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How Much State Does the Social Market Economy Need?
by Wolfgang Ockenfels
Email: marc1seed (nospam) yahoo.com
07 Apr 2016
The use of property is only legitimate within the limits of the public interest. Whoever takes a risk must bear it and be liable for the losses. The state has the political task of laying down effective rules for risk assessment, liability and providing transparency. Distributive battles intensify in times of dwindling growth.
A SOCIAL AWAKENING
By Sahra Wagenknecht
[Sahra Wagenknecht is a chairperson of DIE LINKE (The Left Party in Germany). Her words from 3/23/2016 are translated from the German on the Internet.]
THE ECONOMIC WISE RECOMMENDATION IS RECKLESS
“Whoever plays down the economic challenges facing Germany and acts as though everything were alright like the economic wise men lies and acts very recklessly,” the chairperson of the DIE LINKE fraction in the Bundestag, Sahra Wagenknecht, commented on the expert opinion of the council of experts. “The economic upswing diagnosed by the economic wise men is largely built on sand. The brutal low-interest policy of the European Central Bank expropriates the savers and by no means brings about a sustainable strengthening of investments and domestic demand.”
“The urgently necessary renewal of the social state is not free of charge. Saying the integration of a million refugees can be paid out of petty cash is pure eyewash and prepares the ground for playing off individual population groups against each other. A German government that adopts the recommendation of the “economic wise men” accepts sustained state failure. We urgently need the introduction of a billionaires’ tax to increase public investments, restore the social and shoulder the costs of the refugee crisis.”
HOW MUCH STATE DOES THE SOCIAL MARKET ECONOMY NEED?
By Wolfgang Ockenfels
[This article from the book “How Much State Does the Social Market Economy Need?” Nr. 361 edited by catholic social scientists in Monchengladbach (North Rhine Westphalia) is translated abridged from the German on the Internet.]
THE WAY FROM STATE TUTELAGE AND MANAGEMENT OF SCARCITY
“The German state now has the right to change special property into common property through coercive measures so its own existence and the domestic political order stand and fall with this change.” This statement sounds very dramatic after state socialism and would certainly meet wide approval not only with “Die Linke” (Left party in Germany). This quotation is from the treatise “What Should Be Done?” written by Eberhard Welty in an extreme emergency situation in 1945. After the catastrophe of the “Third Reich,” the Dominican and social ethicist Welty who stood the test in resistance against the Nazi regime published a brochure that became the programmatic foundation of the CDU and the 1947 “Ahlener Program.”
In 1948, the economy was freed from state tutelage and management of scarcity with the currency reform and the lifting of state price controls. The Adenauer-CDU showed an unsuspected pragmatic learning ability with its 1948 turn to the “Dusseldorf Principles.” The party needed to explain its opening for social market positions as marked the Ordo-liberals of the Freiburg school and practiced by Ludwig Erhard. Is the new concept of the social market economy consistent with catholic social teaching? Ludwig’s very successful economic policy was impressive. The success brought public approval. The Erhard slogan “Prosperity for Everyone” proved true so people spoke of an “economic miracle” – as though the “invisible hand” of the market invoked by Adam Smith had fatefully intervened…
How can economic freedom be established, secured and restricted? How can the freedom of all market actors be legally integrated in a competitive political-social system and in a social-political balancing of just distribution? What overarching role comes to the state as guardian of the common good? Is it limited to a mere framing authority or can it intrude in economic affairs through nationalization, socialization, industrial planning, subsidies or other interventions? Didn’t it come into conflict with the right of private property in force for Catholics as a law of nature since Leo XIII, anchored in the 1949 Basic Law and socially bound to responsibility for the common good?
