Expanding on the Social Market Economy

Recently I came across a paper by Dr. Ralph M. Wrobel where he discussed the work of German economist Walter Eucken (1952) surrounding the ordoliberal idea of a social market economy. I really enjoyed the paper as it appealed to a lot of ideas that I’ve been having recently about what society should look like, and I finally decided to write this post because I’ve been endlessly bombarded with questions surrounding what my political ideology is, what my economic ideology is, what system I advocate, etc. etc. and so in this post really only the last question will be answered as I really like the social market approach, but have some proposals to make it better. First, let’s outline exactly what the social market economy is by walking through Wrobel’s paper which explained the system in light of the 2008 financial crash.

Wrobel begins the paper by talking essentially about the motives behind the social market system. He outlines the financial crisis as both the fault of governments irresponsibly setting interest rates low, and lack of regulation and oversight in the financial sector. Although I disagree with this assertion of the government playing a leading role in causing the financial crisis by trying to respond to it (I’m much more accepting of Hyman Minsky (1982)’s approach to economic crises) it is worth noting one of Wrobel’s point about what caused the 2008 crash, that being faulty structures in the financial system. Here, I don’t believe Wrobel is really blaming the government entirely for the crash, rather explaining how the structures they setup in the first place were too weak to prevent one, and that’s the motivation behind the social market option. Last thing I wanted to note on his introduction, Wrobel declares that both socialism and Keynesianism have failed, and therefore a “third way” is needed, however I feel he is too dismissive of both the ideologies given at one point he even dismisses socialism as essentially already having been refuted by Mises and Hayek and therefore not even worth addressing, and neither does he address the specific resurgent arguments given by modern Keynesians, so it is for these reasons that I feel the social market economy needs to be expanded to adopt more progressive social and fiscal policies, which I will argue for shortly.

Next, Wrobel begins talking about the basic conception of the social market system as well as its goals. He describes the social market as being neither a planned economy nor a free market economy, rather, it emphasizes a strong state to maintain the rules of a market economy to ensure that the market produces results as close to its theoretical potential as possible. He cites Erhard (1959) in explaining that the market can be understood as a football game.

“In a good game of football it is to be noted that the game follows definite rules; these are decided in advance. (…) The spectators of a game of football would deeply resent the players coming on an agreement about the number of goals this or that side was to be credited with, and then not playing a fair and interesting game as expected and paid for with gate money. (…) What I am aiming at with a market economy policy is (…) to lay down the order and the rules of the game. (…) In the same manner I conceive it to be the basis of any market economy to retain freedom of competition. This can only exist where nothing is permitted to suppress freedom, but where freedom is guaranteed by statute”

From this, the social market can be understood as essentially a forced market meritocracy which does not allow special interest groups to come to power on their own through market activities. Wrobel goes on to say that enforcing this type of market system alone should be enough to ensure things like fair distributions of income as well as general economic mobility (which in sorts follows from income distribution) without the need for state intervention. However this is where I disagree, while I would say the market needs strict anti-trust laws, I would also say that the market should not be left to its own to ensure fairness and opportunities for all. Let’s not forget that countries like the United States have fairly strict anti-trust laws that are enforced by the federal government (Blumenthal, 2013) yet America still has extremely high income and wealth inequality [1] as well as a general lack of socioeconomic mobility compared to other countries (Mitnik and Grusky, 2015). So from these basic facts, I don’t think it’s simple enough to just say markets under the right laws can produce desired results 100% of the time without further government intervention. This is where I would advocate certain income redistribution policies, as well as things like guaranteed education (from elementary school through university) to ensure that equal opportunity is truly a reality, which on top of something like a progressive income tax, should be able to prevent high income inequality.

The next point made by Wrobel about the constitutive principles of the social market economy is about price flexibility. He asserts that for optimal allocation of resources in the economy, there should be maximum price flexibility which entails a rejection or limitation of all subsidies, monopolies, price limits, or import restraints. What this also entails in light of the recent economic crash in 2008 is stricter rules regarding firm transparency, especially in financial markets. Wrobel argues that rather than stepping in and doing things like setting prices for the private sector, the state should construct a framework in which the private sector has to behave a certain way and has to adhere to certain rules in order to minimize the risk of creating another financial crisis. He goes on to praise countries like Germany and other European nations when they called for stricter rules on financial markets back in 2007.

