Chapter VII CARTELS—ENEMIES OF THE CONSUMER

THE CONCEPTION OF the ‘social market economy’ has been found valid—and not only in Germany. Even the enemies of my economic policy no longer contest this claim. An economic policy may only call itself ‘social’ if it allows the consumer to benefit from economic progress, from the results of increased effort and increased productivity.

The best means to achieve this aim within a free social order is competition: it is the central pillar of this system. The social market economy obliges me to focus my attention on, and to declare war against, all efforts to form cartels and against those aiming at a limitation of competition of whatever kind.

Carlo Mötteli in his contribution ‘Trade Unions and Economic Order’ in Wirtschaft Ohne Wunder (Eugen Rentsch-Verlag, Erlenbach/Zurich, 1953, p. 303) rightly draws attention to the fact that a free economic order must not only resist all attacks by the trade unions, but that ‘within the camp of the employer, honesty towards a true competitive order leaves much be be desired’. The tendency to curtail trade and industrial freedom through cartel agreements is hardly less strong than the urge of the worker towards collectivism.

In view of the importance and urgency of this problem I tried to get work going on proposals for a German cartelization law soon after I became Director of Administration of the Economy on March 2, 1948. This aim was first expressed in the ‘law governing the main principles for controls and price policy after monetary reform’ of June 24, 1948. In accordance with my proposals, Section III of the Law states: ‘In so far as the State does not regulate the traffic in relation to trade and output, the principles of competition must be established. If economic monopolies are formed, they must be removed, and, until this can be done, State control must be exercised. A draft German law along these lines should shortly be submitted to the Economic Council.’

It is worth remembering that the first postwar German Parliament adopted this formula by a large majority. Some time before the Economic Council had made this decision, the U.S. and British Military governing authorities had promulgated broadly similar decrees—the U.S. Law 56 and British Ordinance 78—which, on February 12, 1948, prohibited the excessive concentration of German economic power and outlined plans for decartelization. The military governing authorities reserved the right to see this through.

According to Allied declarations, particularly those of General Clay, these military decrees were intended to be a transitory ruling, to be replaced later by a German cartelization law, which would nevertheless in those days still have needed the agreement of the military governing authorities. Thus the Bi-partite Control Office asked the Economic Council on March 19, 1948, to submit a draft law which, in accordance with the Havana Charter of March 24, 1948, would forbid cartels and similar restrictive practices, and all limitation of competition.

Out of this situation developed the first German attempt to deal legally with this extremely difficult question. At my request, a committee of experts submitted the first draft of a law to secure competition and also a draft law on monopolies, on July 5, 1949. The committee included, amongst others, the specialists on the law on cartels, Dr. Walter Bauer, Professor Franz Böhm, Dr. Paul Josten, President of the Senate, Dr. Wilhelm Koppel, Professor Dr. Wilhelm Kromphardt and Professor Dr. Bernhard Pfister.

Early Rebuff

The early demise of the Economic Council did not allow these plans to be pursued in Frankfurt. But during these months I repeatedly tried to explain in public my fundamental views on cartels. For example I explained quite unmistakably in the Volkswirt of December 16, 1949:

‘I regard the development of competition as the best guarantee both of a continuing increase in efficiency and of a just division of the national income. In the interest of a truly “social” market economy I cannot possibly forgo the advantages of healthy economic progress. … Plans or controls imposed by industry appear to me to be no less undesirable and damaging than State controls. …

‘With all its many facets, its tasks and aims, and, in spite of its infinite nuances and shades in practice, the implementation of cartel systems cannot hide from us that all market agreements, especially in the field of prices, aim eventually at a limitation of competition. …

‘I regard all such attempts as a crime against the sanctity of life, whose inner meaning is change, movement and progress, and therefore cannot respond to the uncouth methods of planning regulations and stabilization.’

On December 27, 1949, I said on the Bavarian radio: ‘Freedom reigns only where the power to suppress freedom is not misused, but where it has been incorporated into the moral and legal code, where it has become part of the general order and where society itself regards it as of great value.’ At the C.D.U. meeting at Goslar on October 22, 1950, I described the future German monopoly law as the cornerstone of the social market economy; it was to ‘prevent the private exploitation of positions of power, protected organizationally or juridically, in favour of free competition’, and to give the Federal Government ‘an effective instrument for dealing with open and secret price agreements’. This monopoly law was to ‘utilize and make effective the best principles of our policy for a social market economy’. The law was to be a ‘milestone in the history of German reconstruction’.

