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Topic - The Social Market Economy

Combining market economy and social inclusion

Introduction

The social market economy forms the basis for our society – a society characterised by freedom, openness and solidarity. This key principle needs to be reaffirmed. The social market economy has always been our compass – it means creating more jobs and fair wages, therefore allowing more people to share in our country’s prosperity. ‘Inclusive growth’ is a successful economic concept and a concept that strengthens social cohesion.

The underlying idea of the social market economy is to protect the freedom of all market participants, ensure that there is a level playing field and at the same time allow the broad majority of people to work and earn a living. The Government report on life quality (link), which was adopted by the Federal cabinet in October 2016, shows that people in Germany consider social justice and inclusion to be important elements of their quality of life.

Safeguarding competition and preventing abuse of market power

In a market economy, businesses compete for customers, which motivates them to use their production equipment in an efficient manner, provide high-quality goods and services, and pass on price reductions to customers. Businesses which continuously improve their products and develop new ideas have a good chance of successfully competing against others on quality, whilst at the same time providing customers with better products and services. As a result, competition drives innovation and progress and improves people’s quality of life.

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 social market economy, the government is faced with the task of safeguarding competition in order to prevent abuse of market power. The government lays down rules that make sure that competitors can access the market and that there is a level playing field. These rules also need to apply for digital services.

Social inclusion and equal opportunities

On a market, the income that is earned is usually based on performance. This means that we need a well-working social partnership: this can negotiate collective agreements that form the basis for fair wages that reflect the performance of employees and allow more people to share in our country’s prosperity. By redistributing wealth, our solidarity-based society also provides a safety net for all those people who do not earn any or only very little money due to their age, sickness or unemployment. Our public social security system is financed by contributions from both employers and employees. This ensures a high level of security. As far as pension benefits are concerned, these are given similar legal protection as property. The idea of achieving social equality through the redistribution of wealth is also taken into account in our tax system and welfare benefits.

The government makes sure that people are protected against serious risks (e.g. by making health insurance mandatory), and promotes equal opportunities by providing schooling that is both compulsory and free of charge, therefore offering everybody the chance to succeed in education. In addition to this, the Federal Government will in the future subsidise and therefore foster new investment in the education infrastructure of municipalities that only have limited resources.

Legal basis

There are no specific provisions in the German Basic Law that enshrine the social market economy. However, there are some key elements in our legal system which establish the social market economy as 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 and socially fair country. It therefore ensures that Germany’s economy is neither centrally planned nor unrestricted.

In May 1990, the Treaty (PDF: 3.2 MB) 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.

Ruder-Wettkampf symbolisiert Wettbewerbspolitik; Quelle: dpa

© dpa

History

Ludwig Erhardt and Karl Schiller

Since the mid-20th century, Germany’s economic policy has been based on the concept of the social market economy (or ‘soziale Marktwirtschaft’). The person who played a major role in the introduction of this concept was Ludwig Erhard, who served as the first Economic Affairs Minister of the Federal Republic of Germany from 1949 to 1963. Karl Schiller headed the Economic Affairs Ministry between 1966 and 1972. He expanded the concept to include the ‘magic square’ – which sets out the aims of price stability, balanced trade, an adequate level of growth and a high level of employment.

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. The introduction of the deutschmark and the social market economy will always be seen as his legacy. In 1948, as economic director of the western occupation zones, Erhardt implemented the German monetary reform, putting an end to the controlled economic system of the past. In conjunction with the positive effects generated by the Marshall plan, his reforms led to an undreamt of economic recovery.

In the 1960s, combatting slow economic growth and unemployment through an active economic policy led to new challenges. Federal Minister for Economic Affairs Karl Schiller – a former professor of economic theory and Economics Senator of the Hanseatic City of Hamburg – played a leading role in passing 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 means, in particular, that the government makes investments based on demand.

‘Prosperity for all’

Erhard’s and Schiller’s goal was to create an efficient economic system whilst at the same time promoting social mobility and creating ‘prosperity for all’. When it came to the question of what role the government should play, the two Ministers strongly disagreed. Ehrhardt leaned towards adopting a passive approach, whilst Schiller favoured taking on a more active role. This became very clear in his famous comment, where he said: “As much market as possible, as much state as necessary”. However, despite their different attitudes towards economic policy, both policymakers were united by their belief in the social market economy as the underlying principle of the German economy.

Photo gallery of historic events between 1949 and 1966

The Social Market Economy today

The underlying principle of German economic policy

Today, the social market economy continues to stand for the promise to create prosperity for all. It serves as the basis for creating good quality of life and security – both in economic and social terms – in Germany and Europe.

The social market economy is the underlying principle of German economic policy. This principle means that there is a strong government that is able to act, that gets involved to defend the common good, a government that promotes the wellbeing of the people, that enforces rules and provides for a reliable framework and that does so in order to work for a dynamic and competitive economy whilst at the same time ensuring that those working for the values of our society share in its benefits. This is key for preparing Germany for the future and for providing a good quality of life for all.

If we want the social market economy to remain successful, we need to continue to face up to the challenges of the future by working productively and engage in intensive dialogue with civil society, the business community and the trade unions. Economic success will be more sustainable if as many people as possible share in its benefits.

It is for this reason, that, at the beginning of this legislative term, the Federal Ministry for Economic Affairs and Energy launched an extensive dialogue process, asking people what it means to lead a good life in Germany and what it is that they find particularly important in our time. This process showed that the people in Germany attach particular importance to the issues of equal opportunities, social cohesion, gender equality and closing the gap between rich and poor in terms of income, education and healthcare.

Inclusive growth and social participation

One of the key reasons for why many people in Germany enjoy such a high standard of living today is that in the middle of the first decade of the new millennium, employment started to pick up again, and has developed very positively since then. There are now 43.5 million people in work, which means that unemployment has fallen to its lowest level in the history of the Federal Republic. In the last few years, Germany has seen solid economic growth, which has led to a sharp increase in purchasing power for large parts of the population.

In order to safeguard our prosperity and strengthen social cohesion in our country, the Federal Government is stepping up its investment, relieving municipalities of their burden, and improving the business environment for SMEs and start-ups. This is because investment and innovations are key for creating higher competitiveness, lasting prosperity and a better quality of life. A modern, efficient infrastructure forms the basis for future growth, as does investment in education, science and research.
The social market economy means investing in economic success, but also investing in improving social welfare – this includes providing for decent pension benefits, affordable housing, good schooling, dynamic cities and municipalities, and good public services. In order to strengthen integration and social cohesion in our country, the Federal Government has adopted an ‘integration package’ and a new ‘Solidarity Pact’. The goal of these initiatives is to put active labour market policies in place that help to integrate refugees into the labour market whilst at the same time giving the long-term unemployed new job opportunities, reviving social housing and providing more affordable housing for all people living in Germany.

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

Further information

  • 27/01/2016 - Press release - Economic Situation and Cyclical Development

    Press release: 2016 Annual Economic Report: "Making Germany fit for the future - taking the opportunities of digital transformation"2016 Annual Economic Report: "Making Germany fit for the future - taking the opportunities of digital transformation"

    Open detail view
  • 08/02/2016 - Brochure - Economic Situation and Cyclical Development

    Publication: 2016 Annual Economic Report

    Making Germany fit for the future - taking the opportunities of digital transformation

    Opens PDF "2016 Annual Economic Report" in a new window.
Construction workerssymbolizes Social Market Economy; Quelle: Getty Images/Helen King