When Governments Are More Than Referees

The state interferes more and more in the economy. It is no longer just a referee, but tries to take part in the game, which causes damage and needs to be stopped. – by Frank Schäffler

The introduction of the D-mark on 20 June 1948 was the awakening moment of the free market economy in Germany. A new stable currency that quickly created confidence was the prerequisite for reconstruction. But without the liberalisation of prices a few days later on 24 June 1948, the market economy would not have been able to unfold so quickly.

This courageous step of Ludwig Erhard, then director of economics of the US and British occupation zones of Germany, is therefore rightly regarded as the birth of the German economic model, the “Soziale Marktwirtschaft” or social market economy. It is based on the idea of competition, in which the state acts as a referee and formulates and enforces the rules, but in which private companies act in the market. In short: private before state.

The social market economy is not some intermediate thing between a free market economy and a planned economy. Ludwig Erhard, who later became minister of the economy and prime minister of West Germany, emphasised again and again: “With ‘social market economy’ I mean that the market is social in itself, not that it has to be made social.”

Why is this still relevant today? A stable currency is surely a necessary condition for a stable economy. Only when companies and citizens can plan their individual investment decisions, when they are guaranteed that inflation will not create incalculable prices and citizens have confidence in the future, prosperity and growth are possible in the long run. The high inflation in Germany and Europe raises doubts as to whether this criterion is currently being met. But a stable currency and stable prices are not sufficient for a country’s prosperity. There must also be a competitive order that allows free prices to emerge through a market process.

My home country Germany has been on a slippery slope for many years. Many sectors of the economy sectors are being disturbed by government intervention. From healthcare to energy and transport to the banking and insurance sectors, almost all markets are heavily regulated and thus distorted. The state interferes more and more.

It is no longer just a referee. It often acts as a coach, a team doctor and a mascot. Sometimes, it even goes into the attack itself to score goals. Every now and then it even manages to do so. Even a blind hen sometimes finds a grain of corn. But at the same time the state concedes more and more goals. Opponents come from all directions, from the left and right sidelines and sometimes from within its own ranks.

If we ask why Germany is falling behind internationally, it is because the state interferes too much. It undermines ownership by telling entrepreneurs how, what and where they should invest. It tells them which raw materials and inputs they should buy and how they may sell their products. The entrepreneur has become both a supplicant and an agent of the state. The Supply Chain Act is one example of many where this erosion of ownership is taking place. The EU’s sustainability requirements are also part of it.

All these legal initiatives may be based on good intentions, the problem is that the government does not trust companies and their customers to make the right decisions. Instead they are to be “democratised”. It is no longer the individual who can decide what and how she wants to invest as an entrepreneur or what he wants to purchase as a consumer. No, all this has to be decided “democratically” – by parliament and government.

But in doing so, the state is overreaching itself. It gets bogged down and creates more problems than it solves. To return to the beginning: This is actually the deeper insight of Ludwig Erhard’s end of price controls 75 years ago. Erhard was not so presumptuous as to believe that one could define a “fair price”, or to take a current example, set the number of heat pumps to be installed per year at 500,000.

It was clear to him that this must fail because no one has the knowledge of when, where and in what numbers heat pumps will be needed in 2030. Maybe at that time there will be better technology, more or less demand, higher or lower energy prices. Nobody knows that, nor does the government. Nobody can have that knowledge today. All that exists are model calculations. What we can see today, however, is that until a few years ago, citizens were still being pushed into switching to gas heating with financial incentives from the state, and now all this is turning out to be supposedly wrong.

Ludwig Erhard

The consequence is clear: market participants will react to this. They will no longer blindly trust government promises. They will hedge their bets and hold back in order to avoid bad investments. This painful learning process, for all its economic danger for the individual, also contains some good elements. It shows every citizen the limits of state action and can make them more open again to the unfettered market economy. And it shows everyone that this state intervention in the markets always has its price. As Ludwig Erhard already emphasised: “There are no benefits of the state that are not based on renunciation by the people.”

Frank Schäffler is a member of the German Federal Parliament and one of the few libertarian politicians in Germany.