Germany: From the Market to Socialism-And Back?

By Barry, Norman | Ideas on Liberty, April 2003 | Go to article overview

Germany: From the Market to Socialism-And Back?


Barry, Norman, Ideas on Liberty


Germany is still the third biggest economy in the world, but like the second (Japan) it is suffering from rising unemployment (approaching four million or 10 percent of the workforce), massive capital flight, a growth rate approaching zero, workers who were once a legend for productivity but who are now over-educated and reluctant to do a full day's labor without consulting a rule book of "rights" (a law restricting shopping on Saturday afternoon has only just been repealed), and enormous present and future welfare obligations.

It is fashionable to blame the current crisis on macroeconomic issues, such as adopting the Euro and fixing the country to high interest rates enforced by the European Central Bank, a restraint on budget deficits (imposed, ironically, on Europe, at the insistence of Germany herself), and the foolish one-to-one swap of the worthless East German currency with the Deutschmark at reunification. These are important, but Germany's travails predate all this, and her fundamental structural problems would have eventually generated a national economic crisis whatever the monetary regime.

The problems can only be understood by going back to the founding of the West German republic after World War II. Under Allied occupation the country was rendered unproductive by a hopeless planning system and an unusable monetary regime (the Reichsmark). The country faced starvation, with women forced into prostitution and people begging on the streets or hunting for food in rubbish bins. The Allied occupying forces, surrounded by Keynesian advisers, knew something had to be done but could only think of reforming the monetary system. The country was saved in 1948, however, by an obscure economics professor, untainted by Nazi connections, who held a fairly minor post in the economic administration. He was instructed to effect the change to the Deutschmark, but this man, Ludwig Erhard, did more than this. Under the protection of monetary reform he repealed overnight almost all the constrictions and regulations on pricing and output that had brought the economy to its knees.1 The Nazis hadn't socialized the economy but had made it inefficient; and it was made unworkable by the occupying powers.

With the exception of one U.S. military commander, the Allies were opposed to Erhard's free-market reforms. One American opponent in Germany at the time was John Kenneth Galbraith, who in a famous newspaper article said that wholesale marketization had never worked and would fail now. This must have been the first of his many legendary mistakes, for very quickly the West German economy recovered.

It is certainly true that the reforms were initially unpopular in the country. Conveniently, the first elections in the postwar Republic were held in 1949, after the reforms had taken effect. The conservative Christian Democrats (CDU) were not keen on them, but went along; the Social Democrats (SDP) were still Marxists; and the influence of Catholicism was a permanent obstacle to the individualism of the godless market. The German Free Democrats have always been the most free-market party, but their pro-capitalist credentials have always been diluted by support for some statism and agricultural protectionism.

To the chagrin of almost everybody important, the reforms worked. Under the wise stewardship of Erhard, who had become finance minister, West Germany made a remarkable recovery. It had the freest market in Europe, outside Switzerland, and within a decade had approached the top of the economic league. While Britain was struggling under heavy nationalization and extensive and costly welfare, West Germany prospered. Chancellor Konrad Adenauer was probably skeptical of the market, but was too interested in world affairs to bother about economics, so Erhard had pretty much a free hand.

Erhard revitalized the economy. In those halcyon days public spending was kept well below 30 percent of GDP. (It is now approaching 50 percent. …

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