CRITERIA FOR THE RELATION OF STATE AND ECONOMY
These questions raise more problems than can be solved under existing conditions. The question “How much” state is needed by the market economy today cannot be answered quantitatively from the perspective of catholic social teaching. Qualitative questions move us today and will move us in the future when we ask about the criteria that obligate the state and the economy to each other. The situation-based interpretation of catholic property doctrine by Eberhard Welty in the crisis year 1945 aimed at repairing a temporary state of emergency and was not a plea for a systematic nationalization. The social market economy was entirely compatible with private property, joint determination and a state framework.
“How much” state does a market economy need? This question seems to be a matter of opinion dependant on the situation that cannot be decided a priori and for all times and cases. If a general emergency situation occurs, there are traditional calls for the state to do what is necessary. This is the sudden state of emergency, the unexpected emergency that seems to justify the state as an emergency brake. To whom can we turn in a threatening economic- and financial crisis if not to the state? We would turn to our own nation state if it had not long dissolved in the European Union or in globalization. The saying “Distress allows no prohibition” seems to justify dubious actions of the state that occur under turbulent conditions and tremendous time pressure. In excitedly confused times, people hardly ask about the legitimations of decisions that would never have been made under usual or normal conditions.
The short-term ultima ratio of the state can temporarily replace long-term economic rationality. Certain ethical and legal criteria are needed that set limits to possible arbitrariness. General criteria involve the property doctrine and the common good principle of catholic social teaching that is also pertinent to the German Basic Law. The current crisis reveals a serious ethical-legal problem addressed by Wilhelm Roepke and other prominent advocates of the social market economy. The question about the powerful and righteous role of the state passes into the question: “How much” morality does a market economy need whose free subjects do not understand themselves as officials of the state? The political-economic or state solution of the problems facing us today is ultimately central.
MORE THAN ECONOMETRIC METHODS
Whoever wants to evaluate the precarious situation today between market economy and the state as a social ethicist does not know how this situation can change tomorrow. Whoever casts a prognosticating glance at the future and relies on the guild of leading economists is already lost. The strength of these trend-setting economists is the post-mortem of a corpse. A science that doesn’t know what is really happening when it is dominated by pure functionalism, mathematical formulas and econometric methods cannot explain how the patient was sick for so long until fading.
Together with Christian social ethics, empirical economics should look “beyond supply and demand” – to that social market economy that assumes a minimum moral responsibility for all market actors.
The whole world economic crisis seemed averted when governments all over the world massively intervened in the financial market. We could speak of a partial nationalization. Is the old leftist “Stamokap” (state monopoly capitalist) theory now confirmed in that the state must be a repair shop of capitalism? A new system debate is forced on us worldwide and not only in Germany.
a) Responsibility of Owners
In Germany, we previously avoided the term “capitalism” for good reasons. The social market economy was our pride. The social market economy was even very successful in its garbled or mutilated form and is very consistent with the property doctrine of catholic social teaching and the subsidiarity principle. The attractiveness of private property lies in stimulating performance and in the responsibility of owners. The state should concentrate on creating a legal framework within which the initiative of the actors can be successful. What is left of this liberal order when the owners of capital or its managers do not control and bear its risks any more and when they only pocket the profits while shifting the losses to the state?
According to the old insight, the market economy assumes private property owners are rewarded by the market with profit for right decisions – by the people who seek and buy goods and services on the market (not by the state) – and punished with losses for wrong decisions. This market-immanent sanction disciplines overly daring decisions. Usually the state only sets “incentives” and legally forces politically-desired conduct… Politicians are not distinguished either by deeper economic knowledge or by higher morality superior to entrepreneurs.
b) Deficits in Competition
People rightly expect politicians to set a political framework for the sake of the common good that prevents the “cartelization (Vermachung) of the markets” and the distortion of competition. Monopolies and cartels should be excluded through a competitive system so prices can be set freely and justly according to supply and demand. Shortages are signaled and overcome through the free price formation… The monopoly prohibition is obviously valid for the state – and concerns centrally managed socialism and state capitalism in the same way.
