Chapter I THE THREAD

ON THE OCCASION of the C.D.U. meeting at Recklinghausen in the British zone at the end of August 1948, and some time before I took over the Ministry for Economic Affairs of the first West German Federal Republic, I outlined my attitude to the ideas which were then in the air about the distribution of incomes. I explained my refusal to allow them to take hold again, for I considered them to be false. I wished to remove all doubts about my aim, which was to create an economic structure within which it would be possible to lead ever widening circles of the German people towards prosperity. Determined to overcome the old conservative social structure once and for all, I planned for a broadly based mass-purchasing power.

The old hierarchy was marked on the one hand by a thin upper crust able to afford anything, and on the other by a broad lower stratum with insufficient purchasing power. The reshaping of our economic order had to work towards two things: to bring to an end this division, which hampered progressive development, and to end with it ill-feeling between rich and poor. I do not wish to hide either the material or the moral foundations of my struggle. They determine my actions now as then.

Competition 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 which result from higher productivity would eventually be enjoyed.

Along the road of competition, the socialization—in the best sense of the word—of progress and profit is best realized. In addition, personal incentive for higher productivity will remain alive. To allow all working people to receive steadily increasing wages out of higher productivity is a natural part of the belief that through competition prosperity can best be increased. Important assumptions must be made to meet this aim. In considering growing consumption we must not take higher productivity for granted. From the start the emphasis was on an expansion of the economy, especially on an increase in the amount of goods for sale, in order to give an impetus to competition. Above all, the growing number of those seeking work had to be found jobs.

The Trade Cycle Overcome

Circumstances made it vital that the old universally held laws of the cyclical development of the economy should be overthrown. It was widely held that the economy moved forwards in rhythmic waves. Seven years were said to cover the period in which recovery, boom, decline and crisis developed, followed by a convalescence during which healing powers gathered strength to start the next cycle. It is now almost nine years since I became responsible for German economic policy, during which time this rigid rhythm has been broken, thus achieving a steady upward trend of the economy, linked with full employment and a rising volume of goods for sale.

It is against this background that my endeavours and hopes to make economic policy and economic theory successful in finding systematic solutions to these problems should be understood. Such efforts will, however, only be successful as long as competition is not hindered or eliminated through artificial or legal manipulations.

The danger of limitation of competition threatens constantly from many sides. One of the most important tasks in a country based on a free social order is, therefore, to secure free competition. It is no exaggeration when I declare that a law against monopoly is essential as an indispensable ‘economic principle’. Should the State fail here, there would be an early end to the ‘social market economy’. This principle means that no individual citizen must be powerful enough to suppress individual freedom, or, in the name of false freedom, to be able to limit it. ‘Prosperity for all’ and ‘Prosperity through Competition’ are inseparable. The former marks the aim, the latter the path leading to it.

These few remarks already show the fundamental difference between the social market economy and the liberal economy of the old days. Businessmen who believe that because of modern economic developments they can demand cartels are like those Social Democrats who conclude that automation inevitably leads to State control. This reflection should shed light on my theory that it is infinitely more useful to increase prosperity by expansion than to try for a different distribution of the national income by pointless quarrelling.

I do not in any way wish to say that the present division of the national income is the only defensible one or that it should remain as it is for ever. An example may explain briefly what I have in mind: between 1949—when the Federal Republic adopted the social market economy—and 1955, we successfully raised the gross national income from DM 47 Mrd. to DM 85.8 Mrd., while for 1956 another increase of about 7-8% was achieved.

Gross National Income 1936-1955

(expressed in 1936 prices)

in Mrd. DM

1936	1949	1950	1951	1952	1953	1954	1955	1956
47.9	47.1	54.8	62.7	66.7	71.6	77.5	85.8	91.9
47.9	47.1	54.8	62.7	66.7	71.6	77.5	85.8	91.9

(estimated)

This measure of the undisputed success of the policy demonstrates how much more sensible it is to concentrate all available energies on increasing the nation’s wealth rather than to squabble over the distribution of this wealth, and thus be sidetracked 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.

I have been scolded repeatedly because I lack all sympathy for this sterile mode of thinking. Success has proved me right. German economic policy has produced a steadily increasing output from which everyone has benefited uninterruptedly year by year. Private consumption rose from 29 to 51 Mrd. DM between 1950 and 1955—expressed in 1936 prices. This striking increase takes first place when compared to that of other countries. According to the O.E.E.C., the index of private consumption per head of population rose in West Germany from 77 in 1949 to 126 in 1955 (at constant prices, 1952 = 100). During the same period in the U.S. it rose from 96 to 107; in France from 86 to 113; in Britain from 100 to 110, and in Sweden from 96 to 110. If the pre-war period is selected as a basis of comparison West Germany’s achievement still easily surpassed the average of all O.E.E.C. countries. Even the most revolutionary reform of our social order could never have provoked such an increase, or part of it, in the private consumption of this or that group compared to what was in fact achieved. Any such attempt would have led to the paralysis and stagnation of our economy.

This scepticism towards the debate about the ‘just’ division of the national income springs from the belief that wage increases demanded on these lines are like the attempts of some sections of the population to gain advantages at the expense of others. Moreover, it is not easily appreciated that every demand for more presupposes that more is produced. Such an attitude, which can be called almost childish, endangers the basis of our progress. Public support for competition is here the most useful bar to all egoism. As in a healthy competitive economy the individual is not permitted to claim special privileges, so whole groups must not be allowed to benefit themselves in this manner.

My constant endeavour to direct all efforts towards expansion without endangering the healthy basis of our economy or currency rests on the belief that only thus can a suitably decent standard of living be guaranteed to those who, through no fault of their own, but because of age, sickness or as victims of two world wars, can no longer directly participate in production.