No American Orders

These statements could be continued indefinitely. I recall them only to show that every citizen who voted for the Federal Government in 1943 and 1953, in voting for the social market economy, also supported my views concerning cartels, unless he reckoned on the dishonesty of politics. Since even today the nonsensical and sly accusation is made in discussions that the work on the cartelization law had been undertaken as a result of American orders or in realization of an American idea, a few remarks are needed here.

In all these endeavours I have never come across orders from the American side, much less bowed to them. Nevertheless it is a very similar kind of thinking and feeling which has led the American economy to such obvious successes, and which, besides considerable detailed research, has strengthened my conviction about the damaging effects of limitations of competition.

For the sake of historical truth it need not be denied that the first Federal Government, when it first came into office, tended, in accordance with the rules of the time, to discuss its draft cartelization law with the Allied High Commission. The latter informed us on December 1, 1951, that expert discussions regarding this all-embracing law would have to take place, and in fact these were begun on December 11, 1951. These discussions, which continued over several weeks, are recorded in a volume the size of a dictionary.

The negotiations themselves continued in a matter-of-fact atmosphere. They concentrated on a number of main questions, such as the specific form of the cartel for rationalization, regulations concerning the acquisition and use of patents and patterns, and the Allies’ wish to incorporate binding regulations protecting industrial freedom, and on the definition of so-called ‘companies dominating the market’.

The draft which was finally passed by the Federal Government contradicted the principles of American law in its basic construction. The principle of outright prohibition is strictly enforced in North America; the alternative of making administrative exceptions, which characterizes the German draft law, is foreign to American law. This brief hint may show how unreal are all the unfair assertions about my dependence on American ideas in respect of monopolies.

The Federal cabinet of the first legislative period finally approved my Ministry’s draft at the beginning of 1952. It was submitted to the Federal Council as a ‘draft law against Limitation of Competition’. The Federal Council in plenary session discussed this draft on May 23, 1952.

It is worth recalling here that the Federal Council in its first deliberations supported paragraph one of the draft law which dealt with the much discussed principle of outright prohibition. This decision represented a remarkable victory for me, in particular since some months earlier a Commission of the Federal Council, which had been especially asked to deal with ‘the preparatory work for the Federal Law against Limitation of Competition’, had proposed that ‘Limitations of competition through interventions conforming to the state of the market should be omitted in those cases in which cartelization would lead to misuse’.

The Federal Government reacted immediately to the suggestions of the Federal Council, and submitted the draft to the Federal Parliament on June 16, 1952. Ten days later, at the 220th meeting of Parliament, it was read for the first time. The twelve months available to the Federal Parliament during its first legislative period proved too short to deal with this difficult law. It had already become clear at the time that the many-sided resistance from the opponents of a general prohibition of cartels had influenced the deliberations of the Federal Parliament, an opposition which was both disturbing and time-consuming.

Principle of Prohibition Confirmed

I did not hesitate to submit anew a draft of the cartelization law to the Federal cabinet a few months after the formation of the second ‘Adenauer Government’. The draft was identical with that of the first legislative period. In spite of violent and many-sided attempts to throw out the prohibitive principle which I supported, the Federal cabinet passed my draft by a considerable majority on February 17, 1954. With it the cabinet expressed the desire that during further parliamentary discussion the Federal Parliament should resume where the previous discussions of the first legislative period had ended.

The Federal Council made its position clear on May 21, 1954, when, in spite of violent and dramatic discussions preceding the meeting, the basic principle of the draft, expressed in the prohibitive principle of paragraph one, was approved by a majority. Several months then passed before the Federal Government decided to pass on the draft to the Federal Parliament. For this delay until January 22, 1955, I am responsible.

Trade and industry repeatedly attacked my draft on the grounds that it would expose the economy to unlimited competition, which was undesirable as long as the State, through taxation, took away too much from the reward of the labour of a working man. Since, from a material point of view, this argument was not without some justification, I agreed to a postponement during the period of discussion of tax reform. In addition it had to be taken into account that Parliament, as a result of its work on tax reform, was in fact overburdened.

The interlude afforded another chance of discussing the most important proposals of the draft law with interested economic circles, in particular the Federal Association of German Industry.

