Germany's Social Market Economy and the New Systems Competition

By Farmer, Karl | Journal of Markets & Morality, Fall 2006 | Go to article overview

Germany's Social Market Economy and the New Systems Competition


Farmer, Karl, Journal of Markets & Morality


World championship in exporting manufactures notwithstanding, weak gross domestic product (GDP) growth and the largest number of unemployed since the 1930s have tarnished the splendor of Germany's once celebrated social market economy (SME). In search of the reasons for their country's present mediocrity, contemporary (ordo-) liberal German economists point to construction defects in the economic constitution that escaped the attention of the founders of the SME. This article reviews the legacy of the father of the SME as well as the liberal critique of the evolution of the SME in postwar Germany under the old systems competition (OSC) between capitalist West and communist East. The liberal white hope, that is the new systems competition (NSC), ensued by European integration and globalization, is presented as a mechanism for overcoming national policy blockades in reforming (labor) market institutions in accordance with the common socioeconomic preferences of all citizens.

Introduction

Germany, once Europe's model economy, has fallen behind England and France in terms of economic growth. Even small European countries such as the Netherlands, Ireland, and Austria have overtaken Germany in terms of percapita income. Five million unemployed, the highest figure since the 1930s, (half of whom are long-term unemployed) (1) is the clearest evidence of Germany's economic malaise. Conversely, over the past five years, German exports have grown more than three times faster than U.S. exports; thus, pushing Germany back into the position of world champion in exporting manufactures. Germany is running a current-account surplus, while the United States has a huge deficit.

Hans-Werner Sinn (2) attributes weak gross domestic product (GDP) growth and the "German disease" of high long-term unemployment among less skilled workers to both internal and external factors. (3) Among the latter, the intensification of international competition on world commodities' markets and the squeezing of Germany's interest advantage after the creation of a common European capital market, figure prominently. Among the former, the comparatively strong increase of German wages and wage-related expenses, hindering job-creating investment, has predominated. (4) In addition, the expansion of the welfare state contributed significantly to the rise in labor costs by increasing minimum wages through the expansion of wage replacement payments and by extending the tax burden on labor. Last but not least, the economic mismanagement of German reunification explains--according to Sinn--a significant part of Germany's weak economic growth. (5)

Wolfgang Kerber and Sandra Hartig trace the roots of Germany's present economic difficulties back to the 1950s: Even then "a broad consensus existed about the need to integrate market-oriented economic policy with a highly distributive welfare state in a 'social market economy.'" (6) While in the 1950s, the decade of the so-called German economic miracle, the ordo-liberal pillar of the SME predominated; in the late 1960s the social precepts gained the better of market orientation, with detrimental effects to Germany's economy in the following decades.

Ulrich Witt associates the extension of corporatist, interventionist, and redistributionist policies beyond ordo-liberal principles with the social ethos that the founders of the SME had included in Germany's economic constitution. (7) Witt claims that organized interest groups learned, over time, to exploit the vague notion of the social in their rent-seeking activities, while on labor markets, the social partners utilized their legally protected monopoly power to achieve wage increases and protection for the employed at the expense of the unemployed, the bankrupt firms, and the German taxpayers. Witt concludes "that the major objective of the fathers of the German economic constitution--to avoid mass unemployment and its consequent hardship--is reduced to absurdity. …

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