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DEREGULATION 59: Wirtshaftswunder Germany's post-war economic miracle The problem: post-war controls How does one reform an economy shackled by detailed state intervention? The idea: remove them Why not follow the precedent set by Konrad Adenauer's post-war government and sweep away as many unnecessary regulatory controls as possible? Results: the economic miracle The radical new policies adopted by Adenauer's post-war Christian Democrat government transformed a sclerotic economy. Between 1951 and 1960 the Federal German economy doubled in size. The pre-war economy was dominated by price cartels. In the Weimar Germany, no less than 2,100 separate cartels were established by 1930. Under the Nazis, economic frreedom was further constrained. By 1938, roughly 50 per cent of total German output was subject to cartels of one form or another. After the Second World War, the Allies banned cartels, but various forms of price fixing continued. During the war, and in the immediate post-war period, the German economy was planned down to the smallest detail. But post-war Germany was led by a group of politicians who rejected the wartime and pre-war orthodoxy of extensive state intervention in the economy. Influenced by Ludwig von Mises and the Freiburg group of economists, they preferred to employ the price mechanism as the key feature of what would be called the Social Market Economy. Ludwig Erhard, Director of Economic Administration in post-war Germany - later he became Federal Chancellor - was a founding figure of the Social Market Economy. He believed that only under a free market economy could an individual find true freedom, and that only a free society and free economy would deliver the wealth needed for humane social policies and programmes. Erhard masterminded the introduction of a new currency in 1948 and lifted price controls. He cleverly waited for a weekend to announce his bonfire of controls, knowing that the Allied powers would not be back in their offices until the following week, by which time it would be too late to countermand him. He argued: "We must find our way back to a market organisation free of controls. In place of interventionism, we must insist on personal responsibility and performance. The market is not a diabolical invention to subdue particular classes. On the contrary, it is the only organisation of economic life which creates a just and optimal distribution, a function which no collectivist authorities can replace." The results of the new free-market policy, adopted in the British and American occupied zones, were outstanding; in contrast, the French and Russian occupied zones remained shackled in poverty. Adenauer commented in his memoirs that: "Every politician who is concerned with questions of economic order should be urged to study the course of events in the Anglo-American zone since June 1948." Arguably they should have studied the United Kingdom too, where rationing and other wartime restrictions were not removed until the 1950s, by which time Germany was well on the way to overhauling the UK economically. A notable feature of the Social Market Economy was the strong commitment to curbing inflation through the adoption of monetarist policies aimed at maintaining the value of the D-Mark. The Bundesbank refused to underwrite cost rises and unsustainable wage demands by engineering an over-expansion of the money supply. Economic policies were targeted at opening up markets to prevent the misuse of resources and the creation of inefficient monopolies. Exploiting the new trade freedoms ushered in by the European Economic Community, Germany trebled its exports to five EEC states - France, Belgium, Luxembourg, Italy, and the Netherlands - between 1958 and 1962. Assessment: time to re-learn the lesson Looking back on the Wirtshaftswunder, Germany's Economics Minister observed in 1979 that: "The Social Market Economy is not a political slogan, but the incredibly successful principle which guided economic policies for over 30 years, giving wide social security and providing the foundations for a free and open society." In his memoirs, Konrad Adenauer, the Federal Chancellor after the Second World War, said that the Social Market Economy "combines freedom and obligation, genuine competition and an independent control of monopolies. Genuine competition is possible where there is a system that rewards better performance in a framework of equal chances and fair conditions of competition. The proper market price gives the right direction of the co-operation of all concerned." In retrospect, he added, "What I had in mind was to use the means of competition and the increasing integration of Germany into the world economy to provide a systematic corrective against the structural defects of the German economy, the result of many years of state controls and war economy." Although the post-war government abolished many burdensome controls, Germany still relies heavily on a detailed statutory approach to management of the economy. The Unfair Competition Act (UWG), first passed in June 1909, is still in force and sets out precise rules on how firms can compete against one another. It regulates, for example, specific business practices such as clearance sales and other types of sales. It also severely constrains the use of advertising as a competitive tool (see the chapter New! Improved!) The Rabattgesetz (Price Rebate Act) of November 1933, forbids retailers from offering discount prices of more than 3 per cent, and bans discount offers such as 'buy two, get one free' promotions. Yet while the post-war Federal government swept away a huge number of unnecessary regulations, it did not manage to abolish enough of them. However, the drive to create a single market within the EU has created a greater urgency to review some of these outmoded regulations. For example, the Rabattgesetz (Price Rebate Act) of November 1993, which banned retailers from offering discount prices of more than 3 per cent as well as offers such as 'buy two, get one free' promotions, was finally abolished in 2001. The German post-war economy illustrates how a country can dramatically revive its economy by abolishing unnecessary controls and regulations on the free functioning of the economic marketplace. It serves as a model for us all. For further information:
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