Questions & Answers

Ludwig Erhard - Questions & Answers

What significance do the principles of a social market economy have for other countries?

The German success story demonstrates that it is more decisive to concentrate all available energies on increasing the nation's wealth rather than to squabble over the distribution of this wealth, and thus be diverted from the fruitful path of increasing the national income. It is considerably easier to allow everyone a larger slice out of a bigger cake than to gain anything by discussing the division of a smaller cake.
Competition within a well-designed framework is the most promising means to achieve and to secure prosperity. It alone enables people in their role of consumer to gain from economic progress. It ensures that all advantages that result from higher productivity would be eventually enjoyed. This way, the socialization of progress and profit is best realized.

What is an effective economic policy ?

The increase in economic efficiency is by no means an end in itself. The social market economy only serves its purpose when, in keeping with growing productivity, prices are lowered, thus making increases in real wages possible. The triad of legal order, monetary stability and competition is at the crux of a policy in the sense of the social market economy. An additional keystone is the observing of the democratic basic right of consumer freedom on the one hand and the right of industry to produce what the market demands on the other hand. Compulsory regulations concerning production violate the principles of democracy. To be effective, economic policy goes hand in hand with a policy of stable prices.

What does the term "social" imply in a social market economy?

The same freedom that develops the forces of all those involved in economic life has to apply to the social sector. Economic policy and social policy ought to be partners. If it is right that it is only possible to distribute what has first been produced, then the first concern of all social reformers must be with that economic order which is most effective. Individual initiative is of the utmost importance. If the state provides financial security for people in every condition of life from the cradle to the grave, the society would become lethargic and spoiled individuals would give work a very wide berth whenever possible. The welfare state is very bad for the common good. If it ever became a reality, no one would be responsible for himself any longer; every individual would live at the expense of everyone else. It is only when there is good economic policy that people are in a position to make provision for their own financial security. Only if the national product grows, effective social help is affordable.

Could we, by adhering to the principles of the social market economy create functioning and sustainable markets?

If freedom should not cause chaos, it has to be accompanied by responsibility.
Important principles of a social market economy - liberty, order and accountability - are necessary conditions for the functioning of markets. An economic policy can only be considered good if and as long as it is absolutely beneficial and beneficent to mankind.

Is protectionism an appropriate answer to the current crisis?

The aim of the social market economy is the creation of a free world market, the conclusion of multilateral contracts, and the renouncement of any form of protectionism.  Historically, unilateral actions and bilateral agreements have tainted the global economic climate. Where two agree, the third is left out. Therefore, protectionism decreases the efficiency of the world economy.

What about state interventions in the economy?

It is not a task of the state to directly intervene in the economy.
No individual group within a government or in the economy is entitled to lay claim to any special rights for itself. However, there is no doubt that it is particular interests that drive the individual as well as large enterprises. What role does the state have to play in this game? The state is like a referee in soccer matches. It is the task of the state to see to it that the rules are kept, but it does not participate. If all eleven players in a team entrenched themselves behind the goal line during a match, they would not only deserve catcalls but would also be breaking the rules of the game. The rules laid down beforehand must be observed unconditionally.

How should governments deal with banks that are likely to fail?

The problem is that banks can blackmail governments because they are "too big to fail". Systemically important banks have to be saved to prevent another chain reaction in the financial sector but the taxpayer should not carry the burden alone. It is of particular importance that the shareholders also share the losses.
Expropriation is in no case an appropriate solution. It demonstrates the dependency of every single citizen on the almighty state. A free economy based on private initiative would seriously suffer by an act of expropriation.

Are bonuses for bank executives in times of a financial crisis justified?

Pay rises that are not linked to growth in production in the economy or individual sectors are not justified. Who benefits in good times has to bear the damage in bad times.

What about the huge deficit spending in major economies?

Deficit spending should be reined in in the medium term, in order to control inflation and to prevent future generations from being burdened with non-repayable debt.
In the long run, deficit spending is a very dangerous policy. The day will come when the citizens and future generations will realize that the state's debt has to be cleared by themselves.

Which was the role of the Federal Reserve Bank in the run-up to the crisis?

The Fed has neglected the political principle that inflation harms the economy and fueled with low interest rates the inflation of real estate prices. Good social policy requires monetary stability. A social market economy is inconceivable without a rigorous policy of price stability. Only a policy of this kind guarantees that individual sections of the population do not profit at the cost of others. It is a big misapprehension if a state believes that it can pursue an inflationary policy and simultaneously safeguard itself from the consequences. This is why inflation needs to be prevented by all costs.

What lessons does the social market economy teach concerning financial markets?

Liability - an important principle of the social market economy - serves an important function in the financial. In the past, incentive structures within the financial sector have allowed bankers to take great risks because they did not have to assume liabilities for their actions. Rating agencies supported this by compromising their fundamental responsibilities.
The more people are responsible for a certain investment, the more carefully this investment is made. Liability means taking a prophylactical effect against the squandering of capital und forces decision-makers to carefully examine the markets.