These talks led to a much discussed and frequently misunderstood summary on October 18, 1954. The Federal Parliament itself read the first draft submitted by the Government on March 24, at its 76th meeting. Thus Parliament had more than two years available before discussions came to an end—a period in which even a difficult law can surely be thoroughly reviewed from all angles.

There may be a tendency here or there to look askance at the slow progress made by this law. But I myself have clearly pointed to the many objections raised at many stages of the discussion. To be fair it must be admitted that we were dealing here with a legal formulation of a highly complicated matter, where the law makers had almost no experience to draw on.

Protection for the Consumer

That is why I believe it to be important to establish that during the different phases of parliamentary deliberations it was not only the technical manoeuvres of my opponents for a postponement that were decisive, but that by agreeing to a postponement I gratified my own wish to receive from Parliament a law which would be truly useful and which would reflect my basic views. I had hoped that with the approaching end of the legislative period Members of Parliament might possibly agree with my views, especially since this law protected the consumer. But these tactical reflections must not be continued here; I consider it far more important to give the outlines of my attitude to cartels which should remain valid beyond the questions of the day.

In the first place, I must state why I am such a definite opponent of cartels. In this connection a brief glimpse into the past is essential.

I start with the sound economic findings made by scientific economic research, that a competitive economy is at one and the same time the most economical and the most democratic form of any economic order. The State must only take a hand in the running of the market in so far as it is needed to uphold the mechanism of competition, or to supervise those markets where complete competition is impossible.

It is a historic fact, not disputed by any economic school of thought, that the liberal economic era at its most civilized stage was responsible for a considerable advance in human progress. After the guild society with its economic, but also ethical and guild aims had become a hindrance to economic progress, the principle of laissez faire released unexpected economic powers. While the guilds prohibited personal initiative and progressive ideas, the producer of the early 19th century was able himself to decide the What, How, Where, How Much and Whither of his production. Since all producers stood the same chance of free activity, competition developed and with it the ‘market’, which now became the focal point of all economic interest. Through the market price, based on supply and demand, production and consumption benefited all.

In the last decades of the 19th century, phenomena which, on the one hand, limited the effectiveness of the market economy and, on the other, led to increased social and political tensions, became increasingly noticeable.

To some extent the forces were part of the market economy, but, in addition, measures taken by the State led to a curtailing of the mechanism of competition through the formation of monopolies and other elements of power governing the market. The development of modern techniques itself encouraged a tendency towards monopolies.

Every monopolistic position conceals the danger that the consumer may be cheated, and allows economic progress to stand still. The negative results of tendencies towards monopolies were more clearly visible when the national economy was smaller, and more cut off from the free world markets by protectionist measures. This was all the more true when, protected by such barriers, private monopolies were even deliberately advanced by measures of economic policy.

All Must Participate in Success

I am convinced, and this is the nucleus of my attitude to cartels, that only as a result of free competition shall we liberate those forces which will guarantee that economic progress and improvements in working conditions will not be absorbed in greater profits, private incomes and other benefits, but that these benefits will be passed on to the consumer. It is the social rationale of the market economy that every economic success, wherever it is gained, and every advantage arising from greater efficiency, and every improvement in labour productivity, will benefit all the people, and lead to the greater satisfaction of the consumer.

The market economy therefore cannot be separated from a system of free competition; it cannot do without the function of free prices. Whoever wants to exclude the function of free prices—and it does not matter whether it is done by Government initiative or by industrial organizations through cartels—kills competition and allows the economy to stagnate.

In pursuing these thoughts to their logical conclusion I have regarded it as my most noble and important task, since the day of currency reform, to limit and reduce the many Government measures in respect of price formation. Since, therefore, everyone knows that I have based my economic policy on the principle of freedom, then a truly organic and harmonious order can only be guaranteed in a guided free market by a free competition of labour and a free formation of prices.

While I firmly oppose every kind of bureaucratic dirigisme and State controls, I am equally firm in refusing to allow other forms of collective economic influence. There is no difference in principle or in function between State and industrial economic planning. If we want to have a free economic and social order, we must not allow anyone or any group to have the right to interpret freedom according to individual taste, and then to limit it. In my view a free economy is synonymous with free economic enterprises. Entrepreneurs do not know what they are doing when they fight the system of a competitive economy.

As far as I am concerned, freedom is indivisible. In my view, political, economic and human freedoms are a complex unit. It is impossible to detach one part without making the whole collapse.

