Social market economy

This article is about the practical implementation of Ordoliberalism in Germany. For the political philosophy accompanying the system in Germany and elsewhere, see Ordoliberalism. For their economic system, see Freiburg School.

The social market economy was the main economic model used in Western and Northern Europe during the Cold War era. It originated in West Germany, and it is known as Soziale Marktwirtschaft in German.

In West Germany, the social market model was created and implemented by the Christian Democrat Ludwig Erhard, Minister of Economics under Konrad Adenauer's chancellorship and German Chancellor in his own right from 1963 to 1966. Erhard once told Friedrich Hayek that the free market economy did not need to be made social but was social in its origin.<ref>F. A. Hayek, The Fatal Conceit: The Errors of Socialism (University of Chicago Press, 1991), p. 117.</ref>

The social market economy seeks a middle path between socialism and capitalism (i.e. a mixed economy) and aims at maintaining a balance between a high rate of economic growth, low inflation, low levels of unemployment, good working conditions, social welfare, and public services, by using state intervention. Important figures in the development of the concept include Franz Oppenheimer, Walter Eucken, Wilhelm Röpke, Franz Böhm and Alfred Müller-Armack (who originally coined the term Soziale Marktwirtschaft<ref>Friedrich, Carl J. (1955). "The Political Thought of Neo-Liberalism". American Political Science Review 49 (2): 509-525. DOI:10.2307/1951819.</ref>).

An important part of social market economies is the tri-partite talks between labour unions, employers' organizations (the social partners) and the state in which they strike agreements on issues like price levels, wage increases, tax rates and pension entitlements. In these countries, collective bargaining is often done on a national level not between one corporation and one union, but national employers' organizations and national trade unions.

At first controversial, the model became increasingly popular in West Germany and Austria, since in both states economic success (Wirtschaftswunder) was identified with it. From the 1960s, the social market economy was the main economic model in mainland Western Europe, pursued by administrations of both the centre right (usually led by Christian Democratic parties) and the centre left (usually led by Labour or Social Democratic parties).

Southern European states, especially Italy, preferred large-scale public services, high salary growth rates and a low unemployment rate over low inflation, low national debt, low public expenditure and other economic health policies. This Service State (Italian Stato Assistenziale, now derogatory) version of the social market is generally considered less successful than the more thrifty Northern European models.

Following the fall of the Berlin Wall on 9 November 1989, most centre right parties gradually moved towards the highly capitalist economic policies of neoliberalism, and a significant portion of the centre left made a similar move, developing the "Third Way". Nevertheless, a commitment to some form of social market economy was present in the European Union Constitution (now in limbo following the referenda in France and the Netherlands).

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The Union shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.
—Art. I-3 of the Treaty establishing a Constitution for Europe