Society and the economy
Walter Eucken (1891–1950)
Wilhelm Röpke (1899–1966)
Alfred Müller-Armack (1901–78)
1848 Karl Marx and Friedrich Engels publish the Communist Manifesto.
1948 German economists Walter Eucken and Franz Böhm establish the journal ORDO, which gives its name to ordoliberalism, a movement that advocates the social market economic model.
1978 Chinese Premier Deng Xiaoping introduces capitalist elements into the Chinese economy.
1980s Milton Friedman’s monetarist arguments against government intervention are adopted by the US and UK.
In the aftermath of World War II West Germany had to rebuild its economy and political system from scratch. Chancellor Konrad Adenauer carried out this task in 1949, following the Allied occupation. The model he chose had its roots in the ideas of Franz Böhm and Walter Eucken of the Freiburg school of the 1930s, which resurfaced in the 1940s as “ordoliberalism.” Its chief advocates were Wilhelm Röpke and Alfred Müller-Armack.
These economists aimed to achieve what Müller-Armack called a social market economy: not just a “mixed economy,” with government providing a bare minimum of necessary public goods, but a middle way between free market capitalism and socialism that aimed for the best of both worlds. Industry remained in private ownership and was free to compete, but government provided a range of public goods and services, including a social security system with universal health care, pensions, unemployment benefits, and measures to outlaw monopolies and cartels (agreements between firms). The theory was that this would allow the economic growth of free markets but at the same time produce low inflation, low unemployment, and a more equitable distribution of wealth.
The mixture of free markets with elements of socialism worked dramatically well. Germany experienced a Wirtschaftswunder (“economic miracle”) in the 1950s that transformed it from post-war devastation into a major developed nation. Similar social market economies developed elsewhere, notably in Scandinavia and Austria. As Europe made moves toward economic union, the social market economy was extolled as the model for the European Economic Community in the 1950s. Many countries in Europe thrived under some form of social market economy, but by the 1980s some—most notably Britain—were attracted by the ideas of Milton Friedman, who advocated “smaller” government. British prime minister Margaret Thatcher criticized the European model for its state intervention and high taxes, which she believed hampered competition.
With the collapse of communism in the Eastern Bloc the planned economies of Eastern Europe were replaced by various versions of the mixed economy. At the same time some of the remaining communist countries made moves to introduce reform. In China, for example, Premier Deng Xiaoping adopted elements of free market economics to operate within the centralized economy, in what he described as a “socialist market economy with Chinese characteristics.” His aim was to promote economic growth and become competitive on the world stage. Today, China’s economy is still a long way from the European social market model, but it has made significant moves toward becoming a mixed economy.
East and West Germany reunified in 1990, a year after the fall of the Berlin Wall. East Germany abandoned its centrally planned economy to merge with West Germany’s social market.
While the German social market is associated with right of center politics, the economies of Scandinavia developed along similar lines but were politically left of center, with more focus on making the markets fair. The so-called Nordic model is characterized by generous welfare systems and a commitment to fair distribution of wealth, achieved through high taxes and public spending. These countries have enjoyed high living standards and strong economic growth, helped by having small populations with strong manufacturing industries and, in the case of Norway, oil.
Today, there is pressure to reduce the role of the state in order to remain internationally competitive. However, change is gradual: governments are mindful that deregulation in Iceland in the 1990s led to economic growth followed by a financial crisis.