The State and the Economic Order

On 23 May 1949, the Basic Law established the basic legal and political order. The Basic Law thus constitutes the current constitution of the Federal Republic of Germany. As a result, fundamental decisions were made about the form of the political system of our country.

 At that time, a concept for a social and economic policy model was also developed. First and foremost, these were Alfred Müller-Armack (* 28 June 1901; † 16 March 1978) and Ludwig Erhard (* 4 February 1897; † 5 May 1977, 1949 to 1963, first Federal Minister of Economic Affairs), who established the social market economy as an economic order with their ideas.

Economic system

An economic system describes how a country's economy is structured. It can, for example, be capitalist or socialist. The type of economy a state chooses influences not only the economy, but also society. 

A distinction is generally made between two forms:

• The planned economy is the national economy centrally planned by a state agency. In it, the state controls economic processes. In this form, many companies are also directly state-owned. A planned economy existed, for example, in the former GDR.
• The market economy is based on the mechanism of supply and demand and the basis of private production. The social market economy is a special form. In this case, the state intervenes to alleviate social hardship and to ensure free competition. In the Federal Republic of Germany there is a social market economy.

Laws and Treaties

The social market economy is regarded as a guarantor of economic success and social stability in Germany.

Due to globalization and the European Union, a common vision of the states regarding the economic order is necessary. For example, the Treaty of Lisbon (2007) was an international treaty between the then 27 members of the European Union.

The ideas in a democratic society are mainly represented by the elected politicians. In the social market economy, policy aims to achieve the highest possible level of economic stability and social balance. To this end, it must prevent negative effects of economic processes. Such a situation occurs, for example, during a financial crisis. Companies in the financial sector are particularly at risk. They could become insolvent and plunge other companies into crisis as well. In the European Union, all Member States should fulfil the values and objectives set out in the Treaties. This is the only way for a common economic and monetary union to function.

The Role of Politics and the State

Politics can be described as statecraft, in which political actors (e.g. the government, parliament, parties or organizations) pursue specific goals. As a rule, they want to use it to shape public life. Their goals are often based on neutral political principles (e.g. freedom, equality, solidarity, emancipation or participation). Other fundamental objectives may relate to the economic and social form (e.g. capitalism, pluralism or social structure).

Politics can be broadly defined as "social action aimed at decisions and control mechanisms that are universally binding and regulate the coexistence of people."

The division of labour and specialisation are of fundamental importance for economic development. However, they quickly make the economy confusing. They also inevitably lead to interdependencies in economic activity. This makes it more difficult to calculate, direct and distribute goods according to specific needs.

The social market economy tries to achieve the best possible combination of two areas. One area emphasizes the independence of the individual. It should be able to fully develop its interests, freedoms and abilities. The other area is aimed at the interests of the community. Human dignity, social security and justice are key points here.

The interplay between the market and the state

The most important goals of economic policy in the social market economy are high economic productivity with prosperity for all, social balance, the limitation of economic power and stable economic development. These goals are largely achieved by the markets themselves. But they are not always realized, and not always to the extent that corresponds to the political ideas that guide society.

That is why the state intervenes in the market. For example, it influences the use of resources if the markets alone do not provide this efficiently.

In the social market economy, all decisions are made by three major groups: (private) households, companies and the state. Every actor is bound by norms and rules in his economic activities. These limit his actions, or at least influence them.

If the state intervenes in the market because it leads to undesirable results, it must do so according to the concept of the social market economy with "market-conforming" measures. These are such measures that do not block the markets, but only change their outcomes. Examples include taxes and subsidies. While they change the behaviour of market participants because they change prices, they do not block the functioning of the market. In the case of market-oriented economic policy interventions, prices are still determined by supply and demand. However, this results in different prices than without taxes and subsidies. In this context, it should be remembered that the economic policy of the first choice is regulatory policy and not intervention in current economic events.

The tasks of the state in the context of the social market economy are particularly evident in economic policy. This refers to all political activities that seek to order or influence processes in the economy. (See: Federal Agency for Civic Education)

The basic goal of economic policy is to increase welfare in society. The following principles are considered to be central:

1. Government intervention only takes place in those areas where the market "fails". Market failure refers to the failure to meet government objectives. 
2. Economic policy-making is based on scientific evidence.
3. The formulation of economic policy is based on the principle of economic efficiency, i.e. either a certain success is achieved with the least possible expenditure of resources (minimum principle). Or in the case of a certain use of resources, the greatest possible success (maximum principle) must be achieved.