The question is whether this problem is settled with the turn year 1989 with the collapse of “command socialism” – or ether it can assume a new form since the capitalism crash of the last months. This crash rouses memories of the worldwide economic crisis at the end of the 1920s and the beginning of the 1930s.
Is history now overtaking us again as though nothing was learned from it? Market economists who take seriously the attribute “social” and reinterpret it on the international plane must face this history. Is there a new worldwide accumulation and monopolization of capital that harms the international competition? Is the “middle class” slowly being rubbed out? Doesn’t the uncoupling of the financial- and real economy lead to wild speculations and price distortions? How should knowledge, capital and labor be classified in a global market world in which short-term shareholder value thinking predominates? Are politics and culture, social and ecological rules overgrown more and more by private economic interests? Are new classes forming within and between the national economies? Do new class conflicts threaten between the have-nots and the privileged owners of knowledge and capital?
c) Dangerous Experiences
…Individualized capitalism was in no way approved. On the international plane, individualized capitalism manifested the disastrous tendency to form monopolies of power, dominate politics and set financial capital over production.
Oswald von Nell-Breuning was commissioned to work out a draft for the encyclical. In 1928, he made a name for himself with his dissertation “Characteristics of Market Morality” in which he turned against wild speculations on the market aiming at short-term profits without rejecting the stock exchange as the “market of markets.” Nell-Breuning’s contribution could prove very fruitful in the current discussion around shareholder value. The theme of his diagnosis in “Quadragesimo anno,” a “financial-capitalist internationalism or imperialism of international finance capital” (Nr 109) was not far removed from the negative phenomena connected with the problem of “globalization” today as in the realm of the financial markets and currency speculations. Nell-Breuning could not envision the progress of information technology through which the financial world has become more and more “virtual” and financial circulation faster and faster…
The market releases forces of self-healing and self-destruction. To resist destructive powers, leading Ordo-liberal thinkers developed institutions and instruments for effectively combating cartels and monopolies. An expanded framework could cover the whole world economy along with financial management. The “market mechanism” – an antiquated and misleading term – does not function like a machine. People who meet in competition on the market do not relate like vending machines. As free subjects, they are ultimately incalculable. But they cannot create any mutual trust without moral rules valid for everyone. A morality in effect for everyone can only be imagined from God or in other words is religiously established. Many things support the assumption that the most liberal system crumbles in the long run without personal morality.
d) Morality and Justice
We insist on the morality of individuals for the sake of the responsible freedom of economic subjects. When morality was still anchored religiously, it contributed to disciplining arbitrariness and to the fulfillment of freedom. Now it is often itself arbitrariness since it has largely lost its Christian holding. People now deplore the loss of moral values. Trust and creditability are invoked everywhere even by those who carelessly gamble away these resources. The Ten Commandments are rediscovered; the virtues are demanded again.
The deterrent vices are more upsetting than virtues. Greed, excessiveness, presumption, vanity etc. were emphasized by the media as vices that contributed to the mortgage- and financial crisis. Early Christian theologians warned of similar vices without focusing on the bailout of the market economy. Reducing the present crisis in a moralizing way to the vice of “greed” is too simplistic. The distinction between “greed” and ‘legitimate self-interest” is important. In most cases, the distinction is used to pillory the “greed” of others while accepting one’s own legitimate self-interest.
The old insight that there is no salvation, just profit or lasting “prosperity for all” in the gambling casino is confirmed again since the grandiose speculation flop with nebulous derivatives and windy certificates.
Perhaps economists in the future will talk less of “rules” and “toys.” The market economy is not really a game. The analogy does not hold because the state plays along as a global player and doesn’t only set the rules and act as umpire. There are no referees and linesmen on the world economic plane… International agreements that legally regulate economic trade and change are urgently needed. When the actors do not act morally out of conviction and in freedom, nothing else often is left than to operate with legally compulsory commands and controls. Whoever ruins trust must expect controls. Whoever risks everything should not get back on his feet at the expense of others.
