Article - The Social Market Economy

Prosperity and climate action:
The socio-ecological market economy is the concept underpinning the transformation towards climate neutrality.

The social market economy forms the basis for our society – a society characterised by freedom, openness and solidarity. According to these principles, the government must afford businesses freedom to operate on a level playing field whilst also promoting prosperity and social security for the people living in Germany. Ensuring the preservation of global ecological assets, including the climate and biodiversity, will, however, require a fundamental development in the German and the international regulatory framework.

“To develop the regulatory policy framework that will turn the social market economy into an ecological and social market economy will be the most important task for our time.” Robert Habeck

This is our best answer to the challenges and changes we are confronted with. It will help us maintain our way of living, working, and doing business, even in different circumstances. The socio-ecological market economy is what we need to renew the promise of prosperity and social security for the people and make it compatible with climate action.
It is for policy-makers to define the regulatory environment that will allow us to deliver prosperity and to safeguard global environmental assets, including a viable climate and biodiversity. Among other things, this requires the correction of market failure, for instance by internalising external effects (e.g. encouraging climate action through carbon pricing).

Safeguarding competition

The market economy is a system that encourages companies to develop innovative products that offer an added benefit. Companies vie for customers and are thus encouraged to use their resources as efficiently as possible, allowing them to offer excellent products and services at attractive prices. Businesses that constantly develop new products and improve their existing ones whilst also harnessing the potential for price reductions stand a good chance of success and also improve our quality of life. In other words, competition drives innovation and progress and changes our lives for the better.
However, businesses often regard competition as a cumbersome burden and try to avoid it – for example through fixing prices or acquiring direct competitors. This is why, in a socio-ecological market economy, the government has the task of safeguarding competition by preventing any abuse of market power. The government lays down rules that make sure that new competitors can access the market and that there is a level playing field. These rules must also apply for digital services and especially the platform economy.

Equal opportunities and the performance-pays principle

The socio-ecological market economy is good for companies and good for employees. On a market, the income that is earned is usually based on performance. Collective agreements negotiated between employers and the unions also play an important role in ensuring that performance pays and allowing employees to have a fair share in the wealth generated. Adequate regulation on working hours, health and safety at work and protection against unfair dismissal are equally important. Furthermore, our society practises solidarity in that it provides for all those who are not able to generate an income, or can only earn very little money due to their age, for medical reasons, or as a result of unemployment. Our public social security system is financed by contributions from both employers and employees and provides for a strong safety net.
Our tax and welfare system is also designed to promote social cohesion. The government makes sure that people are protected against serious risks (e.g. by making health insurance mandatory), and promotes equal opportunities. Schooling, for instance, is provided free of charge, which promotes equal access to education.

Underlying legislation and regulations

There are no specific provisions in the German Basic Law that would make the socio-ecological market economy a constitutional requirement. However, there are some key elements in our legal system which provide the basis for Germany’s economic system. For example, the German Basic Law lays down the principles of private ownership, freedom of contract, freedom of association and the right to choose one’s profession and job. In addition to this, the German Basic Law establishes the Federal Republic of Germany as a democratic country that promotes social justice. This means that both a centrally planned economy and an unfettered market economy are impossible to establish in Germany.
In May 1990, the Treaty (PDF: 163 KB) establishing a Monetary, Economic and Social Union between the Federal Republic of Germany and the former German Democratic Republic set forth in law that the social market economy constitutes the common economic order for the whole of Germany. Similarly, the Treaty on European Union also establishes a social market economy. Recently, the Federal Constitutional Court highlighted the importance of climate action to ensure intergenerational justice.

The Social Market Economy today

The underlying principle of German economic policy

The social market economy lays the basis for economic and social security and a good quality of life in Germany and in Europe. It has been and still is a guarantor of growth and prosperity for all.

German economic policy is underpinned by the principles of the social market economy. These include having a government that sets rules and enforces them, thus establishing a reliable framework for businesses to thrive in competition with one another. At the same time, the rules are designed to leave scope for the government to promote social equality and ensure that everyone benefits from our joint prosperity.

