Social Market Economy: origins, meanings and interpretations

Nils Goldschmidt ⋅\cdot Michael Wohlgemuth

Published online: 24 June 2008
© Springer Science+Business Media, LLC 2008

Abstract

This paper investigates various possible meanings of ‘Social Market Economy’-60 years after its political initiation in Germany. We focus on the variety of intellectual sources that influenced the formation and interpretation of the concept in Germany during the first half of the last century. Our particular attention is on Müller-Armack’s definition of a rather dualistic concept of ‘social’ versus ‘market economy’ and the subtle differences it has with an original (Freiburg School) view of ordo-liberalism that lends itself more easily to a constitutional economics perspective.

Keywords Social Market Economy ⋅\cdot Ordo-liberalism
JEL Classification A11 ⋅\cdot B20 ⋅\cdot H10 ⋅\cdot N44

1 Introduction

This year marks the 60th birthday of the German ‘Soziale Marktwirtschaft’ (Social Market Economy). In fact, the political initialization of this economic policy concept can be dated quite exactly: On Sunday, 19th June 1948, Ludwig Erhard, then director of the Administration for Economic Affairs, let it be known via radio that (for many products) rationing would be ended and prices freed. The occupation

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N. Goldschmidt
Universität der Bundeswehr München, Institut für Soziologie und Gesellschaftspolitik, Werner-Heisenberg-Weg 39, 85577 Neubiberg, Germany
e-mail: nils.goldschmidt@unibw.de
N. Goldschmidt ⋅\cdot M. Wohlgemuth ( ⊠\boxtimes )
Walter Eucken Institut e.V., Goethestrasse 10, 79100 Freiburg, Germany
e-mail: wohlgemuth@walter-eucken-institut.de ↩︎

authorities who were just about to introduce the Deutschmark on 20th June were not informed about this bold step; Erhard’s act of insubordination aimed to forestall a likely British veto on a radical unleashing of market forces (see Mierzejewski 2004, Chap. 3 for the historical details).

This year may also see the ratification of the Lisbon treaty by 27 member states of the European Union. This treaty would create a new Art. 3.3 which postulates that the EU should be ‘based on a highly competitive Social Market Economy’. By contrast, the German constitution never entailed an explicit endorsement of a specific economic system; a ‘Social Market Economy’ is not mentioned as a goal or principle of Germany’s constitutional framework. But the new European ‘constitution’ (in the sense of a body of elementary rules overriding national laws in all member states) would provide at least the programmatic commitment to a ‘Social Market Economy’ as the desirable ‘European social model’. All of this begs the question: just what is a Social Market Economy?

This question itself can refer to two very different things: (a) the present political practice and economic performance in Germany as the country that claims to be, in fact, a Social Market Economy or (b) the original intellectual concept as understood by those who once propagated a Social Market Economy. Differences between the real politics and the ideal concept of a Social Market Economy have, of course, always existed, but they have grown substantially since the 1960s (Wohlgemuth 2006). In this paper, we want to concentrate on the original intellectual ideas that relate to the Social Market Economy as a shortcut notion for an ideal-type economic constitution based on liberal and social principles. To that purpose, we will analyze the basic ideas of the two main campaigners and ‘godfathers’ of the Social Market Economy, Germany’s first Minister of Economic Affairs and later chancellor, Ludwig Erhard (1897-1977), and Alfred Müller-Armack (1901-1978), professor of economics and later State Secretary in the Ministry of Economic Affairs. We will contrast their ideas with the ordo-liberal concept of the Freiburg School, which is commonly considered a major academic inspiration of Germany’s post-war economic policies and the ensuing legendary German economic ‘miracle’. But even if there is nothing ‘miraculous’ about the ‘Wirtschaftswunder’ to a sober economist, there still remains something mysterious about the origin of the very idea, meaning, and even term ‘Social Market Economy’ to the historian of economic ideas.

The question of the origins of the very term ‘Soziale Marktwirtschaft’ is an unsettled, but telling aspect of the history of ideas. While it is without doubt that Alfred Müller-Armack (1947) used the term for the first time in a publication-he headlined the second chapter of his book Wirtschaftslenkung und Marktwirtschaft (Economic Planning and Market Economy) ‘Soziale Marktwirtschaft’—the historical roots of this formula remain unclear. There is some evidence that Harold Rasch, who in 1946/47 was deputy head of the British and later on also of the new interzonal economic administration, used the term in late 1947 and early 1948 independently of Müller-Armack (see Rasch 1948, Chap. 4).