The Secret of Market Economy

Every politician solicitous for the welfare of the people in general must be conscious of the indivisibility of freedom, and after years without political freedom he must be prepared to grant the people this freedom. This sense of responsibility moved me, as soon as I had taken office, to rout these ghosts from the past that were trying to regulate the actions of those concerned with the economy in the interests of the State. I created in my sphere of work the basic condition for a true democratic order; I helped freedom to come to the surface.

The secret of market economy is just this, and herein lies its superiority over any kind of planning—that it enables processes of adaptation to take place almost daily and hourly, balancing supply and demand, national income and national product, both quantitatively and qualitatively. Whoever does not support competition and free market prices no longer has any argument available to oppose planning.

Some of my opponents may now ask whether the freedom of the entrepreneur, which I have so strongly stressed, is not circumscribed if the entrepreneur is no longer permitted to use his freedom in a way he considers proper—in other words, to use it in given circumstances to limit the free activity of the individual. I am pleased to admit that this is one of the central questions of modern market economy. To ask and answer this question means that we have to demonstrate the great difference between the social market economy, which we have been trying to realize in West Germany since 1948, and the liberal economy of the old days.

In my conception the social market economy does not recognize the freedom of the entrepreneur to exclude competition through cartel agreements; it imposes far more the obligation to gain the favour of the consumer through one’s own efforts in competition against rivals. The State must not decide who should be victorious in the market, nor should an industrial organization such as a cartel; it must be the consumer alone. Quality and price determine the form and direction of production, and it is only on the basis of these criteria that the selection is made.

In this sense, freedom is the right of every citizen, and it must not be short-circuited by anyone. The freedom demanded by supporters of cartels to limit or remove freedom is not the concept of freedom which, in the interest of the future of free enterprise, I should like to see put first. Whoever uses the word freedom must be honest about it. Freedom—I repeat—is and remains indivisible. It must not be either defended or rejected on grounds of expediency.

The opposite pole to economic freedom is represented by strongly marked economic power. Therefore it must be ensured by law that the advantages of a competitive economy are not wiped out by the disadvantages (which have been proved historically) of a serious concentration of power.

So the law maker is forced to give particular attention to the problem of economic power as a factor which may possibly disturb the balance of the market economy. Competition and the increase in output and progress which follow must be secured by Government orders and protected from all disturbing elements. In particular, there must be guarantees that nothing will hinder the production of free price regulating in a free market which acts as a guide to the trend of the economy.

The Basic Forms of Economic Power

Economic power in the main comprises three basic forms:

1. By legal treaty, or organization, or by trade agreement, independent companies bind themselves in such a way that a group of them agree to limit their own independence or to restrict or eliminate competition by regulating market factors.

2. On the basis of share capital, so that the power of decision of a legally independent enterprise will be influenced by interlocking interests or by a holding in another firm so that it cannot fully exert its ability in the market.

3. By the emergence of a single large concern which, because of its strong position in the market, exerts a dominating influence on supply and price establishment.

The market price, which in a perfect competitive economy cannot be dictated by a single market partner, could be wilfully changed by concentrated economic power, and with it the market trend, to the advantage of influential power groups, who could consciously and artificially control it. A price thus determined for a market organized on monopolistic lines is no longer a ‘datum line’ to which individuals have to adapt themselves to retain their ability to compete, but it can only be determined according to individual judgment and so manipulated. From it naturally grows the danger of cheating the consumer, but also the danger of national misdirected investment, and the possibility of a curtailment of technical and economic progress.

The law maker must regard it as his task to exclude factors which disturb market trends by

(a) preserving, to the greatest possible extent, competition between companies;

(b) preventing the abuse of monopoly power in markets where complete competition is impossible; and

(c) by creating a State organ to supervise and, if necessary, to influence markets.

An economic constitution drawn up on such a basis would be the economic counterpart of political democracy. As the political right of the citizen to decide is essential in a political democracy, so the competitive order assures the basic economic rights of freedom to work and freedom of choice on the part of the consumer.

The close relationships and interdependence between the political and economic constitutions make the legal settlement of basic economic rights urgent and essential. My efforts are thus aimed at establishing competition firmly as the driving force, and free prices as the regulator, of the market economy within a legal framework.

Whoever wishes to go beyond these principles, or disregards them, undermines the market economy and destroys the foundation on which our social and economic order rests. The reader may well feel that we are here dealing with basic questions of economic policy, and that in a discussion of cartel policy we are not dealing with just one of many points at issue. Here we are dealing above all with the central problem of our economic order. Only from this central position can the battles for a monopoly law which have continued for years be understood.