While I do certainly agree with Wrobel that stricter rules are needed on financial markets in order to minimize the risk of another crash, he really does not expand on what he believes the state should do during an economic collapse, he only goes into detail in explaining how we could prevent one in the future by adopting the principles of the social market economy. This is where I’m going to inject some of my own thoughts on how the social market economy should react to economic crises. Obviously reforms are a good thing, and should be sought after, but we should never assume that we can reform capitalism enough as to make it completely crisis free. Because markets are inherently unstable and lead to crises if left to their own fruition, [2] it is necessary for the state to have a plan in the event of a crisis.

The plan I will be advocating is heavily based on van Lerven (2015)’s assessment of the crisis in the Eurozone. What van Lerven shows is that the response of the European Central Bank (ECB) to the economic crisis in the Eurozone was very ineffective for numerous reasons. One of the key things the ECB did in light of the crisis, was run a program of Quantitative Easing (QE) which essentially entails the ECB flooding financial markets with newly printed money, in hopes that the private sector will use the money to invest in new projects, create jobs, and ultimately boost aggregate demand (van Lerven: Appendix 1). The problem with this, van Lerven explains, is that this is a debt-based recovery strategy. What this will do is simply force the private sector to go into debt in order to try and repair a crisis that was caused by private debt in the first place. This QE strategy also is ineffective in its main goals because banks are worried about maintaining their balance sheets during recessions they couldn’t care less about spending to create jobs, no sufficient amount of banks would engage in enough spending that is needed to rebuild the economy. [3]

This is why I advocate that in order to both lessen the risk of a financial crisis, as well as have a strong response to one prepared, the social market economy should adopt a system where money is no longer created by the banking system as it is now, [4] but rather allow money to be only created by the central bank. As van Lerven explains, this would allow the state to directly inject money into the economy during recessionary times via public spending on things like infrastructure, housing, roads, etc. instead of waiting around for the private sector to do it. This will have the affect of boosting aggregate demand and thereby stimulate the economy into a recovery.

This approach also fulfills the social market claim to a regulatory framework to prevent future crises in a more concrete manner [5] where, instead of simple regulation, this would change the structure of how money works in the economy and because only central banks would create money, money would no longer be debt-based, and (assuming the central bank establishes a democratically elected committee which plans money creation) we would have the money supply under direct public control rather than private control. This would allow us to keep a stable monetary and financial system in order to prevent future crashes, which is something Wrobel advocates but really doesn’t explain concretely how it should be achieved. Another point I’d like to make that I plan on expanding on in a later post, is the importance of maintaining full employment in an economy especially when it’s in a recession. As Mitchell and Muysken (2008) expand on largely, full employment policy has major benefits such as making sure aggregate demand is sustained, and the economy is working at its maximum capacity.

Moving on, Wrobel stresses the importance of maintaining private property rights as the basis for incentives in a social market economy. However he, correctly, understands the simultaneous importance of liability and accountability laws in any market system. Wrobel writes,

“[E]nterprises, who mismanaged have to take the consequences in the crisis. It also might be necessary that they leave the market and make room for more efficient enterprises. Additionally rules for managers have to be implemented, which reach a level of responsible handling of the resources entrusted to them. Managers who according to the Shareholder-Value-Principle only see the current stock exchange price of their enterprise, because their quarterly bonus payment depends on that, as well as those who can just retire in a case of failure due to their guaranteed high pensions, will only act shortterm-wise. A long-term, responsible business policy does not serve their needs, instead shortterm high acquisitions promising risks are taken willingly.”