The growth of social service payments in recent years has justified this view. The increase in payments by the State from DM 9.6 Mrd. in 1940, to nearly DM 21 Mrd. in 1955, like the pensions reform, was only possible through economic progress. The poor have increasingly shared in prosperity, but only as a result of economic expansion. If, as is stated now, the Federal Republic can afford further and larger increases in social service payments, it can do so only because our economic policy allows us to rely on an increase in our national income in the future.

The Key to Lower Taxes

This belief in a policy of expansion is also essential from other points of view. The political observer will have to accept that the modern State today faces huge tasks. Even if everything possible is done to limit the functions of government—I have contributed by abolishing State planning and ending price controls—it will have to be recognized that midway in the 20th century the functions of the State are unlikely to shrink. Yet the just demands of all citizens and the needs of the economy to cut the tax burden must in the end be acknowledged.

This aim will only be achieved if government expenditure can be kept at its present level, which is not small. If this is done, then, as the national income increases it will bring relief to the citizen and to the economy. It should be recognized how much lower the tax burden could be in ten years, if by then the national income has grown to over DM 250 Mrd. compared to DM 90 Mrd. in 1949 and DM 192 Mrd. in 1956.

The bare facts of the recent past support this view. No one would assert that the individual tax burden has increased relatively since 1949. Yet the State income (Federal, Länder and Municipal) has risen from DM 237 Mrd. in 1949 to DM 54.45 Mrd. for the financial year 1955/56. This increase is purely the result of a steep rise in our national income.

If the ceiling to government spending which I have demanded can be imposed, and if the development of the national income continues as in recent times, it is easy to see and calculate the degree of tax reductions that could be undertaken. A true and real solution of this inhibiting tax problem would thus be possible.

Through this increase in general prosperity economic policy contributes something valuable to the democratization of West Germany. In both elections for the Federal Parliament the German voter has shown that he is overwhelmingly opposed to the class war.

The thread, then, is a desire, after years of effort, for increased general prosperity, and, if the only possible path leading to this goal is through increased economic competition, then economic policy is bound at the same time to strengthen the many traditional basic human freedoms.

Fundamental Economic Rights

First consideration must be given to the freedom of every citizen to live his life according to his financial circumstances, personal desires and values. This basic principle of freedom for the consumer must logically be counter-balanced by freedom for the producer to make and sell what he believes to be marketable, that is, what he has found, after studying individual needs, to be essential and likely to succeed. Freedom for the consumer and freedom to work must be explicitly recognized as inviolable basic rights by every citizen. To offend against them should be regarded as an outrage against society. Democracy and a free economy are as logically linked as are dictatorship and State controls.

To achieve increased prosperity, any policy which prefers apparent success to real progress must be abandoned. Whoever is serious in this must be prepared energetically to oppose all attacks on the stability of our currency. The social market economy is unthinkable without a parallel stability of the currency. Only a policy of this kind guarantees that individual sections of the population do not profit at the cost of others.

There have been several such attempts recently. Here, for example, we should mention the agreements of joint management concerns which have led to wage increases overtaking increases in productivity, thus offending against the principle of price stability. Employers who, for these reasons or out of self-interest, have raised prices can be similarly reproached. This could become a real curse if someone wished to introduce a deliberately inflationary policy in order to repay loans more easily. Far be it from me to suggest it, but it would be all the more a curse because even to make such an attempt would lead to a political disaster.

For that reason the trade unions should ask themselves whether their pursuit of higher wages, if it leads to higher prices, does not put them on a par with irresponsible speculators. The German people have reacted sharply in recent times even to the smallest increases in prices by reducing their rate of savings. For instance, the excess of new savings of DM 188.1 million in July 1955 turne into an excess of withdrawals of DM 109 million in July 1956. This serious development was reversed only as a result of energetic measures by the Federal Government.

Such a distorting trend could lead us not only into economic but also into sociological and political dangers. If such reflections are brought to their logical conclusion they should lead us to regard currency stability as one of those basic human rights which every citizen can demand from his Government.

Pyrrhic Victories

These principles can then only be put into practice if public opinion is prepared to give them priority over any selfish sectional interests. No further proof is needed to demonstrate how democracy is threatened than the lobbying and self-assertion of powerful groups. One does not need to be a pessimist to reach the conclusion that many democracies are facing a serious crisis on this score. The problem of organized pressure groups as part of society and the political structure has yet to be solved. This problem has in recent times allowed an increasing number of groups to demand more from the economy than it has been able to afford. Any successes so gained have already clearly proved themselves to be Pyrrhic victories. Every single citizen without exception pays for them every day and every hour through slightly higher prices. It is no consolation, but more a matter for regret, that these questionable successes have been achieved largely at the expense of those sections of the population who for sociological reasons are least able to protect themselves. The most recent price increases are almost exclusively due to the fact that, in spite of requests to be moderate, people have knowingly acted against their better judgment, ignoring all appeals and warnings.

If the future of our young democratic country is to be assured, it is high time it returned to the path of virtue. In this economic and social policy join forces. In the middle of the 20th century a prosperous economy is closely linked with the fate of a country, as, conversely, every Government or country is immediately affected by the failure of its economic policy. This interdependence of politics and economics forbids all narrow thinking. In the same way as the economist must feel a duty towards the democratic State, so must every politician recognize the outstanding importance of the economic well-being of the people and act accordingly.

The social market economy practised in the Federal Republic can claim recognition by politicians as an important and formative factor in the reconstruction of our democratic State. Over a very short period this economic policy has achieved a degree of reconstruction which must be historically unique. It has not only succeeded in providing work and bread for a population which has increased by a quarter, but it has also lifted all these people above the level of prosperity known in the best pre-war years. The social market economy has marched towards reconstruction along a hard but honest path and, by so doing, has regained the confidence of the world.