Others claim that it was Ludwig Erhard himself who first spoke about ‘Soziale Marktwirtschaft.’ In his autobiography, Karl Günther Weiss, who at the time was academic assistant to Otto Ohlendorf, SS-Gruppenführer and deputy state secretary at the Reich Ministry of Economic Affairs, claims that Ludwig Erhard and he ‘invented’ the term during an informal conversation in January 1945. Weiss reports that he himself proposed the term as a title for Erhard’s analysis of a post-war economy. Erhard allegedly responded like this: “What did you say? Soziale Marktwirtschaft-that is a term I like. If you would still have a glass of your fine Burgundy, we shall drink to it: Soziale Marktwirtschaft is a good way to connect past and future” (Weiss 1996, p. 571). Material connected the idea of the Social Market Economy was then stored in a cardboard box, on which Erhard wrote “Soziale Marktwirtschaft”. After the end of the war-according to Weiss-Erhard transmitted the material to Müller-Armack, requesting that the documents be published under the title ‘Soziale Marktwirtschaft’, but without mentioning his name (ibid, 666 f.). Unfortunately, the box had disappeared and remains lost until this day.

While this somewhat smacks of fiction and legend, it is certainly true that the idea of a ‘controlled or guided market economy’ was quite common during these difficult years; Müller-Armack spoke of controlled market economy before he established the term ‘Soziale Marktwirtschaft’ (see Klump 1997, 149 f.). It was Erich Preiser (1942), a later post-war member of the ‘Wissenschaftlicher Beirat’ (Advisory Council to the Federal Ministry of Economic Affairs), who in an article contributed to the volume Der Wettbewerb als Mittel volkswirtschaftlicher Leistungssteigerung und Leistungsauslese (Competition as a means of boosting economic performance and selection based on performance), coined the term ‘government-controlled market economy’ by contrast to the term ‘free market economy’ (see Klump 1997, p. 149).

Despite contemporary official rhetoric, it would be a grave misunderstanding of the true intentions of Preiser and others, to think that ‘government-controlled market economy’ was in any way meant to serve as an apology of the present regime whose economic policy referred to a bizarre mix of pseudo-Keynesian, Darwinian, collectivist ideas. Quite to the contrary, the mentioned 1942 volume contains contributions by several liberal economists who were opposed to the Nazi regime and secretly worked on plans for the social and economic order after the war. Later on, many of these authors pursued their conspirative work in various circles, of which the most relevant for the preparation of a Social Market Economy was the ‘Arbeitsgemeinschaft Erwin von Beckerath’ (see Rieter and Schmolz 1993; Goldschmidt 2005). Thus, not just the concept, but the term itself has some roots in the opposition against the Nazi regime.

But there might also be earlier sources and perhaps surprising connecting lines to the younger Historical School. Werner Sombart, for instance, introduced the term ‘Sozialkapitalismus’ (social capitalism) as early as 1913 when he observed that:

Unions, safety provisions for workers, workmen’s insurance, cooperatives, socialization, and urbanization have initiated an era of social development

which might really be called social capitalism. With capitalism being the substantive and social being the adjective.
(Sombart 1913, p. 455) 1{ }^{1}
In short, it is fair to say that the origins of the Social Market Economy are diverse and diffuse. Both, term and concept, have different roots that can be traced back not only to the immediate post-war period, but also to the early 1940s (in official circles as well as in circles of resistance), and even to an older debate which took place within the Historical School when the German Kaiser was still there. At all these stages of a very volatile history of events and ideas, the idea of a ‘Social Market Economy’ may have been used as an integration formula, aiming at a socioeconomic system that should be able to reduce social tensions and at the same time create economic wealth, and also inspire peoples’ confidence within a disoriented society. This integrationist intention became particularly urgent after 1945, and on two fronts, as Zweynert (2004, p. 4) argues:

Müller-Armack’s main concern … was how the acceptance of capitalism might be improved in a country, where the population traditionally had distinct socialist and romantic propensities. At the same time the rhetoric of Social Market Economy as an outspoken liberal reform program met the political demand of the Western Allies, especially the Americans, who at the beginning of the cold war wished to establish a liberal and capitalist society in the Western part of Germany in order to demonstrate the superiority of the Western model.

