Social market economy

The social market economy (SOME; German: soziale Marktwirtschaft), also called Rhine capitalism, is a socioeconomic model combining a free market capitalist economic system alongside social policies that establish both fair competition within the market and a welfare state.[1] It is sometimes classified as a coordinated market economy.[2] The social market economy was originally promoted and implemented in West Germany by the Christian Democratic Union (CDU) under Chancellor Konrad Adenauer in 1949.[3] Its origins can be traced to the interwar Freiburg school of economic thought.[4]

The social market economy was designed to be a third way between laissez-faire economic liberalism and socialist economics.[5] It was strongly inspired by ordoliberalism,[6] social democratic ideas and the political ideology of Christian democracy, or more generally the tradition of Christian ethics.[7][5] The social market economy refrains from attempts to plan and guide production, the workforce, or sales, but it does support planned efforts to influence the economy through the organic means of a comprehensive economic policy coupled with flexible adaptation to market studies. Combining monetary, credit, trade, tax, customs, investment and social policies as well as other measures, this type of economic policy aims to create an economy that serves the welfare and needs of the entire population, thereby fulfilling its ultimate goal.[8]

The "social" segment is often wrongly confused with socialism and democratic socialism and although aspects were inspired by the latter the social market approach rejects the socialist ideas of replacing private property and markets with social ownership and economic planning. The "social" element to the model instead refers to support for the provision of equal opportunity and protection of those unable to enter the free market labor force because of old-age, disability, or unemployment.[9]

Some authors use the term "social capitalism" with roughly the same meaning as social market economy.[10][11][12] It is also called "Rhine capitalism", typically when contrasting it with the Anglo-Saxon model of capitalism.[13][14][15][16] Rather than see it as an antithesis, some authors describe Rhine capitalism as a successful synthesis of the Anglo-American model with social democracy.[17] The German model is also contrasted and compared with other economic models, some of which are also described as "third ways" or regional forms of capitalism, including Tony Blair's Third Way, French dirigisme, the Dutch polder model, the Nordic model, Japanese corporate capitalism and the contemporary Chinese model.[18] A 2012 comparative politics textbook distinguishes between the "conservative-corporatist welfare state" (arising from the German social market economy) and the "labor-led social democratic welfare state".[19] The concept of the model has since been expanded upon into the idea of an eco-social market economy as not only taking into account the social responsibility of humanity, but also the sustainable use and protection of natural resources.


Social market economies aims to combine free initiative and social welfare on the basis of a competitive economy.[20] The social market economy is opposed to laissez-faire policies and to socialist economic systems[21] and combines private enterprise with regulation and state intervention to establish fair competition, maintaining a balance between a high rate of economic growth, low inflation, low levels of unemployment, good working conditions, social welfare and public services.[22] The term "social" was established by Adenauer to prevent further reference to Christian socialism[23] which was used in the early party agenda Ahlener Programm in 1947.[24]

Although the social market economy model evolved from ordoliberalism, this concept was not identical with the conception of the Freiburg School as it emphasized the state's responsibility actively to improve the market condition and simultaneously to pursue a social balance. In contrast to Walter Eucken, who sought an answer to the social question by establishing a functioning competitive order within a constitutional framework, Alfred Müller-Armack conceived the social market economy as a regulatory policy idea aiming to combine free enterprise with a social programme that is underpinned by market economic performance.[25] In putting social policy on par with economic policy, Müller-Armack's concept was more emphatic regarding socio-political aims than the ordoliberal economic concept. This dual principle also appeared in the name of the model. Although the adjective "social" often attracted criticism as a decorative fig leaf or conversely as a gateway for antiliberal interventionism,[26] it meant more than simply distinguishing the concept from that of laissez-faire capitalism on the one side and of ordoliberal conceptions on the other.[27] In drawing on Wilhelm Röpke's anthropo-sociological approach of an economic humanism leading to a Civitas Humana,[28] Müller-Armack pursued a "Social Humanism" or "Social Irenics"—the notion "irenics" derives from the Greek word εἰρήνη (eirēnē), which means being conducive to or working toward peace, moderation or conciliation—to overcome existing differences in society. Therefore, the social market economy as an extension of neoliberal thought was not a defined economic order, but a holistic conception pursuing a complete humanistic societal order as a synthesis of seemingly conflicting objectives, namely economic freedom and social security.[29] This socio-economic imperative actively managed by a strong state—in contrast to the ordoliberal minimal state solely safeguarding the economic order[30]—is often labelled by the ambiguous but historical term Der Dritte Weg ("The Third Way").