This is where it would have been nice if Wrobel inject a policy suggestion to alleviate the risk that shortterm minded managers pose to an economy, but instead he just once again is very vague and implies that some business policy must exist out there which forces mismanaged enterprises to take consequences or leave the market. My proposal for this is to allow policy makers to catch mismanaged businesses early through institutions like the IRS and have them be assessed as to whether or not they should be allowed to stay on the market. Obviously this is easier said than done and could easily become corruptible with special interest groups forcing competitors out of the market as has even been done in the past with anti-trust laws, but this is just the suggestion or stating point I would focus on to achieve the goal of more market stability via management.

The next point that Wrobel gets into explaining is on trade. He asserts that the social market supports free trade, free investment, and free migration; however, in opposition to the neoliberals, the social market view does not see free markets as inherently stable. And while Wrobel emphasizes the need for freedom of contract, he does explain that this can only go so far, as free and fair competition must be enforced above all else. He implies that this would entail things like minimum wages, anti-trust laws and occasional price fixings. I believe that this view is good in some respects and bad in others. Obviously free trade has the potential to be very beneficial to developing countries, the reality is, as Chang (2002) has pointed out, that almost every modern developed nation engaged in protectionism in their development stages in order to boost their own economies. This is why I’d advocate a form of international institutionalism which helps developing nations work out the specific degree of protectionism and free trade they should have in their economies, especially because as Hart-Landsberg (2010) shows using China as an example, forcing free trade and economic liberalization on a country can lead to massive economic instability and large social problems.

The last main principle of the social market economy that Wrobel explains is the importance of consistency of economic policy. He states that without consistency in economic policy, there would be fluctuations in market behaviors by businesses because they wouldn’t be able to predict what the economic policy will be in the future so they’d tend to behave much more conservatively and reduce investment which in term reduces consumers’s long term ability to make rational purchases. To illustrate the principles of the social market economy, Wrobel uses this figure:

fig1.PNG
Figure 1: Constitutive and regulative principles of a market order

From this, he asserts that to maintain market stability, all of these principles must be enforced at the same time. For instance, private property leads to excessive economic power via capital accumulation if freedom of contract is not restricted and liability is only limited, as well as if wealth redistribution policies aren’t occasionally enacted.

There are only a few things I think I should expand on/reiterate in light of figure 1, those being the nature by which we achieve monetary stability via allowing only central banks to create money in the economy, which ensures public oversight of money creation and management, and I’d also like to bring up things like healthcare and education and how I feel they should be managed. Obviously this would entail a post of its own, but for healthcare it is pretty obvious that the current U.S. system is extremely lacking in almost all but a select few fields. [6] Therefore I would mostly agree with Mitchell (2017) that our economy needs to maintain full employment in order to operate at maximum capacity (this also entails a post of its own) and this especially holds true regarding healthcare when he states,

“In a fully employed economy, the intergenerational spending decisions on pensions and health come down to political choices sometimes constrained by real resource availability, but in no case constrained by monetary issues, either now or in the future.

All governments should aim to maintain an efficient and effective medical health system. Clearly the real health care system matters by which we mean the resources that are employed to deliver the health care services and the research that is done by universities and elsewhere to improve our future health prospects. So real facilities and real know how define the essence of an effective health care system.”

This does not mean I support an entirely single payer system, I feel that has problems of its own, but I feel the government should use its abilities to ensure that whatever system exists (whether it be single payer, a system like Obamacare, etc.) it is accessible to all, and has good quality. My opinion holds true on this for things like education and social welfare as well.

Wrobel ends his paper by essentially going over how the social market economy can be implemented, what the constraints are, and what the benefits would be, which I don’t feel like I have to explain in this specific essay. But to wrap up, I’d like to say I think Wrobel’s proposals are a good starting point for how I believe an economy should function, but it definitely needs to adopt the policy recommendations put out by modern theorists about how money, employment, and inflation work in the economy such as full employment, and money creation only via the central bank among other things. Thanks for reading!

Notes:

[1] For income and wealth inequality in America, see Saez (2015), Saez and Zucman (2015), CBO (2011), Piketty (2014) as well as see inequality.org for more information.

[2] I realize this is a large assertion and so I will give this its own blog post eventually, but for more on this see Minsky (1982) and Shaikh (2016).