In order to understand, in a systematic way, the intellectual origins of the Social Market Economy we now attempt to clarify the contributions of its main protagonists.

If one wants to understand Erhard’s stubborn and, at the time, daring commitment to the social merits of a competitive market economy (not, at the time, shared by either academic experts or public opinion), one has to consider the intellectual source of his thinking. We believe that the seminal influence on Erhard’s vision were the ideas of his Frankfurt academic teacher, Franz Oppenheimer (1846-1943). When analyzing Oppenheimer’s approach, it becomes clear why Erhard was convinced that to establish a competitive, privilege-free market order meant establishing an economic order that not only created wealth (or badly needed economic recovery), but that was also socially desirable and just.

In the recent academic debate concerning Oppenheimer’s influence on his students, a wide range of interpretations on how he influenced Erhard’s beliefs have been put forth. 2{ }^{2} Regardless of these different exegeses, Erhard himself appears to

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1{ }^{1} Our translation. The same is true for all quotes for which no English version is available.
2{ }^{2} See e.g. the different interpretations by Wünsche (1996), Hentschel (1996, pp. 15-18), and Haselbach (2000). ↩︎

have had a clear position. When he held a speech on the occasion of Oppenheimer’s 100th Birthday-titled ‘Franz Oppenheimer, Teacher and Friend’-Erhard underscored the close bond to his teacher:

For as long as I live, I will never forget Franz Oppenheimer! I shall be happy if the Social Market Economy-perfect or imperfect as it may be-will further testify to the work, to the mental approach of thought, and to the teaching of Franz Oppenheimer. I believe that many people do not know how much they owe to this one man. I, at least, do know … .
(Erhard 1964/1988, p. 863)
Such exuberant praise seems odd considering the close connection Oppenheimer’s program has to at least some of Marx’s theories (in particular the theory of the state) and the socialist undertone of his doctrine. How Oppenheimer arrived at the crucial concept of ‘Bodensperre’ (land tenure) and other fundamental ideas was concisely summarized by his student, the aforementioned Erich Preiser:

Marx failed, as Oppenheimer thought, because of his industry-centric view; only an agro-centric view reveals the germ which turns the pure economics of the market economy into the political economics of capitalism. The therapy is almost self-evident. The abolition of large estates would deprive the collective monopoly of the classes, the industrial Reserve Army would disappear, and the path would be open for a society of the free and equal, founded solely upon work and exchange.
(Preiser 1964, 20 f.)
If one lays the stress on this largely physiocratic concept as the basic idea of Oppenheimerian theory, Erhard’s program is clearly fundamentally different. 3{ }^{3} However, if one looks at the origins of Oppenheimer’s beliefs and compares these with Erhard’s perspective, one gains a different perception. Oppenheimer’s theory stands in the context of the so-called ‘Ricardian Socialists’ who argued that an income which is not earned through work is directed against the legitimate claims of workers. Correspondingly, Oppenheimer writes in Wert und Mehrwert (Value and Surplus):

The problem whose solution we seek would be completely solved if it were possible to prove that the working class is subject to a permanent monopolistic relationship with the capitalist class such that it is forced to sell its product, i.e. its services, at a reduced value, with the upper class retaining the surplus. Now, such a class monopoly relationship does indeed exist. And it is, in fact, set up by forces beyond the economic realm. It is based on the possession of real estate.
(Oppenheimer 1913, p. 221)
Thus, following Oppenheimer, land tenure is due to powers beyond the economic realm, or to put it differently, exploitation and misery are the effect of ill-defined

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3{ }^{3} Erhard himself, in retrospect, emphasized that during his time as a student, “sometimes doubt plagued me, whether the land tenure, still today, could be the source of bondage and possibly exploitation.” (Erhard 1964/1988, 859 f.) ↩︎

property rights and thus results of political and not economic forces. Consequently, one quintessence of Oppenheimer’s teachings must have been obvious, at least for Erhard: shortcomings of capitalism are not the result of free competition, but rather of the exclusion of workmen from free access to land, in other words, the result of political power and privilege. Thus, one would have to remove the excesses of this combined political-economic power for the transition from class-capitalism to an open market economy without class control and exploitation to become possible.