The concept of the social market economy received fundamental impulses from reflection and critique of historical economic and social orders, namely Smithian laissez-faire liberalism on the one hand and Marxian socialism on the other. Furthermore, various Third Way conceptions prepared the ground for the socio-economic concept. Already in the late 19th century, the Kathedersozialisten ("Catheder Socialists") engaged in social reforms in the Verein für Socialpolitik, turning away from pure liberalism to demand a purposive state policy designed to regulate economic life and advocating a middle course between anarchic individualism, traditionalistic corporatism and bureaucratic etatism.[31] In the early 20th century, the Frankfurt sociologist and economist Franz Oppenheimer postulated a so-called liberal socialism (i.e. socialism achieved via liberalism) as the pursuit of a societal order in which economic self-interest preserves its power and persists in free competition.[32] This desirable order of freedom and equality was labelled by a later programmatic publication entitled Weder so – noch so. Der dritte Weg (Neither thus, nor thus. The third way).[33]

This position was widely shared by Oppenheimer's doctoral student and friend Ludwig Erhard,[34] though the latter displaced adjective and subject by promoting a social liberalism[35] and never liked the expression Third Way.[36] In his opinion, the term was tainted, reminding him too much about ideas of a mixed economy, somewhere between a market economy and central planning. He vehemently and consistently argued against the view that models were converging.[37]

Further in contrast to Müller-Armack who emphasised the social aspect, for Erhard the social market economy was always first and foremost a market economic system.[38] By proclaiming "the freer an economy is, the more social it is",[39] Erhard once told Friedrich Hayek that the free market economy did not need to be made social, but that it was social in its origin.[40] Erhard was rather inclined to Walter Eucken's ordoliberal competitive market order. Although he even considered himself an ordoliberal,[41] Erhard based his economic conception neither on Eucken nor on Müller-Armack. In fact, his doctoral supervisor Oppenheimer and especially Röpke, like Erhard a student of Oppenheimer, was his source of inspiration.[42] Erhard perceived Röpke's books as works of revelation and considered the economist a brother in spirit.[43] On 17 August 1948, Erhard referred to Müller-Armack by whom he was strongly impressed most of all not as a theorist, but instead as one who wanted to transfer theory into practice[44] and his concept of the social market economy. Soon after, at the second party congress of the Christian Democratic Union in the British zone in Recklinghausen on 28 August 1948, Erhard circumscribed the concept as a "socially committed market economy".[45] Whereas most neoliberal economists viewed the concept not only as an economic path between the Scylla of an untamed pure laissez-faire capitalism and the Charybdis of a collectivist planned economy, but also as a holistic and democratic social order, Erhard and in particular Müller-Armack emphasised public acceptance and civic engagement as prerequisites for the success of the socio-economic model.[46] For instance, Müller-Armack stressed that by "more socialism" he meant the social engagement for and with the people.[47] Equally, Erhard pointed out that the principles of the social market economy could only be achieved if the public was determined to give them priority.[48]

Important figures in the development of the concept include Eucken, Röpke, Alexander Rüstow, Franz Böhm, Oppenheimer, Erhard, Constantin von Dietze and Müller-Armack, who originally coined the term Soziale Marktwirtschaft.[49] They share an involvement in the Anti-Nazi Opposition, whose search for a post-Nazi order for Germany is an important background for the development of this concept. Early protagonists had close contacts to the oppositional church-movement Bekennende Kirche and Dietrich Bonhoeffer and emphasized the reference of their concept to Catholic and Protestant social ethics.[50]

Rhine capitalism

Michel Albert described a similar concept, "Rhine capitalism". He compared the so-called "neo-American model" of a capitalistic market economy introduced by the administrations of Ronald Reagan and Margaret Thatcher with what he called Rhine capitalism, present in Germany, France and in some of the Northern European economies.

While the neo-American model builds largely on the ideas of Friedrich von Hayek and Milton Friedman, Rhine capitalism according to Albert has its foundations on publicly organized social security. Albert analyzes the Rhenish model as the more equitable, efficient and less violent one. However, according to Albert complex psychological phenomena and the functioning of the press lets the American model appear more attractive and dynamic to the general public.[51]

Social capitalism model

Social capitalism as a theory or political or philosophical stance challenges the idea that the capitalist system is inherently antagonistic to social goals or to a political economy characterized by greater economic equality.[10] The essence of the social market economy is the view that private markets are the most effective allocation mechanism, but that output is maximized through sound state macroeconomic management of the economy. Social market economies posit that a strong social support network for the less affluent enhances capital output. By decreasing poverty and broadening prosperity to a large middle class, capital market participation is enlarged. Social market economies also posit that government regulation and even sponsorship of markets can lead to superior economic outcomes as evidenced in government sponsorship of the Internet or basic securities regulation.

Main elements

The main elements of the social market economy in Germany are the following:[52]

  • The social market contains central elements of a free market economy such as private property, free foreign trade, exchange of goods and free formation of prices.
  • In contrast to the situation in a free market economy, the state is not passive and actively implements regulative measures.[53] Some elements such as pension insurance, universal health care and unemployment insurance are part of the social security system. These insurances are funded by a combination of employee contributions, employer contributions and government subsidies. The social policy objectives include employment, housing and education policies as well as a socio-politically motivated balancing of the distribution of income growth. In addition, there are provisions to restrain the free market (e.g. anti-trust code, laws against the abuse of market power and so on). These elements help to diminish many of the occurring problems of a free market economy.[54]
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