Catholic social teaching stresses the dignity and right of work by taking seriously the employer as an owner of capital. It can also contribute internationally to renewal of the social market economy. Our economic system is at stake because it has fallen in the suction of the global players and deregulators. A morally alien or foreign capitalism that has nothing to do with the social market economy in the original sense corresponds to the model of the global player.
Catholic social teaching was never a pure ethic of social structures. The papal encyclicals always connect social principles based on the law of nature that should align the general state framework with moral values and virtues orienting the actions of individual subjects. Models or ideals like the “honest businessman” and “trustworthy bankers,” concepts like “decency” and “moral responsibility” also characterized the social market economy and were part of its recipe for success.
The great mediators built supportive bridges between the church social teaching and the social market economy. Joseph Hoffner, Wilhelm Weber and Anton Rauscher can be named on the catholic side and Walter Eucken, Alfred Mueller-Armack and above all Wilhelm Roepke on the side of the social market economy.
SOCIAL MARKET ECONOMY AS CREATIVE SYNTHESIS – WILHELM ROEPKE’S ANSWER
That a convergence, a far-reaching synthesis between catholic social ethics and liberal economic ideas could occur is owed to Roepke’s efforts even if some time was needed until his ideas were accepted by most representatives of catholic social ethics.
The desire of mediation between a free and socially obliged social- and economic system stood behind the term “social market economy” coined by Mueller-Armack in 1946. This synthesis was sought as a “third way” between capitalism and collectivism according to Roepke in 1942. Long before catholic social teaching and its movement (above all in Germany) searched for a “third way” as in the 1891 encyclical “Rerun novarum” in which Pope Leo XIII accepted private property and the market economy, established the freedom of coalition as a law of nature and urged the social-political responsibility of the state. Building a bridge to liberal economic ideas occurred throu9gh the property term that Leo XIII formulated following John Locke and embedded in the common good notion of Thomas Aquinas.
Roepke was not one of the liberals of laissez-faire or one of the followers of continental Enlightenment (Voltaire, Rousseau) with their constructivist centralist thinking. He also rejected a sharp separation of law and morality, politics and the economy. While his nearness to the English-American Enlightenment tradition (John Locke, Adam Smith) appears in many passages, he oriented himself very strongly in a humanism following the Christian-western view of the person and the order.
a) Moral and Legal Order of the Economy
From his view of the person, Roepke speaks of a “mutual dependence of individuals.” Roepke’s confession on the nature of the person as a social being bound to God goes so far as regarding the Ten Commandments as the “moral foundation” for a market economy order. With that, the question is not yet answered how far the moral order should flow into the (forced) state legal system. The natural law connection of morality and law is maintained with Roepke and legal positivism is rejected while everything morally commanded is not part of state law since Thomas Aquinas.
No absolute autonomy of the economic is possible as the council document “Gaudium et spes” explained because of the priority of the supra-economic, only a “relative” autonomy. Economic life is only a part of the greater and more comprehensive whole of the society whose nature is spiritual. The economic is held by a “meta-economic framework” that includes the elements of the political, social, legal, moral and religious.
b) Materializations of Values and Liberal Institutions
How can these values and goals that seem so abstract be translated in reality? Roepke demands the “fulfillment of supra-economic ideals” from the market economy. Roepke emphasized the question about the means for reaching this as the “great question.” How can the worth and dignity of the person, the inviolability of his person and freedom and justice be safeguarded under the conditions of the modern industrial society without inhibiting or bringing material progress to a standstill? This question was also raised by the encyclical “Mater et Magistra” (1961). Not less clear than the so-called “neoliberals,” John XXIII said the right answer to this question must be twofold: the decisive rejection of socialism and a new design of the market economy that protects the dignity and worth of the person, freedom and justice and person and family, from the undeniable dangers of modern industrial society.”