But let me illuminate, too, the social side of this question. I oppose cartels in principle, since a sound and well-intentioned social market economy—in which the word ‘social’ is consciously stressed—can only be guaranteeed if as a result of competition the superior achievement gains over the inferior, and if through this form of competition what is needed is supplied in the best possible quality and quantity and at the proper price. Simultaneously this principle ensures that a higher achievement gains a better reward, and that in this social aspect worthy producers reap greater security and new opportunities.

So far as the moral evaluation of cartels is concerned—and this is so often misunderstood—I want to say straight out that I am far from judging cartels morally, or even from imputing dishonest motives to individual industrialists and entrepreneurs.

For example, if a businessman believes that the price of his product should cover his production costs, no moral reasons can be opposed to this idea. Yet this view cannot be reconciled with the inner laws of a market economy, for it would guarantee an income even to the least efficient businessman.

No, with the best will in the world I cannot see any positive good in cartels. Above all, when evaluating them from a national economic point of view, I can see only their negative side. Often in recent years I have had the experience of people coming to me—from one branch of industry after another—asserting that unless they are allowed to make price agreements, they will inevitably collapse. I have never granted such requests, and the collapses which had been predicted have not taken place.

Exceptions are Necessary and Possible

If in past years I have defended the principle of the market economy with a toughness verging on obstinacy, there have been good reasons. Yet at the same time I am aware that the theoretical model of pure competition is not entirely valid everywhere.

A ‘theoretical model’ of this kind in no way means that it can be realized everywhere in practice and in its purest form. I am not so unrealistic as not to see thousands of examples around me from which it is clear that the theory of free competition has been mixed with other elements and thus diluted. Nor am I so dogmatic that I do not understand that there may be situations in which the prohibition of cartels could be or might have to be modified. In particular instances it is very possible to permit limitations or a loosening of restrictions against cartels. But in the meantime whoever makes fun of the ‘theoretical model’ of complete competition only shows up his own spiritual inadequacy.

In enacting the above concepts the Government’s draft law is free of all dogmatism. Thus it does not start from the much-criticized concept of complete competition, but instead it recognizes possible justifications or even the necessity for intervention. Consequently the draft envisages conditional cartels as well as export cartels and possibly rationalization cartels. No one can declare with a good conscience that the just needs of the economy have not been taken into account, or that by adopting this procedure certain economic interests are being discriminated against.

Discussions of Principle Miss the Point

These observations would be incomplete if I did not mention the debate between the supporters of a law of prohibition and a law of misuse. According to my way of thinking this way of putting the question misses the point as much as an attempt at a moral evaluation of the problem. Thus I should like to stress once more that my opposition to cartels does not rest on the idea of deliberately evil aims or practices, which amount to discrimination, but that in my view collective price maintenance must be regarded as a grievance—even if these can be defended morally and mathematically. Thus any law on misuse would not be practicable.

I go so far as to say that the fixing of prices at too low a level can be as damaging economically as prices which are put too high. The only economically ‘proper’ and defensible market price cannot be defined. It emerges above all from the equilibrating function of price in a free market.

According to my view the total prohibition law is always logical. It makes the only possible deduction from the negative quality of every kind of law of misuse, yet allowing for those exceptions which may appear to be economically necessary.

The supporters of cartels make the big mistake (surely not by accident—which displays their weakness) that they measure the effects of cartel or anti-cartel measures only by the private economic results of the undertakings involved, leaving entirely on one side the general economic view. It is just those tight cartels that are successful in their aims which, viewed from a general economic point of view, must be regarded as the most damaging.

The cartelization law based on the principle of a prohibition of cartels must in no event be changed, or else it will become a farce which would render the whole policy of the Federal Government ridiculous in the eyes of the public. Also I believe that the cartelization law is a useful, if not altogether the best, means to silence the political attacks on the business economy.

The businessman is unassailable if free competition makes the function of the free businessman indispensable, and if as a result of free competition and the resulting progress, a price is reached which offers the best possibilities to the consumer. The attitude of the consumer towards our economic order will become increasingly more favourable if the citizen can be certain that through a free market he can be master of his fate, and that he is not exposed to anonymous economic forces and powers.

