Freedom as the supreme and indivisible principle

The principle of freedom emerges directly from the image of man in the social market economy. Society is made up of individuals with different needs. Everyone sets their own personal goals. The freedom of the individual is thus a central condition for the success of the social market economy. Germany guarantees this freedom with the freedom of occupation, trade and enterprise. Furthermore, it is guaranteed by the right to freely choose one's place of work, the place of education and freedom of contract. (See also the article "Social Market Economy" of the Konrad Adenauer Foundation)

"The starting point of the social market economy is the recognition that people are capable of freedom, which always means responsibility, and must be constantly fought for anew. In complex, modern societies based on the division of labour, there is a need for a regulatory policy that ensures that individual freedom does not detach itself from the responsibility that goes with it, e.g. through liability rules."  

 

["Ludwig Erhard: The Principle of Freedom – Maxims and Insights", edited by Lars Vogel, Anaconda Verlag, 2009, page 9f.]

 

Characteristics, Principles and Objectives

The social market economy is characterized by the following basic characteristics. These were also laid down in the German-German State Treaty on Monetary, Economic and Social Union:

• private property
• Performance Competition
• Free pricing
• in principle, full freedom of movement of labour, capital and services.
   

"The social order corresponding to this economic order is shaped "by a labour market order corresponding to the social market economy and a comprehensive system of social security based on the principles of meritocracy and social compensation". [Source: Konrad Adenauer Foundation]

Competition and freedom are two sides of the same coin. Freedom means that no one is prevented from participating in competition, neither by other market participants nor by the state. Freedom is therefore a prerequisite for effective competition. As we know, in a market economy, the interplay of supply and demand determines which goods are produced when, where and with what techniques.

The wishes of the consumers are decisive and the best competitor (provider) prevails. This relationship is described by the terms "primacy of consumer interest" and "consumer sovereignty". The state only sets the framework conditions. But how exactly does the competition work? Is it always fair?

Tasks of the market

The market economy is characterised by a fundamental priority of decentralised distribution (allocation), i.e. the decision on where and how to use which resources is made on a voluntary basis by the market participants. Wherever resources are exchanged in this way, a market is at work. These include:

• factor markets (e.g. for raw materials or labour);
• Goods markets (e.g. food, textiles, furniture, machinery)
• as well as markets for services (such as health, education or media)
• or financial markets (e.g. for investments, shares, insurance or loans).

The market coordinates itself and thus assures all players of an advantageous balance of their  individual needs. In other words, the individual players enter the markets as suppliers and consumers of scarce resources. There, they are in competition with each other, trying to balance their respective plans with those of the other side of the market. This process of economic coordination takes place through the formation of prices. These, in turn, develop as a result of supply and demand. (See: Konrad Adenauer Foundation)

 

"The social market economy is also based on competition – on the one hand as a means of disempowering the market, and on the other hand as a method of discovery with the goal of "prosperity for all", which is not only to be understood in material terms. Since history teaches how quickly competition is displaced by power structures such as monopolies and cartels, it calls for an economic policy that serves to preserve competition."

 

["Ludwig Erhard: The Principle of Freedom – Maxims and Insights", edited by Lars Vogel, Anaconda Verlag, 2009, page 10.]

 

Dangers of competition

The competition helps with selection and supports the promotion of performance and progress. This can only work if there is room for manoeuvre between complete competition (polypol: many market participants) and oligopoly (few, at least two suppliers). Otherwise, monopolies will be created. Only one company offers a certain product and the consumer has no choice. In order to avoid disadvantages, every player in the market will strive for performance and progress.

Competition is endangered if competitors do not compete with each other but with each other, possibly also by illicit means, for the favour of consumers. That is why a system is needed to protect the existence and quality of competition. This is done with  laws and ordinances that regulate and shape competition. Examples of this are the Unfair Competition Act, the Rebate Act, the Endowment Ordinance, the Trademark and Patent Act or the Act against Restraint of Competition. (See also the further remarks on the subject of competition)

Consumer sovereignty

The sovereignty of consumers (consumers) is a fundamental principle. It describes the freedom to meet one's needs in "free" markets with regard to one's own wishes and possibilities. An enlightened consumer can also be referred to as the "king customer". This is because they control the quality and quantity of goods and services on the market with their purchasing decisions. In today's world, it is also associated with the concepts of freedom of choice, customer centricity or customer orientation, and buyer power.

Consumer sovereignty is also a guiding principle of competition policy. According to this, the consumer controls production and the state pursues a competition policy that prevents concentrations in the market or even monopolies. This can be achieved, for example, by the Federal Cartel Office.

Result

Thus, the market fulfills several functions, from coordination and supply to pricing and distribution. The social market economy thus enables the greatest possible freedom of markets and combines them with a social component. When the market fails, the state steps in.

State action is necessary to enable free and regulated competition. In an emergency, the state can create the desired conditions with economic incentives. In doing so, he must make sure that he chooses the right market areas and instruments. (See also the "Social Market Economy - What Does That Mean in Concrete Terms?" by Siegfried F. Franke and David Gregosz, Berlin, 19 March 2013, publisher: Konrad-Adenauer-Stiftung e.V.)