization. The only restrictive factors are the common welfare and the freedom and rights of other human beings (Schlecht, 1998, p. 37).
As competition is the second dominant principle, the consumer is in the main focus of Social Market Economies. Consequently, efficient production, innovations and technical progress are enforced, free consumption arises and finally income is distributed depending on performance. Furthermore, competition is known to prevent any oversized concentration of power and, therefore, guarantees, the rights of the citizens (Schlecht, 1998, p. 38).
Thirdly, Erhard stated that, notwithstanding the fact that the majority of people will gain its income through this market process, a substantial need for amendment through socio-political measures remains. However, the intentional accentuation lies on the following: The more successful the economic policy is, the fewer social services are needed. Thus, socio-political services are a fundamental component of the Social Market Economy, but only as a clearly subsidiary element.
Fourth, the durable protection of the economic order requires conscious state forming and interventions. An effective competition policy in order to perpetuate intensive competition is an important duty of the state.
The fifth principle is formed by constitutive and regulative general conditions. They include private property, liability regulations, convertible and stable money as well as free formation of prices in open markets, freedom of contracts and establishment. Policies need to be constant and reliable and must provide public infrastructure and regulations for environmental protection (Schlecht, 1998, p. 38). It can be concluded, that Social Market Economy is a general economic policy concept, an open model for a flexible social and economical arrangement – depending on social and societal objectives and scarcities (Schlecht, 1998, p. 36).
Ludwig Erhard made a decisive contribution to the enactment of the Social Market Economy as he enforced the monetary reform on 20th June 1948. Other important influences on the conception originated from Walter Eucken, Friedrich August v. Hayek, Alfred Müller-Armack, Wilhelm Röpke, Alexander Rüstow, Franz Böhm and Oswald v. Nell-Breuning (Gutmann, 1998, p. 50).
In the following years, the social and economic order was built according to the Social Market Economy. With the help of Ludwig Erhard, the concept mastered its first major challenges in form of the Korea-Crisis in 1950/51 so that a relapse into a command economy could be prevented. Instead, the Social Market Economy was soon held responsible for the German so-called “Wirtschaftswunder” (Cassel & Rauhut, 1998, p. 4). Dynamic growth rates, declining unemployment rates, stable level of prices, and increasing real wages led to a general acceptance of the system and even the Social Democratic Party renewed its programmatic position under the influence of Karl Schiller, Heinrich Deist and Herbert Wehner with the “Godesberger Programm” in 1959 (Schlecht, 1998, p. 39f).
Also, the Independence of the Bundesbank, standing for the principle of monetary stability, and the Law against anticompetitive practices were finally established against all resistance (Streit, 1998, p. 180). First reforms for social balance like the “Wohnungsbaugesetze” were implemented, but social measures were still guided by the principle of subsidiarity and, thus, provided a framework in which acting on one’s own responsibility was encouraged. This contained for example the “Tarifsvertragsgesetz” in 1949 and the “Betriebsverfassungsgesetz” as well as the “Sozialhilfegesetz” in 1961. Pensions became dynamic and wage-related and, therefore, they were a substitution of wage instead of a grant. On the other hand, privatizations as Preussag in 1959, VW und Veba in 1961 and 1965 were an important withdrawal of the state. Internationally, Erhard achieved to fix some of the liberal principles in the Treaty of Rome in 1957 (Cassel & Rauhut, 1998, p. 1