As soon as this stage is reached, i.e. the stage of privilege-free competition, there would be nothing to prevent the harmony of interests and the welfare of all from prevailing. This perception is both the foundation and the goal of Oppenheimer’s teaching of ‘pure economics’ in which class society would no longer be upheld by political means:

As [society] stops to be an organization of class utility, eliminates all privileges and monopolies, and becomes an organization of overall utility, human beings-finally freed-can succeed: because no more ‘hostile competition’ rushes the individual against a rival-rather, the individual is driven by a ‘peaceful competition’ towards highest achievements …; because of the ‘harmony of all economic interests,’ the necessity to choose between self-interest and the welfare of society no longer obtains.
(Oppenheimer 1923/1964, p. 1113)
Thus Oppenheimer’s concerns were of an explicit social nature, as can be further demonstrated by his idea of ‘liberal socialism’. Liberal socialism is “the belief in and the pursuit of a societal order, in which economic self-interest preserves its power and persists in completely free competition,” (Oppenheimer 1910/1964, p. IX), i.e. liberal socialism is a “socialism achieved via liberalism” (ibid, p. XI). This ‘third way’ postulated and labeled by Oppenheimer was his answer to the social question.

This is where the connection to Ludwig Erhard’s program emerges. Erhard (1964/1988, p. 861) wrote in 1964: “There should [according to Oppenheimer] be a way-a third way-which presents a prosperous synthesis, or a way out. Through Social Market Economy I have tried, nearly in accordance with his mandate, to spell out a pragmatic way.” Hence, this “same spirit” (ibid) is Erhard’s program, even if he switched “adjective and noun” to promote “social liberalism” (ibid). In his view it is “along the road of competition [that] socialization-in the best sense of the word-of progress and profit is best realized” (Erhard 1958, p. 1), as he wrote in the first chapter of his best-selling book Wohlstand für alle (Prosperity through Competition). Competition can serve as an instrument in achieving social goals thus bearing social merit in itself. In Oppenheimer’s ‘liberal socialism’, as in Erhard’s ‘social liberalism’, what is at stake is a desirable order of both freedom and equality. Social Market Economy, the equal guarantee of individual liberty and social opportunity then, is Erhard’s goal; and a market economy is only a means but also the only means to satisfy these conditions. Thus, Erhard’s Oppenheimerian vision of a market economy as a necessary condition for social balance can be seen in at least three points: first, the repression of arbitrary and disorderly political power, second,

the sharp rejection of any monopolistic structure, and third, the clear preference for freedom and competition.

Even though it is very difficult to establish explicit and direct links between the Freiburg School and Erhard, there is no doubt that the Freiburg School did influence Erhard. 4{ }^{4} In 1961, Erhard wrote:

For if there ever was one theory that was able to correctly interpret the signs of the time and whose insights gave a new impetus to both a competitive and social economy, then it was the theory created by the men known today as neoliberals or ordoliberals. They gave an increased weight to the social and political aspects of economic policy …
(Erhard 1961/1988, p. 696)
This connection is somehow surprising, because there is a significant ‘methodlogical gap’ between the Freiburg program, 5{ }^{5} especially as developed by Walter Eucken (1891-1950), and Erhard’s thinking. In contrast to Erhard’s (and Oppenheimer’s) approach, Eucken’s theory can be seen as the combination of the traditions of the German Historical School, Neo-Kantism and Phenomenology (Goldschmidt 2002). Even without going into detail, but bearing in mind the influence of Oppenheimer, it is clear that Erhard does not belong to this methodological paradigm, particularly when it comes to its social and philosophical aspects.

How, then, could the Freiburg paradigm become a ‘twin idea’ of Erhard’s economic policy? 6{ }^{6} Two aspects in particular are worth mentioning in this respect. First, the historical environment in which the protagonists found themselves. Both Erhard and Eucken experienced the deterioration of a free and competitive market-caused by private power and a weak state-that turned into a carteldominated economy during the Weimar Republic. Erhard described this period as “the years of the degeneration of the free market economy” (Erhard 1949/1988, p. 221). Equally shocked by these circumstances, Eucken (1952/2004, p. 172) criticized how “the industry left the realm of competition to be controlled by the state and the cartels took over.” Eucken and Erhard came to the same conclusions concerning their historical experience during the ‘period of experiments’ under the Weimar Republic and the Third Reich: instead of having state control or state intervention through a planned economy, or a powerless state in the face of private