For years, Germany has been posting solid growth rates. According to the 2018 autumn projection, the German economy will grow by another 1.8 % in 2018. Economic growth also translates into a strong labour market. At present, some 44.9 million people in Germany earn a salary or wage. Unemployment is at its lowest level for 25 years. According to the autumn forecast, employment will increase by 400,000 persons in 2019; unemployment will thus reach a new historic all-time low. Our goal is to achieve full employment by 2025. Our GDP growth also generates prosperity,with real net wages and salaries having risen by an annual average of more than 1.6% since 2013. The solid economic growth we have seen in recent years has also resulted in a substantial increase in purchasing power for large parts of our society.

Making the social market economy shipshape for the future

Germany is doing well at the moment. But the major trends of the 21st century, notably globalisation, digitisation, demographic change, recent developments within the EU, and the energy transition all represent major challenges for us to tackle. This does not mean that we are having to reinvent the social market economy. But we must make use of our current position of strength to prepare for the future. In its almost 70-year-old history, the German social market economy has seen constant adjustments that have allowed Germany to remain one of the most competitive economies and one that can offer high levels of prosperity to its people.

First and foremost, we must invest in forward-looking technologies an innovation that will strengthen our core industries and our SMEs, and to promote digitisation in our businesses.

Priority for industry, SMEs and cutting-edge technologies

We want our SMEs to remain the backbone of the German economy and to continue to create well-paid jobs that are also secure. This is why we need a new age of entrepreneurship covering industries from bakeries through to digital start-ups.

The German economy owes much of its current success to the fact that we have bucked the global trend and safeguarded our industrial sector. If we want to keep it that way, we must expand our digital infrastructure and invest in forward-looking technologies such as artificial intelligence and find applications for these in our country.

Strengthen Europe

European policy also needs to be designed with the future in mind. The EU is the world’s largest free-trade zone. This makes us an economic heavyweight and also gives us the possibility to shape global standards. As we design the Digital European Single Market, we need to keep a close eye on the developments around the platform economy. Germany is a strong exporter and will therefore continue to advocate free trade internationally, and speak out against protectionism.

Design the energy transition in a reasonable way

The principles of the social market economy also apply to the energy transition. This means that we need to design it in a way that allows for economic success and social security. The share of renewables in our electricity supply is to increase to 65% by 2030, which is a major leap. As we tackle this challenge, we need to make sure not to ask too much of our businesses or consumers. We must ensure that our energy supply remains stable, at a cost that does not harm our businesses’ ability to compete or our consumers’ ability to buy.

Germany also promotes the principle of the social market economy at international level. This is necessary if we are to successfully maintain our high standards, promote inclusive growth and social inclusion, and provide a reliable framework for companies in a globalised economy.

History

Ludwig Erhard, the father of the social market economy

Since the mid-20th century, Germany’s economic policy has been based on the concept of the social market economy (or ‘soziale Marktwirtschaft’). This economic model is firmly engrained in German society and has been hugely successful.

Ludwig Erhard played a major role in bringing about Germany’s so-called economic miracle (the Wirtschaftswunder) in the early years of the Federal Republic. From 1949 to 1963, he served as the Federal Republic’s first Minister for Economic Affairs and is credited with introducing the social market economy. In 1948, in his previous position as economic director of the western occupation zones, Erhard had made use of the German monetary reform to also put an end to the controlled economic system of the past. His reforms, which were given an extra boost by the Marshall plan, gave rise to an economic recovery of a scale nobody had imagined possible.

The 1960s were a decade characterised by sluggish growth and high unemployment rate. The government sought to overcome these challenges by actively stimulating the economy. This stimulus came in the form of the Act to Promote Economic Stability and Growth. Since then, the principle of the ‘economic equilibrium’ has become the basis for defining the Federal Government’s economic objectives. This also means that public-sector investments are made based on demand.

‘Prosperity for all’

Ludwig Erhard was guided by the objective of creating ‘prosperity for all’. Through to this day, the social market economy is about achieving the same by encouraging a combination of economic prowess and a strong safety net. Companies are given a level playing field that encourages them to conduct their business in an efficient way. At the same time, there is a set of rules designed to allow the general population to share in the country’s economic success. This helps unleash economic momentum and provides for a good quality of life for the people living in Germany.