[3] Keep in mind to my knowledge Wrobel does not support this kind of monetary policy, I am simply explaining this to lead into my proposal for how governments should act during recessions. Also I highly suggest checking out positivemoney.org to learn more about this topic.

[4] See here for detail on how money is created in modern economies.

[5] What I mean by this is that throughout the paper Wrobel makes very vague policy suggestions in my opinion when it sounds more like he’s arguing in favor of systematically reshaping things like the financial system, and I feel that van Lerven’s solution is the best way to do that.

[6] For quality of American healthcare see Woolf, S.H. and Aron, L. (2013) as well as Case, A. and Deaton, A. (2015)

References:

Blumenthal, W. (2013) Models for merging the US antitrust agencies

https://academic.oup.com/antitrust/article-abstract/1/1/24/274789/Models-for-merging-the-US-antitrust-agencies?redirectedFrom=PDF

Case, A. and Deaton, A. (2015) Rising Morbidity and Mortality in Midlife Among White Non-Hispanic Americans in the 21st Century

http://www.pnas.org/content/112/49/15078.full

Chang, H. (2002) Kicking Away the Ladder

https://econsynthesis.files.wordpress.com/2017/07/ha-joon-chang-kicking-away-the-ladder-development-strategy-in-historical-perspective.pdf

CBO. (2011) The Distribution of Household Income and Federal Taxes

https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/49440-distribution-income-and-taxes-2.pdf

Erhard, L. (1959) Prosperity through Competition

https://books.google.com/books/about/Prosperity_Through_Competition.html?id=SQXpzVmO8oIC

Eucken, W. (1952) Grundsätze der Wirtschaftspolitik

https://books.google.com/books/about/Grunds%C3%A4tze_der_Wirtschaftspolitik.html?id=TR_MJgAACAAJ

Hart-Landsberg, M. (2010) The Chinese Reform Experience: A Critical Assessment

http://journals.sagepub.com/doi/abs/10.1177/0486613410383954

van Lerven, F. (2015) Recovery in the Eurozone

https://positivemoney.org/wp-content/uploads/2015/12/Recovery-in-the-Eurozone-FINAL-WEB-READY-2015-12-11.pdf

Minsky, H. (1982) Can ‘it’ Happen Again?

https://econsynthesis.files.wordpress.com/2017/07/hyman-minsky-can-1.pdf

Mitchell, W., Muysken, J. (2008) Full Employment Abandoned: Shifting Sands and Policy Failures

http://gen.lib.rus.ec/book/index.php?md5=87351AC7BD96A9769CABF63CECBD0937

Mitchell, W. (2017) A government can always afford high-quality health care provision

http://bilbo.economicoutlook.net/blog/?p=36477

Mitnik, P., Grusky, D. (2015) Economic Mobility in the United States

http://www.pewtrusts.org/~/media/assets/2015/07/fsm-irs-report_artfinal.pdf

Piketty, T. (2014) Capital in the 21st Century

http://www.hup.harvard.edu/catalog.php?isbn=9780674430006

Saez, E. (2015) U.S. income inequality persists amid overall growth in 2014

http://equitablegrowth.org/research-analysis/u-s-income-inequality-persists-amid-overall-growth-2014/

Saez, E., Zucman, G. (2015) Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data

http://gabriel-zucman.eu/files/SaezZucman2015.pdf

Shaikh, A. (2016) Capitalism: Competition, Conflict, Crises

https://eastsidemarxism.files.wordpress.com/2017/04/anwar-shaikh-capitalism_-competition-conflict-crises-oxford-university-press-2016.pdf

Woolf, S.H. and Aron, L. (eds.) (2013) U.S. Health in International Perspective: Shorter Lives, Poorer Health

https://www.nap.edu/catalog/13497/us-health-in-international-perspective-shorter-lives-poorer-health

Wrobel, R. Social Market Economy as Alternative Approach of Capitalism after the Financial and Economic Crisis

http://www.kasyp.net/fileadmin/kasyp_files/Documents/reused/Social_Market_Economy/Wrobel-_Social_market_economy_1_.pdf

 

Published by: Economic Synthesis Blog

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