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4{ }^{4} The influence of the Freiburg School can be illustrated by the example of Leonhard Miksch (19011950). Miksch, a student of Eucken, was, under Erhard, director of the department for ‘basic questions of price competition and business administration’. Miksch became a close assistant to Ludwig Erhard. See Goldschmidt and Berndt (2005) for details.
5{ }^{5} In what follows, we focus solely on the connection between the Freiburg School and Erhard’s vision of Social Market Economy. For a broader discussion of the Freiburg approach, see e.g. Grossekettler (1989) and Vanberg (2001, Chap. 3).
6{ }^{6} For a broader discussion of Erhard’s ‘conversion’ to ordoliberalism, see Commun (2003). ↩︎

economic interests, both believed the solution was a ‘strong state’ safeguarding the market game on a constitutional level and therefore able to counter special interests. This is the ‘differentia specifica’ of all ordoliberals: the state sets up and guarantees economic order, but it does not control economic processes. By guaranteeing economic order, the state enables free and fair competition.

The role of the state leads us to the second aspect where similarities are to be found between the Freiburg School and Erhard. Economic activity and competi-tion-domains protected by the state-are necessary conditions for society to develop, but they are not ends in themselves. This idea is summed up programmatically in the first volume of the ORDOO R D O year book, jointly edited by Eucken and the jurist Franz Böhm (1895-1977), one of the co-founders of the Freiburg School. One can read:

All we are asking for is the creation of an economic and social order which equally guarantees economic activity and humane living conditions. We call for competition because it can be utilized to reach this goal-in fact, the goal cannot be reached without it. It is a means, not an end in itself.
(Preface, in: ORDO 1, 1948, p. XI)
In contrast to the harmonious Smithian world of the ‘invisible hand,’ the ordoliberals were convinced that the economic system must be guided by an ‘economic constitution’ provided by the state. Eucken stated the following as early as 1940:

The problem will not solve itself simply by our letting economic systems grow up spontaneously. … The economic system has to be consciously shaped. The detailed problems of economic policy, trade policy, credit, monopoly, or tax policy, or of company or bankruptcy law, are part of the great problem of how the whole economy, national and international, and its rules, are to be shaped.
(Eucken 1940/1950, p. 314)
This never meant central planning or state interventionism but rather the design of an economic framework and the formulation of a few general principles of economic policy, which politicians have to adhere to. As Eucken (1951, p. 95) put it: “the state should influence the forms of economy, but not itself direct the economic process. … State planning of forms-Yes; state planning and control of the economic process-No!” Both, the members of the Freiburg School and the first generation of practitioners of the Social Market Economy were confident that only by shaping a legal-institutional framework for a well-functioning market order it would be possible to fulfill the 19th century liberals’ project. And they believed that the principles that govern and maintain a well-functioning economic constitution of a competitive order would also provide the solution to the ‘social question’:

Without freedom, there can be no solution of the social question. … Under a proper marketing system, it becomes impossible for individual freedom to degenerate into the arbitrary domination of many by a few. … Social reasons, in particular, indicate that there is no alternative to free competition.
(Eucken 1948/1982, p. 275)

Consequently, differences in paradigms notwithstanding, the crucial common element between Erhard and Eucken is that both have a functional understanding of competition within a market economy. Ludwig Erhard integrated ordoliberal ideas into the concept of a Social Market Economy not because the two programs were based on similar methodologies and theories, but because they had the same functional approach when it came to the role of the state and the role of a functioning competitive market. The ultimate objective for both was to establish a society of free and equal men. Competition would be the most effective and necessary (but not sufficient) means; and wide-spread economic wellbeing would be the most likely side-effect.

At first glance, it would seem that Alfred Müller-Armack’s conception of the Social Market Economy is in many ways analogous to the ideas of the Freiburg School, as well as to Erhard’s vision. Perhaps the most concise survey on Müller-Armack’s agenda is given by himself in his essay ‘The Social Market Economy as an Economic and Social Order’ published in 1978, the year he died. Müller-Armack (1978, p. 326) presents three theses, from which the concept of a Social Market Economy emerges:
(1) A meaningful economic policy can be conducted only on the basis of a comprehensive order. …
(2) Mixed systems of economic policy, intended to reach ends by an unsystematic mingling of methods in some type of interventionism, cannot be continued. …
(3) [I]t is utopian to believe in central control and at the same time to comply to the wishes of consumers. Economic policy, therefore, must be developed on the basis of the other pure order, the market economy.