The supporters of cartels who demand a law of supervision or misuse are basically far more dogmatic than the supporters of the law of prohibition, since they rule out any refutation of objections. They persist even when it is pointed out to them that a law of misuse misses the point of the real national economic problem. I do not accuse cartels of misuse in a criminal or a moral sense. The ‘misuse’ is expressed in the fixing and immovability of prices—i.e. in doing away with the function of the free price. That is why I can do nothing with a law of misuse. In all these years I have never received a reply to this objection; and I agree that, from the point of view of the supporters of cartels, no answer is possible.

Essential Barometer

It is an illusion and a bare impossibility to form a nationally ‘right’ economic price through a cartel. Can anyone really refute my basic conception that in a free market, in which the free businessman produces freely and at his own risk, there can be no fixed prices tied by a cartel, because then the quantitative and qualitative balance of the various offers from producers, and the far greater demand of millions of consumers become logically impossible? The economy would have to become blind, the businessman could no longer take his bearings according to the state of the market, since he cannot tell where, when and what is being produced, and in what quantities, from price reactions. The balance of supply and demand cannot exist, if the economy stands still as a result of cartels.

What the layman regards as the more or less secret doings of a free national economy begin just where we ask the question: ‘How does it happen that the millions of consumers choosing freely find just what they need in the market?’

No one can suppose that hundreds of thousands of free businessmen never make a mistake in their individual calculations. No, naturally, they are not infallible; too much is produced of one thing and too little of another, and not always the right thing as regards price and quality, i.e. not always what is in demand. And we all know how changeable the consumer is.

Public consumption changes all the time, but nevertheless supply must be able to absorb this peculiarity. That can only be achieved if every businessman who wants to survive has no other ambition than ‘to be right’ in the market, to retain the goodwill of the consumer, and to offer him all the time something better, in order to survive in competition with his rival. In this wrestling match for a position in the market the function of the free price cannot be excluded.

Indirectly, this means that the businessman cannot receive a guarantee that his production costs will be refunded to him in his price. If a cartel wants the support of such dangerous moral theses, then it would follow logically that the businessman could not justify his continued existence. His task would then be merely one of a technical and administrative officer. He could no longer lay a claim to a businessman’s profits.

In a national economy the price will sometimes have to be high to balance supply and demand—it may have to be higher than one which might have been imposed by a cartel. On the other hand, according to the position of the market, it may be below costs.

Thus I must refute the views of those who base the case for cartels on the position of the undertakings in question. I have no objections to cost accounting; on the contrary I would wish that every enterprise had available people able to make the right calculations. Cost accounting has the one purpose of ascertaining the exact position of the individual enterprise, and whether and how far it can maintain itself in a competitive economy. But it is quite wrong to make demands or put forward a case for cartels on the basis of such calculations.

The German businessmen who rightly oppose excessive tendencies towards joint management have every reason to cease supporting cartels, for in fact the policy of free or fixed prices touches the problem of joint management closely.

The businessman can justify his existence only as long as he is prepared to fulfil the function of a free businessman, with all its opportunities but also with all its risks. He remains irreplaceable and untouchable only as long as he is willing to prove himself in free competition in a free market. As soon as the businessman tries to limit the risks by collective agreements, or attempts to remove them entirely—i.e. if he aims at shifting through cartels the individual decision from the level of his own undertaking to the level of branches and associations, then, I believe, the demands for joint management can no longer be opposed and certainly not with any justification or conviction.

By forming cartels the businessman deprives himself of his proper function; eventually he becomes an official and thus is replaceable. At the very same moment as the responsibility of the businessman is removed, and the fate of his enterprise and that of his workers are made dependent on collective decisions, then the attitude of the public to the businessman will change fundamentally. In the social climate of the mid-twentieth century it will then be no longer surprising if joint management is demanded to make such fateful decisions. If businessmen themselves decide to relinquish their freedom of movement, they undermine their political, social and moral standing; at that moment officialdom would reach for power.

I cannot omit to mention here the view which may be painful for the supporters of cartels, that the economy after 1948, while the sellers’ market prevailed, was enthusiastically in favour of competition and free prices, but that a visible change of opinion took place when, with a balanced economy, the inner laws of a rising volume of goods made themselves felt.

Cartels to Overcome Crises

It is one of the main arguments of the supporters of cartels that economic groupings of the cartel kind are essential to prevent, or at least limit, the disastrous consequences of crises, whether of an economic or a structural nature.

