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Topic - The Social Market Economy

Combining the market economy with a strong welfare system

Introduction

The social market economy forms the basis of our free and open society, which is also characterised by solidarity. It has proven itself as an economic system that allows for prosperity, provides welfare and promotes a strong social fabric. 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 provide for a strong welfare system.

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.

History

Ludwig Erhard – founding 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. The person who invented this concept was Ludwig Erhard, who served as the first Economic Affairs Minister of the Federal Republic of Germany from 1949 to 1963.

He 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, Erhard 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.

Erhard’s goal: to achieve prosperity for all

Ludwig Erhard, who was born in Fürth in 1879, fully relied on the concept of the social market economy, which he helped develop. The term social market economy was coined by the economist Alfred Müller-Armack and is used to describe an economic system that combines competition with private property and the principle of profit. Erhard’s goal was to create an efficient economic system whilst at the same time promoting social mobility and creating prosperity for all.

Photo gallery of historic events between 1949 and 1966

The social market economy today

The guiding principle of German economic policy

The Social Market Economy has been a success story. It provides the platform for Germany’s future and is the basis for ensuring that people in Germany and Europe can continue to enjoy prosperity and social security. The social market economy is a modern economic system that brings together market and government and combines individual responsibility and solidarity. It will therefore remain the guiding principle of Germany’s economic policy.

Germany is faced with a number of great challenges including global competition, demographic change, digitisation and the integration of refugees.

In order to safeguard the viability of Germany’s economy, the government has set itself the target of strengthening private-sector and public-sector investment in Germany and Europe. Investment and innovations are key to 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.

In order to better harness the opportunities offered by digitisation, the Federal Government is promoting the digital transformation by creating an ecosystem conducive to the digital economy. It is continuing to develop the regulatory framework and is taking account of the special features of digital markets.

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"

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  • 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

    Last revised: January 2016

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