Müller-Armack’s clear pleading for a market economy guided by principles, the refusal of mixed systems of economic policy, the insight that complying with consumer wishes is the goal of the market game and the endorsement of precautions against every form of market power, are fundamental ideas which can be found in Erhard’s concept as well as in Eucken’s ordoliberalism. These points are the main principles of all the thinkers who constructed the intellectual background of the Social Market Economy.

Yet it is Müller-Armack’s firm conviction that a competitive market economy must be amended by various countervailing principles so that the whole system reaches social equilibrium: “While accepting the need for competition in principle, one needs also be conscious that it is necessary to be aware of the variety of insights and claims to be attributed to the word ‘Social’” (Müller-Armack 1978, p. 326). Müller-Armack (1978, 326 f.) mentions four aspects that aim at the social compensation of market results:
(1) Unlike the advocates of Classical Liberalism, we know that the machinery of competition has certain deficiencies caused by imperfect markets, oligopolies

and monopolies. … Above all, the competitive order requires legal safeguards ensuring that the market parties do not destroy it by pushing it into an antimarket direction. …
(2) Neither the initial social data entering the market process nor the distribution of income issuing from it need to be in harmony with our social standards and our concepts of justice. …
(3) We know today that the market economy does not sufficiently satisfy certain requirements of social conciliation and security. We should, therefore, strive to build in appropriate stabilizers … .
(4) The competitive order must be viewed in the framework of society as a whole. … Only if we succeed in incorporating the individual as a human being in an order of freedom, can we overcome the deep distrust of many towards orders of freedom.

Whereas it is obvious that the first aspect-safeguarding the market through a legal framework-is identical to the ideas of Erhard and Eucken, it is doubtful that the remaining three aspects are in line with them. Müller-Armack did not solely put emphasis on the social benefits of a well-functioning and free economic system, rather, he stressed that the free market system must be balanced by additional and subsequent social security measures, i.e. his idea of ‘social compensation’ (see Koslowski 1998, pp. 81-84). Furthermore, according to Müller-Armack, economics must be ‘embedded’ into a comprehensive theory, sociology, of social order.

Müller-Armack’s broader view of necessary elements of a Social Market Economy can also be found in his preface to the 1965 first edition of Wirtschaftsordnung und Wirtschaftspolitik (Economic Order and Economic Policy), where he outlines the origin of his idea of a market economy designed in a way that was socially sensible:

Already during the last years of the war, I gratefully picked up thoughts by Walter Eucken and his circle that aimed at a renewal of competition. The strong emphasis on the competitive order as the means to design economic policy I sure enough always felt to be too narrow. Thus, I additionally called for a system of social and socio-political, yet market-conform measures.
(Müller-Armack 1965/1976, p. 10)
In contrast to Eucken or Böhm, Müller-Armack saw the principle of free market competition and the idea of social balance as potentially antagonistic ideals that needed to be reconciled by ways of “a regulative policy which aims to combine, on the basis of a competitive economy, free initiative and social progress” (MüllerArmack 1956/1989, p. 83). For Müller-Armack, a ‘framework of rules’ is not sufficient; the outcome of the competitive forces must be corrected. The crucial problem can be formulated in the following question: “How to bring to a novel balance the diverging objectives of social security and economic freedom?” (Müller-Armack 1952/2008, p. 461). Müller-Armack saw his ‘Social Market Economy’ as the dissolution of libertarian and socialist antagonisms through the ideas of balance, equilibrium, and compensation. His is not a perspective which integrates social and economic aspects on a constitutional level, but a dualistic

conception which first separates and then mediates between conflicting objectives of freedom and social justice. As a result, the areas of economic and social policies tend to be viewed as separate fields and become antagonistic (s.a. Vanberg 2002).

Thus Müller-Armack tried to overcome a too ‘pristine’ concept of Social Market Economy, by advancing the idea of a much more extensive theory of social order. Without going into detail, this idea can be best described by Müller-Armack’s term ‘Social Irenics’, which aims at “establishing a social concept embracing different creeds and ideologies” (Müller-Armack 1950/1982, p. 347). ‘Irenics’-derived from the Greek word ’ ειρηη′\varepsilon \iota \rho \eta \eta^{\prime} ’ not only means peace but also includes the idea of conciliating different ‘currents’ and ‘beliefs’ in society. It is “an attempt to overcome the existing differences and which sees in the dissolution the essence of preservation and in those differences the elements of a possible unity” (ibid). The process of building a social and humane order, as aimed at in Müller-Armack’s concept of the Social Market Economy, should unify society as a whole-“an integrated society where the theories of economic order and economic policy are in harmony with its culture and its cultural policy, social policy and other fields of policy” (Koslowski 2000, p. 8).