Most market economists advocate ordering principles of “coordination” and “spontaneous order” and are skeptical about “subordination” and “organization.” Roepke stressed the subsidiarity principle against state centralism and economic monopoly, entirely in the sense of the “Quadragesimo anno,” an encyclical highly regarded by Roepke.
Roepke interpreted the term “freedom” as a moral term. However freedom is impossible without moral bonds. An arbitrary doing and allowing, a release from all bonds and limits cannot be understood under freedom. A freedom without norms, rules and moral self-discipline of individuals represents the most dreadful unfreedom for all those trampled and enslaved for the “economic freedom” in which the appetite of individuals is especially raging.
False private initiative and private property are two necessary “pillars of a Christian-humane order of society and the economy,” Roepke said in agreement with catholic social teaching. They are also bound to certain virtuous behavior that if not present can hardly be replaced by compulsory legal systems. Roepke recognized “justice, responsibility for the whole, kindness and sympathy” – values as “more important than all economic laws and national economic principles that thereby fulfill the “goal” of freedom. “Family, church, genuine communities and tradition” are named as value-mediating authorities.
According to Roepke, an economic integration cannot exist without a minimum in trust, reliability, loyalty to contract, respect, righteousness, fairness, professional honor and honesty. Nevertheless these conscious norms of the moral law depend strongly on the self-discipline of individuals for their realization and therefore need a supplement, he said. To curb the private interest, a functioning competition and the group discipline of a (state) legal system are necessary alongside the moral law. “Economic freedom cannot last if a brake on the unabridged will and appetite is not installed somewhere. The less this brake works in the human interior, the more it must be installed from the outside.” Here Roepke hints at the dilemma that a growing deficiency in personal morality practiced in free self-discipline can hardly be compensated by increasing compulsory state regulations because these narrow the freedom possibilities – and the testing of moral initiatives – more and more.
c) Public Interest Function of the State
According to Roepke, free competition with which the market economy stands or falls must be protected against a double “generation”: against monopoly and against unrestrained distorted competition. No harmony optimism and no “invisible hand” ruling everything can replace the state according to Roepke. Roepke also explicitly affirms the standpoint of catholic social teaching represented in the encyclical “Mater et Magistra” that the use of property is only legitimate within the limits of the public interest. In another place, he concedes there are cases where the public interest is played off against the markets and its standards – and where a higher rank for the bonum commune must be claimed. This is still burning given an arrogant “rule of the lobbyists” – and today particularly with view to the wild financial markets.
This involves substantive interpretation, matters of opinion and weighing questions whose answer cannot be true for all times and cases. A far-reaching social discourse is vital.
WHAT SHOULD BE DONE?
1. First of all, what should be done regarding the financial crisis? Banks and other businesses take risks in the hope for profit. The more one risks, the higher the profit can be and also the loss. Everyone obviously inclines to privatize the profit and to socialize the loss. However this model cannot be right. Whoever takes a risk must bear it and be liable for the losses. The state has the political task of laying down effective rules for risk-assessment and liability and providing transparency because of the great significance and responsibility of banks for the money and credit system. But a nationalization of the banks would aggravate the problem as the example of the regional banks shows. Economic competence cannot be expected of politicians and state officials in awarding credits.
2. The consequences of the current bailout package cast their shadows ahead. State subsidies amount to national protection but are harmful for a European and global economic system… The increasing indebtedness of the state minimizes its action possibilities…
3. To avert “climate change,” spending for protection of the atmosphere must be increased considerably…
4. Distribution battles intensify in times of dwindling growth. Some warn or even threaten “social unrest.” The expectations of the problem solving competence of the state increase as the self-regulating powers of the market slacken. “State failure” becomes the great theme when the expectations of the state are not fulfilled. Consequently, democracy could fall into a legitimation crisis. A new testing of the social market economy seems urgent including a social partnership where employers and unions seek responsible solutions.
Prof. Dr. Wolfgang Ockenfels OP teaches Christian Social Science in the theological department of Trier and directs the “Institute for Social Sciences” in Berlin.