Far be it from me to suggest that all economic crises are due to the spread of cartels—that would of course be stupidity. But I am firmly convinced that the attempt to try to save oneself from the crisis by cartel agreements is neither fitting for the national economy nor can it possibly lead to success.

At any given time the total supply of goods faces a fixed purchasing power, and that is why not everyone can gain immediately from more purchasing power. That would be like believing in magic. The first great danger of cartel-like agreements is that those branches of the economy meeting an essential need scoop off more purchasing power than they would in a free market. This advantage for those who benefit must logically work to the disadvantage of those for whose products only a relatively small purchasing volume exists.

What has been said here about the urgency of needs is also valid for those cases in which powerful interests demand preferential positions. Over and over again the supporters of cartels point to the necessity of preventing economic collapse; they believe they have found a cure for all such eventualities in fixed cartel prices.

But in this way the organic healing of the symptoms of crisis is prevented. For, if a certain product, at a certain price, can only be sold at a certain, but for industry, insufficient quantity; or if, perhaps as a result of changes in consumption, the demand for such products declines, then price fixing is useless. If a falling price can attract new buyers and encourage consumption to rise, while a higher price repels the purchaser, then a cartel wanting to control purchases and cover production costs can only bring about a forced cut in production at rising production costs. The calculation never works out—but the crisis deepens.

The inner laws of such actions inevitably lead to a progressive shrinkage of national economic activity. If too many were to act in the same manner we would come to a complete standstill in the market and finally to an insoluble hardening of the crisis. No cartel agreement will then suffice to reactivate the economy or to make room for new production.

In a free market, however, the distortions arising from crises are brought about less easily, for the free price reacts easily to the fluctuations and changes of the market, and through competition permits those forces to grow which make for assimilation and balance.

In a free market economy the tensions arising organically from the dynamic of expanding business can be cured. That is the only successful and satisfactory path for the economy and the individual undertaking. If in this process profits have sometimes to be forgone, or if losses are made, it has been proved again and again that a free business economy possesses the ability to adapt itself to an almost incredible degree, and that it is just this ‘having to prove oneself’ in the market which guarantees economic progress, and which permits the advantages accruing from greater effort to benefit the consumer, i.e. the people as a whole. In this sense our policy may rightly be called a ‘social market economy’. The businessman can do no better in seeking a moral basis for his position than to be prepared to carry all risks openly, and not to seek refuge in cartels, nor to look for protection in collective agreements. It is a more than dangerous path when the businessman aims at a collective, rather than a personal, responsibility.

Nor can cartels be justified from a social policy point of view on the ground that they aim to protect business and to safeguard work, and that for this reason the workers are interested in supporting them. This is an untenable view for all those who understand even a little of the workings of the national economy.

What can be protected and secured artificially by cartels are, at best, unproductive jobs, with the resulting danger that the whole national economy will cease to progress—a state of affairs which in the long run must become fatal in a world of international competition—even if in view of our present export surplus this danger appears to be small.

Such a policy cannot be called social, since it inhibits progress and thus prevents the creation of new, productive and secure jobs. There have never been as many unemployed in German economic history as in the period when cartels flourished most strongly. Cartels always have to be paid for by a lower standard of living.

A Modern Fairy-tale

In the attempts to gain supporters for cartels all conceivable means have been used. The most remarkable which has recently been put forward is the statement that cartels would protect and further the well-being of the middle classes. That is, to put it mildly, one of those typical modern fairy-tales which does not even contain a grain of truth. Every market has as much purchasing power as there are goods available for consumption. And that means that all those offering supplies and services fight for a given purchasing power.

We know very well that not all branches of our economy are equally able or willing to form cartels. In basic industry and in heavy industry, and where agreement is easily attained, a tendency towards forming cartels, a desire for cartels and an ability to form cartels must be assumed to exist to an appreciable extent. But the nearer we come to the sphere of manufactured goods, the nearer we move to processed goods, the stronger changes in pattern appear, and the more difficult will any agreement be, and so cartel agreements become ineffective and useless.

Those who want cartels aim to gain a greater part of the purchasing power for themselves, i.e. for their product, than would be their share in a free market. As a natural consequence this greater purchasing power, which some groups demand for themselves, will be missing from other parts of the national economy. And it will be missing just where middle class existence is at stake, with a hundred thousand small and medium-sized companies. Here purchasing power is lacking, which the branches of industry able to form cartels have attracted to their own undertakings.

