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 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, 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 by 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.
Promoting social equity and inclusion of the disadvantaged
In the markets, peoples’ incomes are determined based on their work. By organising a strong welfare system, the government 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. In order to ensure social equity, the government uses the tax system and welfare benefits. The government also 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.
Underlying 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 serve as the basis for establishing 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. This ensures that Germany’s economy is neither centrally planned nor unrestricted.
In May 1990, the Treaty 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.