Thus, for Müller-Armack, the Social Market Economy was more an economic, social and cultural style-a concept first developed by the younger Historical School to describe the understanding of the individuality of different economic periods and combining it with an analysis of the ‘laws’ of historical development. Even though Müller-Armack’s considerations were based on his sociological studies of religion and his works on economic styles, which he published as early as the 1940s (see esp. Müller-Armack 1941), he mainly propagated his socio-political approach after the normalization of economic conditions in Germany in the early 1960s: “Hence, we can only protect the political and spiritual roots of our free society if we reform its economic and social elements on the broadest possible basis as the manifestation of a specific mental orientation” (Müller-Armack 1960/1982, p. 60 f.). 7{ }^{7} Without going into this in more detail, 8{ }^{8} one has to be aware of the fact that even though Müller-Armack’s concept of ‘Social Irenics’ is a comprehensive approach, it considers economic and social or cultural aspects as opposites. The necessity of an all-embracing theory arises from Müller-Armack’s skepticism towards the ability of a legal-institutional framework to safeguard economic efficiency and social security at the same time. Rather, he favors a ‘metaconstitutional’ societal frame to overcome the seeming opposites. Thus, MüllerArmack achieves (solely) "an irenic formula …, with which we attempt to bring the

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7{ }^{7} See also Müller-Armack (1952/2008, p. 462): “the task before us … is not only about shaping an economic order, what is actually needed is embedding this order into a comprehensive life-style [Lebensstil]”.
8{ }^{8} Like Müller-Armack, Erhard too in the early 1960s propagated a cooperation of different groups and the consolidation of interests. His approach was the idea of a ‘formierte Gesellschaft’ (integrated society); see Erhard (1965-66/1982). Of course, not only Müller-Armack’s ‘Social Irenics’ or Erhard’s ‘integrated society’ seek to combine economic and social approaches. Such a perspective is also prominent in the concepts of Alexander Rüstow, Wilhelm Röpke, Walter Eucken and other protagonists of Social Market Economy. However, Müller-Armack’s concept not only has a distinct normative background, it also aims at a specific ethical formation of society through a dualistic confrontation of freedom and social security. ↩︎

ideals of justice, freedom, and economic growth into a rational balance" (MüllerArmack 1970, p. 29).

It would be unfair to blame Müller-Armack for framing the concept of the Social Market Economy in a way that has turned out to provide ample excuses for building a German welfare-state that is no longer sustainable and increasingly tends to contradict both, the notions of social balance and of a workable market economy, under present-day circumstances of hardly hampered rent-seeking and increased global competition. However, one can identify two intellectual flaws that, with the benefit of hindsight, not only characterize Müller-Armack’s thought, but also the factual policies of the ‘Social Market Economy’ in terms of the political real-type that developed during the last decades.

One flaw of both was that the crucial distinction between the level (order) of constitutional rules (basic legal commitments and principles) on the one side and the level (order) of sub-constitutional actions (policies and interventions) on the other has not been taken seriously enough. As a consequence, it never became clear whether the ‘Social Market Economy’ would be a matter of principle (based on long-lasting, general and abstract constitutional rules of just behavior; the rule of law) or a matter of expediency (based on momentary assessments of conflicting interests; the rule of political reason). In fact, both kinds of assessments are legitimate. But, as Müller-Armack might not have expected or appreciated, matters of expediency easily become matters of political opportunity with unfortunate consequences if they are not guided and sanctioned by matters of principle and durable commitment. The formula aimed at ‘social irenics’ can be interpreted as an invitation for case-by-case ‘regulative policies’ in the name of 'social balance’interventions and regulations which, in the aggregate defy all principled and coherent ‘Ordnungspolitik’ and keep the economic apparatus from delivering on both counts: economic efficiency and equal justice. Had Müller-Armack (and other German neo-liberals) had a premonition of Public Choice theory and the logic of rent-seeking, he could have seen the potential political irony of his formula of social irenics: that instead of a pacifying principle it could also be used as a political weapon.

