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70 years of social market economy

Economic growth and prosperity for all – the social market economy has proved to be a model for success in Germany. This is how the system works.

VW Beetle: symbol of the German economic miracle.
VW Beetle: symbol of the German economic miracle. © dpa

According to the German Federal Ministry for Economic Affairs, “the social market economy is the foundation of our liberal, open and democratic society. The main idea behind the social market economy is to protect the freedom of the economy and functioning competition, and at the same to foster prosperity and social security in our country.”

Who instituted the social market economy?

Ludwig Erhard, the first German Federal Minister for Economic Affairs (1949 to 1963) under Federal Chancellor Konrad Adenauer, is seen as the father of the social market economy. As Director of the Economic Administration of the “Combined Economic Area” he in 1948 declared the end of the controlled economy, against opposition from the occupying powers.

Ludwig Erhard, founder of the social market economy in Germany.
Ludwig Erhard, founder of the social market economy in Germany. © dpa

How does the social market economy work?

The goal of the market economy is the greatest possible prosperity with the best possible social protection. It is about benefiting from the advantages of a free market economy, which include free choice of workplace, pricing freedom, competition and a wide range of affordable goods, while at the same time absorbing its disadvantages, such as monopolization, price fixing, and existence-threatening unemployment. This is why the state to a certain extent regulates the market and protects its citizens against illness and unemployment through a network of social insurance schemes.

Is the social market economy enshrined in the German Basic Law?

No. But central elements of the German Basic Law form the basis of the social market economy. Nor is there any pure social market economy doctrine or handbook. The social market economy was always seen as a process and repeatedly had to adapt to new conditions – for example after the reunification of Germany. In May 1990 in the State Treaty between the Federal Republic of Germany and the German Democratic Republic establishing a monetary, economic, and social union, the social market economy was enshrined as the joint economic order for the first time.

Which challenges does the social market economy currently face?

At the moment globalisation, digitisation, climate change, the aging population and migration are providing the social market economy with enormous challenges. Political action is needed in order to adapt the framework conditions and finance the social security of citizens. But in the 70 years of its existence, the social market economy has proved itself capable of accommodating new framework conditions well.