It is utterly clear that the sectors able to form cartels are not those in which the middle class participates. The middle classes work with processed goods, and in the manufacturing goods industry. We find them in consumer goods, in retail trade and in skilled crafts. It should always be remembered that cartel manipulations do not increase purchasing power by a single penny. The result is that in an economy containing cartels, existing purchasing power is insufficient to absorb the total supply of goods—unless it is at the expense of the non-cartelized branches of the economy; that is, in the main, the middle class sector.

If then, wiser by experience, the middle class sectors of manufacturing industry and the consumer goods branches also want to find their salvation in cartels, it will be shown that the divergent elements there can hardly be mastered, and technical difficulties will permit only hypothetical solutions. Even where agreements are possible it will be found that at the best the price can be saved, but turnover can in no circumstances be maintained. That, in turn, is not surprising; it is only natural. Suppose a national economy had the possibility or the power through cartels to raise its price level by 10%, then the real purchasing power of the consumer would have to drop by 10%. That means that the existing purchasing power would only suffice to absorb a national product which had shrunk by 10%. In a free market economy the phenomenon of an unsold supply of goods would lead to a new balance as a result of price pressures. Where cartels predominate such attempts lead to an inevitable crisis.

No New ‘Dirigisme’

Another reproach against my conception of cartels is that the cartel bureau would become the starting point for a new State dirigisme.

I can hardly believe that this view can be taken seriously by anyone knowing the situation; nevertheless, since it appears again and again in the discussions, I want to mention it.

One almost tends to hear here a Babel-like confusion of tongues. On the one hand efforts are made to show that cartels are not so easy to form, and therefore the danger of a thorough cartelization of the economy does not exist. At the same time it is held that applications for cartels might be so numerous that the cartel bureau would not be in a position to cope with the task.

If the opponents of the Government plan really fear that a giant administrative apparatus might come into existence, they express thereby their conviction that large sections of the German economy want to return to cartels. Unfortunately I, too, share this belief, and that is why I regard a defence through my draft law against cartel formations as absolutely essential.

The cartel office, as explained before, will have to be as big as the German economy demands. So far as I am concerned it should be as small as possible. It is within the power of the economy itself to decide how large the cartel office should be.

So far as the much-feared State dirigisme is concerned, the contradiction within the argument is complete. The private cartel bureaucracies which are formed when cartels are permitted are never mentioned, although this privately organized economic dirigisme would certainly have to be vastly larger than any cartel bureau, which would have merely the one task of preventing the unjustified spread of cartels, to maintain competition and allow the market to function freely.

Here a not very convincing attempt is made to name a bureau as dirigiste which, quite to the contrary, tries to prevent the dirigisme of cartels and the growth of a new privately organized planned economy. With the best will in the world it is impossible to speak of State intervention, if the State attempts to safeguard the principles of a free democratic social order.

A Word to the Businessman

I have frequently been misunderstood by German businessmen during discussions about a cartelization law which have now gone on for years. That is why before concluding these observations I should like to say a word to the businessman:

The free businessman stands or falls, I believe, with the system of the market economy. In any other order he becomes more and more the mere executive organ of a foreign will and descends to the level of an official in a planned economy.

If the businessman no longer wants to meet the task of measuring up to free competition—if an order is established where the force, the imagination, the wit, the efficiency and the desire to create is no longer in demand, if the more able are no longer in a position or permitted to be more successful than the less able, then the free business economy will shortly cease to exist. A general flattening and avoidance of responsibilities would gain ground; the striving for security and stability would produce a mentality no longer in tune with the true spirit of enterprise.

I am aware that the offensive against the market economy by the collectivists of all kinds aims at undermining the function of enterprise. When the striving for collective agreements gains the upper hand in the camp of the businessman, then, much earlier than these businessmen would like to believe, the time will come for the question to be put politically: What defence is there for private ownership in production and what right has the businessman to make economic decisions?

If my conception of cartels is interpreted as enmity vis à vis the businessman, I must doubt the seriousness and honesty of such an interpretation. There is in Germany really no more glowing defender of the free enterprise economy. I have remained faithful to these views throughout the eight years in which I have been responsible for the economic policy of the Federal Republic, in the face of all suspicions, attacks and abuse, and I have forcefully defended the order of a free enterprise economy. History will show that in fighting for the cartelization law I defended the position and function of the free businessman more effectively than those purblind circles who see the salvation of the businessman in the cartel.