The second flaw in Müller-Armack’s ‘irenic formula’ may have been a major source of this irony: By defining the market economy as a mere apparatus for generating income to be transformed according to ‘social’ standards systemically unrelated to the preconditions of a private law society, Müller-Armack hinted at a comparative moral inferiority of the market society vis-à-vis the ‘socially’ needed counterbalances-an inferiority that can easily be exploited by politicians catering for the expedient demands of special interests. Indeed, the market economy itself was to Müller-Armack (and most political actors after Erhard) morally neutral if not inherently morally deficient. Even the ‘competitive order’ championed by the Freiburg School was to him (1962/1976, p. 302) only a “mechanic process that is indifferent towards values or goals” or "an order that receives values, but does not

set them" (ibid, p. 299). Hence ethical values such as ‘social justice’ would have to be set from outside the market, albeit by ‘market-conform’ means that would not destroy the purely instrumental, income generating, merit of a market economy.

As Viktor Vanberg (2002) made clear, such a denial of any implicit ethical background of a competitive order understood as the political enforcement of a ‘private law society’ in the sense of Böhm (1966/1989) marks a crucial difference with both the ordoliberal and constitutionalist view. And, by framing the ‘Social Market Economy’ as a compound of two antagonistic elements only one of which (the social policy component) would entail ethical merit, (the politically expedient interpretation of) Müller-Armack’s view might have fostered the erosion of marketoriented principles (Vanberg 2002, p. 230). For politicians, it became all to easy to ignore (or fail to communicate) that the competitive order is based on the rule of law which grants market participants equal rights and duties, that such an economic order arises from the abolishment of privilege and is prerequisite for the peaceful coordination of economic plans with the unintended effect of enhancing consumersovereignty. By defining the rules of a competitive order based on equality before the law and autonomy of individual planning, the members of Freiburg School were not intending to construct a morally neutral ‘apparatus’; they described a ‘constitutional ideal’ (Vanberg 2002, p. 236) that reflects the most fundamental ethical and ‘social’ values: peace, liberty and equality (before the law).

As a consequence, it may have been intellectually more demanding, but also more consistent, to define and defend the ‘Social Market Economy’ more along these lines of a ‘constitutional ideal’. This would also mean that the main ‘social’ element is not in the first place the creation and distribution of wealth on a subconstitutional level, but rather the abolition of privilege on the constitutional level. As a further consequence, this would have implied that social policies would have to be judged according to their ability to be consented on and enacted in a nondiscriminatory way, rather than according to their impact on the market as a mere tool for the generation of material wealth. 9{ }^{9}

The apparent problems of today’s ‘Social Market Economy’ in Germany-which are manifest in the crises of its social security systems, in the dissatisfaction of employers and employees with the current labor market arrangement as well as in the uncertainness of how to deal with fiscal constraints in a globalizing world-find their explanation to some degree in Müller-Armack’s dualistic conception. If (market) freedom and (social) security are perceived as opponents, then politicians do not feel obliged to shape the legal-institutional framework in such a way that economic constraints and social demands be linked at a constitutional level. On the contrary, there is growing contradiction, both in legislation and regulations, between

[1]

9{ }^{9} Vanberg (2002, 247 ff.) argues that non-discriminatory social insurance against many risks can well be beneficial and rational for all citizens whereas protection of social status for certain groups (in short: privilege) could neither claim ethical value nor expect common consent. ↩︎

the social and economic spheres. It is largely but wrongly believed that more social justice necessarily means less economic efficiency (and vice versa). Understanding the benefits of an integrative perspective on a constitutional level is the valuable and lasting message of Erhard’s and Eucken’s conceptions.

These conceptions, however, are not only in need of respectful remembrance. They are also in need of permanent scrutiny and renewal. Today, a more robust theoretical basis for a modern version of the Social Market Economy can be derived from the approach of constitutional economics as developed by Viktor Vanberg (e.g. 1988 and 2001). Accordingly, ‘social models’ ought to rely on rules of principle that lead to gains from joint commitment based on voluntary agreement by the citizens affected. In the on-going process of updating concepts of a Social Market Economy, the debate should be on alternative policies to be tested within an ‘agreeable’ legal-institutional framework, and this does not only apply to Germany, but also to the European Union-and beyond.

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Social Market Economy: origins, meanings and interpretations (original) (raw)